Federal Reserve Bank Issues Report On Economics Of Marijuana Legalization

The topic of marijuana (cannabis) legalization moved into headlines following Colorado’s and Washington’s decisions to permit recreational use of the drug in 2012. Yet, these changes reflect nearly 50 years of evolution in drug policy.

A new report from regional economist Charles S. Gascon at the Federal Reserve Bank of St. Louis looks at how economics comes into play as more states legalize marijuana. The report highlights three key points:

• More states are legalizing marijuana for medical or recreational use, and this movement has created a patchwork of laws and policies on how the drug is treated.
• Among the states that allow the medical use of marijuana, laws can vary greatly in terms of the medical conditions that can be treated by the drug.
• Policymakers face complex decisions on how to regulate marijuana. For example, the goal of maximizing revenue may conflict with the goal of reducing recreational use.

“Research is still needed to understand the economic impact of recent state policy changes, and differences across states provide researchers with many real-world ‘experiments’ to study,” Gascon writes. “However, with marijuana remaining illegal at the federal level, these firms face additional challenges in operating their businesses, such as lack of access to banking networks or developing interstate supply chains.”

Gascon continues:

While legal marijuana has been touted as a means for improving the fiscal position of states through lowering enforcement expenditures and generating additional tax revenue, the reality is much more complex. First, taxation on medical marijuana use is inconsistent with tax policies on other drugs used in medical treatment. Over time one would expect these policies to converge if a consensus emerges on acceptable medical use. Second, increases in tax revenue from recreational sales likely overstate the fiscal impact or could be short-lived. Consumers are likely to spend a greater share of their income on marijuana and less on other taxable goods, such as alcohol.10 Furthermore, states may use the new tax revenue source as a replacement for existing revenue sources (or future revenue increases).11 Third, as is the case with many types of “sin taxes”—taxes on products such as alcohol, tobacco and the lottery—individuals in lower income brackets are generally more likely to consume these products, thereby producing a regressive tax policy. Fourth, the reliance on sin taxes for revenue creates an incentive for policymakers to set a tax rate that maximizes revenue as opposed to a higher tax rate that would reduce consumption.

Read the full report at www.stlouisfed.org.