An Analysis of the Economic Benefits of Legalizing Marijuana

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Through an interpretation of the interstate clause commerce, the United States Supreme Court has cast marijuana legalization as an economic issue. In a series of rulings, the Court upheld the right of the federal government to regulate marijuana because of the impact that marijuana sales has on a federal level. Further, opponents of marijuana legalization highlight the detrimental impact that legalization would have on drug use rates and the financial health of the labor force. This presents an important question for policy analysts: do the economic consequences of legalizing marijuana outweigh the economic benefits of legalization? An examination of the disadvantages and advantages of marijuana legalization reveals that legalization is economically advantageous for the state because it reduces the costs associated with drug law enforcement, it increases tax revenue for the state, and it provides a stable tax environment for businesses in the marijuana industry.

The Legal Status of Marijuana

Currently, marijuana is classified as a Schedule I drug at the federal level, a classification reserved for drugs that lack medical benefit. Yet, despite the prohibition on the production, sale, are distribution of marijuana at the federal level, several states have taken the individual initiative to legalize marijuana both for medical and general purposes at the state level. According to Joshua C. Hall, 24 percent of the United States population lived in one of the 14 states that had legalized or decriminalized marijuana use by the year 2011 (Hall 197). As Hall notes, the extent to which marijuana is decriminalized varies between states. In states where marijuana is legal for medical purposes, the state exempts individuals who cultivate or possess marijuana from criminal penalties if the marijuana is prescribed to them by their doctors (197). In same states, a medical ID card is issued, which provides the added benefit of enabling states to receive revenue through charging a fee for the card (197). However, the specific requirements that an authorized marijuana distributor or user must comply to varies between states.

Adding to the complexity of the trend in marijuana legalization, state laws decriminalizing marijuana use conflict with federal laws that prohibit the substance. In the 2005 case Gonzales v. Raich, the United States Supreme Court considered the complaints of Angel Raich and Dianne Monson, two California medical marijuana users who had their cannabis plants destroyed by federal agents (Bostrom 47; 48). In its ruling, the Court held that the federal government has the authority to regulate home grown marijuana, even when permitted by individual states, because of its authority to regulate commerce between the states (47). The ramifications of this ruling are twofold. First, the Court provided the federal government with the ability to interfere with the legislative decisions of the states on matters pertaining to marijuana legalization. Second, the Court determined that marijuana legalization can be viewed as primarily an economic issue. Because the sale of marijuana possesses economic significance that extends across state lines, the overall economic ramifications must be assessed when determining the feasibility if legalizing marijuana. Whether the federal government benefits from regulating marijuana can be partially determined by weighing the costs against the benefits of legalizing marijuana in the United States.

The Economic Disadvantages of Marijuana Legalization

The economic disadvantages of marijuana legalization often provide the rationale for prohibiting marijuana use and investing in drug enforcement laws. The first main criticism of marijuana legalization focuses on the detrimental economic impact that marijuana use is believed to have on the individual user. In a longitudinal study on the impact of marijuana use on the wages of male users, Robert Kastner determined that increased use of marijuana among individuals leads to a reduction in wages by between 2 percent and 22 percent (Kastner 463). Further, researchers Jeanne S. Ringel, Phyllis L. Ellickson, and Rebecca L. Collins determined that there was a negative relationship between earnings and marijuana use in 12th grade males by the time they reached the age of 29 (Ringel, Ellickson, and Collins 58). As they determined, the mean earnings of 12th grade marijuana users was $5,430 lower than their non-using peers (58). Further, through controlling for other variables, such as the tendency to engage in other deviant activities or working less hours, the researchers determined that marijuana use lowers earnings because users were less likely to develop their human capital (59). Drawing from these conclusions, opponents of marijuana legalization can assert that the productivity and earnings of the labor force would decrease in an environment where marijuana legalization were promoted.

As a corollary to the negative impact that marijuana use has on the earning of individual workers, critics also assert that legalization would lead to increased use. As Walter Block outlines, opponents of marijuana legalization often argue that the elasticity of demand for drugs is very high, thus lowered prices that would result from legalizing marijuana would contribute to conditions where use drastically increases (696). Yet, as Block determines, this is argument is mistaken because those addicted to substances view drugs as a necessity, making the elasticity for substances low (696). A comparative study between the drug policies of the United States and the Netherlands confirms this contention through the finding that decriminalization laws in the Netherlands led to no significant increases in the use of marijuana across the country (Yacoubian 27). Thus, legalizing drugs would have no significant impact on the use of drugs or the number of individuals in the workforce adversely impacted by marijuana use.

The Economic Benefits of Marijuana Legalization

While the economic arguments against marijuana legalization can be countered through evidence, there are many undisputed benefits to legalizing marijuana. First, the costs of enforcing marijuana laws burden the federal government. As Edward M. Shepard and Paul Blackley note, the federal government spends $7.7 billion annually to enforce drug laws (Shepard and Blackley 404). As they note, over six million arrests have been made over a ten-year span, and 88 percent of marijuana arrests are made merely for possession (404). In order to criminalize marijuana and increase enforcement to supersede statewide decriminalization laws, the federal government must be willing to invest significantly in drug law enforcement. Yet, with no concrete financial benefits to criminalizing marijuana, the expense of arresting, prosecuting, and incarcerating marijuana offenders comes strictly at a loss to the federal government.

Though enforcing drug laws is costly, legalizing marijuana provides great financial benefits to the government. The legalization provides economic benefits to localities and states. As the New York Times reports, Oakland, California was able to cope with an economic downturn by collecting $1.4 million in taxes from marijuana dispensaries in 2011, which accounted for 3 percent of the business taxes collected by the city (Cooper). Further, it was reported that in Colorado, the city of Colorado Springs collected over $700K in revenue from marijuana dispensaries in 2011 and Denver collected over $3.4 million from sales taxes, application fees, and license fees (Cooper). Overall, Colorado collected $5 million from the marijuana industry, which doubled from the amount that it collected in 2010 (Cooper). From an economic standpoint, the revenue that states can generate from a thriving marijuana industry is significant.

However, in order for states to continue to increase its revenue received from the marijuana industry, a stable tax environment must exist. As Edward Roche highlights, the status of marijuana businesses as illegal entities under federal laws creates barriers for businesses that seek to comply with tax laws (Roche 429). For example, because the Court has acknowledged the right of Congress to regulate state marijuana initiatives under the commerce clause, federal legislation is able to prohibit marijuana distributors from deducting their business expenses or inventory costs (432). However, Roche notes that the tax system must compel taxpayers to voluntarily disclose financial information on their tax returns if it is to function properly (435). From this standpoint, the incentives for marijuana businesses is undermined if criminalization of the industry at the federal level penalizes businesses that are forthcoming about their finances while withholding beneficial deductions. Thus, legalizing marijuana will enable businesses in the industry to become full participants in the tax system without fear of being penalized.


While critics of marijuana use cite the negative economic impacts of marijuana use on individuals, the overall economic benefits of marijuana legalization outweigh these consequences. Though marijuana use can lower the human capital in individual users, research demonstrates that legalization can have the impact of lowering overall rates of marijuana use in society. Further, there is no evidence that lower prices under legalization would drive up demand for marijuana. Yet, while the hypothesized consequences are not established, the benefits of marijuana legalization can clearly be demonstrated. Research demonstrates that the federal government would save significantly on law enforcement if marijuana were decriminalized. Further, states that currently legalize medical marijuana benefit from the revenue generated by marijuana sales. However, in order to encourage full compliance with tax laws, marijuana must be decriminalized at the federal level so that state businesses can have a stable tax environment that compels them to fully disclose their earnings. Because the societal detriments of marijuana legalization are low and the financial benefits are comparatively high, it can be determined that marijuana legalization in desirable to the state.

Works Cited

Block, Walter. "Drug Prohibition: A Legal and Economic Analysis." Journal of Business Ethics 12.9 (1993): 689. ProQuest.

Bostrom, Barry A. "Gonzales v. Raich in the Supreme Court of the United States." Issues in Law & Medicine 21.1 (2005): 47-56.ProQuest.

Cooper, Michael. “Struggling Cities Turn to Crop for Cash.” The New York Times. 11 Feb. 2012.

Hall, Joshua C., and Jesse Schiefelbein. "The Political Economy of Medical Marijuana Laws." Atlantic Economic Journal 39.2 (2011): 197-8. ProQuest.

Kaestner, Robert. "New Estimates of the Effect of Marijuana and Cocaine use on." Industrial & labor relations review 47.3 (1994): 454. ProQuest.

Ringel, Jeanne S., Phyllis L. Ellickson, and Rebecca L. Collins. "The Relationship Between High School Marijuana Use and Annual Earnings Among Young Adult Males." Contemporary Economic Policy 24.1 (2006): 52-63. ProQuest.

Roche, Edward J., J.R. "Federal Income Taxation of Medical Marijuana Businesses." The Tax Lawyer 66.2 (2013): 429-82. ProQuest.

Shepard, Edward M., and Paul R. Blackley. "The Impact of Marijuana Law Enforcement in an Economic Model of Crime." Journal of Drug Issues 37.2 (2007): 403-24. ProQuest.

Yacoubian, George. "Assessing the Relationship between Marijuana Availability and Marijuana use: A Legal and Sociological Comparison between the United States and the Netherlands." Journal of Alcohol and Drug Education 51.4 (2007): 17-34. ProQuest.