LEGALIZING AND TAXING MARIJUANA IN CALIFORNIA
                               Is this a Solution to Balancing California’s Budget ?   

               

In Dire Need
During the first week of May of this year, California’s Governor Arnold Schwarzenegger expressed
his interest and welcomed a public debate on the proposals to legalize and tax marijuana.  The
rationale for the debate is that California faces a $24.3 billion budget deficit and some say that this
action could provide a lucrative new ‘pot’ of revenue for the State.

Schwarzenegger's comments came on the heels of a Field Poll survey that found 56 percent of
California voters contacted supported the idea of legalizing marijuana for recreational use and taxing
its proceeds. This was followed by a bill AB 390 introduced in the state Legislature by Assemblyman
Tom Ammiano, a democrat legislator from San Francisco, aimed at approving the legalization and
subsequent taxing of the sales of marijuana to adults while barring sales to or possession by anyone
under age 21, similar to the law that exists for alcoholic beverages.
 
Ammiano said his proposal would generate up to $1.3 billion in revenue for the state. He and others
who support legalizing marijuana say such a move also would improve public safety by redirecting
law enforcement efforts to more serious crimes and would end environmental damage to public lands
used for illicit marijuana cultivation. Voters in California became the first state to approve the use of
marijuana with the approval of Proposition of 215 for medical purposes in 1996, putting California and
many other states that followed with similar legislation at odds with federal law illustrating a potential
for legalization. But in 2004, Schwarzenegger vetoed a bill that would have eased rules on how much
medical marijuana patients can possess in California. So, the marijuana market continued to stay
underground.

But since the downturn in the economy, the governor, the legislator and state budget officials have all
been looking for new revenue sources (taxes) to fill the gap to operate the state. The idea of examining
the legalizing and taxing of marijuana came from a budget brainstorm in the effort to resolve the state
budget.

So what are the issues that frame such a public debate?  The immediate elements that come to the
forefront involve its social costs including law enforcement, the impact on the environment and issues
of a health.  These elements alone illustrate that the framework for the debate is significant. However,
the economics of such an action specifically as it pertains to the revenue (taxes) that could be accrued
needs to be defined before further discussion on the viability of this action is deemed viable. If the revenue
(taxes) generated do not achieve significant revenue, specifically to offset societal costs than it seems
indisputable to even think this a plausible action.

Fuzzy Math
Research from a variety of sources illustrate that marijuana based upon estimated growth volumes is
California's largest cash crop. The estimates illustrate a value of nearly $14 billion.  Some statistics
show that it is twice the value of the state's grape and vegetable crops combined. But given the illegal
nature of the business it is hard if not impossible to quantify.

In 2007, the state's Campaign Against Marijuana Planting (CAMP) eradicated 2.9 million marijuana plants.
CAMP estimates the value at $11.6 billion. As a measurement, a recent report by Trish Regan of CNBC,
it was identified that one plant can produce 2 pounds.  Experts interviewed identify that a pound can sell
for $2500-$6,000 on the street. Thus using the number of plants eradicated by CAMP as an example, the
legalizing and taxing of marijuana could yield the following:

2.9 million plants each produce an average of 2 pounds of marijuana =
5.8 million pounds x $2500 a pound = $14.5 billion

2.9 million plants each produce an average of 2 pounds of marijuana =
5.8 million pounds x $6000 pounds = $34.8 billion

The methodology applied to calculating the potential of tax receipts that could be collected is based upon
the state sales tax to a dollar’s worth of marijuana.  Thus continuing to applying the above example, the
tonnage eradicated illustrates the retail value at $14.5 billion to $34.8 million in 2009 dollars and if taxed
at the current state base sales tax level of 8.25 percent, the value would be $1.1 billion to $2.85 billion.

2.9 million plants each produce an average of 2 pounds of marijuana =
5.8 million pounds x $2500 a pound = $14.5 billion
$14.5 billion X 8.25% = $1.1 billion in sales tax receipts

2.9 million plants each produce an average of 2 pounds of marijuana =
5.8 million pounds x $6000 pounds = $34.8 billion
$34.8 billion X 8.25%=$2.85 billion in sales tax receipts

Other input places the numbers at a much lower yield per plant.  For example,
some claim that a plant can really only produce a half of pound. 

            2.9 million plants each produce an average of a half of pound of marijuana=
            1.45 million pounds X $2500 a pound=$3.6 billion
 
So, from a supply side of the equation, something is askew, to the numbers previously identified because,
unless CAMP eradicated all of the marijuana crop in the state in 2007, which law enforcement itself believes
it only put a dent into the crop, then the volume is very much underestimated which subsequently means
the tax receipts are under-estimated.

                                                             

According to government surveys, 14.5 million Americans use marijuana at least monthly. According to
the US Dept of Health & Human Services SAMHSA 2007 survey of drug use, 1.95 million Californians
admitted to having used marijuana in the past month. Insofar as these figures are based on self-reporting
of illicit activity. According to a 2002-04 SAMHSA survey, daily users constitute 20% of this population,
or about 400,000 Californians.

In an analysis by Dale Gieringer, PhD (Stanford) completed an updated analysis in February 2009 as
state coordinator for the non-profit organization California NORML that marijuana legalization could yield
California over $1.2 billion per year. Gieringer outlined the following based upon the demand for marijuana
in the state.

The bulk of consumption is accounted for by "regular" users, who consume marijuana at least
several times per week. Included is a small minority of very heavy smokers (10 or more joints
per day), who push the average consumption figures upwards. According to a British survey by
the Independent Drug Monitoring Unit, "regular" users average 2 oz of cannabis per month or
about 2 grams per day (a gram yields one or two joints). The population of regular users is
somewhat larger than that of daily users. Assuming 500,000 - 600,000 "regular users" in
California averaging 2 grams per day, consumption by this group accounts for 1.0 to 1.2 million
grams per day. Assuming the remaining ~1.5 million monthly users average one joint every
week, this adds another 200,000 grams per day. Total marijuana consumption by Californians
may therefore be reasonably estimated at 1.2 to 1.4 million grams per day, or about 0.95 to 1.1
 million pounds per year.

Thus, based upon the examples illustrated above, it appears that California grows more marijuana than
what is consumed in the state. So it appears that further research needs to be completed on both the
demand and supply sides of this equation.  It appears that the crop volume is far larger than estimates
and the demand side estimates is lower than the supply, so further analysis needs to be completed to
ascertain the supply and demand curve to determine the economics of the crop.  Of interest, if the crop
supply (volume) is so much larger in than the demand, does that mean that most of the crop is exported
and distributed out of the state?  

If You Can't Beat Them, Join Them?
For California, an area known as the Emerald Triangle, comprised of Humboldt, Mendocino and Trinity
Counties was once the region where the majority of the marijuana was grown in the state.  In recent
estimates for Mendocino County it was identified that the cultivation of marijuana comprised two-thirds
of its county’s economy, or $1.3 billion of the gross domestic product of the county. This would place
 the value of the marijuana cultivated in the county at nearly five times the size of the farm gate of $202
million for the county based upon its 2007 Crop Report.  If this is true, it is a sad commentary on the
economy, specifically if this is what filled the void after the demise of the logging industry and most
recently with the collapse of the salmon fisheries, illustrating that the options for legal and legitimate
business ventures for residents are limited, and thus the venture into the illegal market of growing
marijuana has become the easiest opportunity for many residents.

But the 2008 report by CAMP illustrates that the biggest accumulative eradication is now occurring in
other locations such as Lake, Tulare and Shasta counties. Lake County is just east of Mendocino and
Shasta along with Tulare illustrate a disbursement of cultivation across the state, (north and south)
possibly due to increase eradication in Humboldt, Mendocino and Trinity forcing growers to other areas
where there is the access and coverage offered by national forests, specifically in those counties.

Top Ten ‘Plants Seized by County

        1) Lake (499,508) 
        2) Tulare (395,489) 
        3) Shasta (394,375) 
        4) Mendocino (231,802) 
        5) Humboldt (145,762) 
        6) Fresno (137,409) 
        7) Napa (120,706) 
        8) Trinity (92,971) 
        9) San Bernardino (90,233) 
        10) Kern (86,631)
 
But in the economic case that Gieringer presents, a legal market for marijuana would generate
additional benefits. Gieringer compares the potential market similar to California's wine industry,
which generates $51.8 billion in economic activity according to the Wine Institute. With $12.3 billion
in retail sales, the wine industry generates 309,000 jobs, $10.1 billion in wages, and $2 billion in
tourist expenditures. Extrapolating these figures to a legal marijuana market with 25% - 35% as
much retail sales, one might expect $12 -$18 billion in total economic activity, with 60,000 to 110,000
jobs, and $2.5 to $3.5 billion in legal wages, which would generate additional income and business
taxes for the state. With California taking the lead in marijuana legalization, especially strong spin-off
benefits could be expected.

While it currently appears that precise figures are hard if not impossible to acquire given the illicit nature
of the market, it is reasonable to suggest that California could easily collect it if legalized and taxed a
significant larger sum than currently identified in tax revenue specifically if it was regulated similar to
how the state handles beer, wine, liquor and tobacco.

But currently the state doesn't receive any revenue from this green cash cow. Instead, it spends billions
of dollars enforcing laws pegged at shutting down the growth of marijuana.

In the meantime, as the debate moves forward it will need to address the social costs associated from
addiction and rehabilitation treatment and lost productivity.  Of course, legalizing marijuana wouldn't
automatically harvest revenues for the state, for an organized system of regulating sales and collecting
taxes will need to be implemented.

In a New York Times article on May 7, 2009, Governor Schwarzenegger said that the discussion over
whether to legalize and tax marijuana for recreational use in California would benefit from a large-scale
study, including international case comparisons, to show the possible impact of such a change. The
Governor also said that he does not support sweeping legalization, but that more information would
help. Meanwhile marijuana advocates like Ethan Nadelmann, executive director of the Drug Policy
Alliance stated that the governor’s invitation to have a discussion at all was a landmark.  Nadelmann
in the New York Times article stated, “There has been enormous fear at a political level about saying
out loud and on the record that we should think about this.” “What stands out about the governor’s
comments is not that he thought it but said it,” said Nadelmann.

While the Governor’s comments provided headlines, it appears that they are nothing more than that.
Given the current budgetary problems of California, he needs to find immediate solutions. Expectations
shouldn't be elevatedon the expectations of a study to be initiated any time in the future that would provide
the framework for further discussion.

 
tjohnson@CaliforniaBusinessMinute.com
www.CaliforniaBusinessMinute.com