The Economic Effects of Legalized Marijuana

Since the legalization of recreational marijuana in parts of the United States, scholars, economists, politicians et al. have weighed in on the economic impact of the plant. One would assume that the economic rationale has been examined in light of legalization from both a financial and social standpoint, albeit a difficult social measurement.

The vast amount of scholarly work has focused on the economic benefits, which proponents use as fodder to move the product forward while noting the difficulties of placing a monetary figure on addiction, traffic accidents and fatalities, and the like. With that said, let’s take a non-partisan look at the economic aspects of legalizing marijuana.

    • Tax Revenue: This is ostensibly the main reason that legalization has occurred. There is no doubt that this translates into tax dollars. While not legal on the federal level, cannabis data analytics firm New Frontier Data released a report in 2017 estimating that the immediate legalization of marijuana at the federal level would lead to $131.8 billion in aggregate federal tax revenue being collected between 2017 and 2025. In California for example, sales brought in around $74.2 million in marijuana industry tax revenue during the second quarter. This was up 22 percent from the first quarter, but lower than budgeted expectations. The cultivation tax and the 15% excise tax on cannabis purchases went into effect on Jan. 1. But in total for the six-month period, revenue from those taxes fell far short of the $185 million forecast. In Colorado, there has been a steady trend upward in tax revenues, bringing in over $233 million this year to date.

  • Job Creation: Somewhat analogous to the past coffee boom and Starbuck’s baristas, a similar job creating effect has happened in legalized states. However, this one is more agrarian in nature. There is a demand for jobs that put workers in direct contact with the cannabis plant, such as farmers, processors, distributors, and retailers. Basically, any business directly involved with the cannabis supply chain. New Frontier also estimates that the immediate legalization of cannabis, and its steady growth through 2025, could lead to the cumulative creation of 1.1 million jobs.
  • Profitable Corporate Investment: Whether it is cannabis, bitcoin, or the latest hot sector on the scene, investors will put their money into areas touted as potential growth blockbusters. Because cannabis is not legal at the federal level, it cannot be traded on a major exchange. Thus, the only current opportunity is through highly speculative penny stocks which trade on an over the counter exchange. Many of these are like the pink sheet stocks that were sold in the film Wolf of Wall Street.

Remember that for the moment, we are still driven by a capitalist society, and as much as Bernie Sanders and the naive Alexandria Ocasio-Cortez would like to give you cannabis for free, it just can’t happen. The free flow of goods and services and the ability for price to fluctuate with supply and demand are key elements that will soon impact this neophyte sector. Studies show that a steady decline in marijuana prices has put some cannabis firms at risk of bankruptcy, while also crippling the ability for states to generate the kind of tax revenue that they did in the very beginning. In addition, reports show that for every dollar Colorado earns from legal weed, the state is spending $4.50 to combat public health and safety issues. These two issues alone could sandbag the legal marijuana movement.

It’s not a surprise that the moon-eyed politicians in states like California and Colorado may have missed the boat on the financial future of marijuana, as most of them have never run a hot dog stand. Everything looked great, man. Constituents were getting high while the politicians raked in the tax revenues. Oops.  That’s right, there is competition in a free market. This is not Venezuela, as much as they would like it to be.

I digress. As competition enters the market, prices will fall, and they will fall sharply. In Colorado alone, prices have fallen 70% in the last four years alone. “It’s just a plant,” said Jonathan Caulkins, a professor at Carnegie Mellon University. “There will always be the marijuana equivalent of organically grown specialty crops sold at premium prices to yuppies, but at the same time, no-frills generic forms could become cheap enough to give away as a loss leader. Did he say give away? Maybe Bernie was right!

About John Thomas

John Patrick Thomas is a four-time cancer survivor who lives with his family in South Florida. John attended Gettysburg College and The American University before embarking on an entrepreneurial career on Wall Street. He turned to the teaching profession after his life-threatening bout with bone cancer. John has recently written a #1 Amazon Cancer Bestselling book entitled, “A Call to Faith, the Journey of a Cancer Survivor.” He has appeared in publications such as The New York Times, The Wall St. Journal, The Washington Post, Memorial Sloan-Kettering Cancer Center publications, and was featured in new DayStar network series, “Impact with Pastor Dave.” He has traveled as a missionary and may be one of the few people that tell you cancer was the best thing to ever happen to him. You’ll have to ask him why.

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