THE AUDACITY OF DOPE

Could Legal Marijuana Save California's Economy?

Olympic swimmer Michael Phelps has made marijuana a popular topic. He
was photographed smoking from a bong, lost corporate sponsorships,
and was suspended from the sport as a result. But celebrities aren't
the only ones thinking about dope.

Some legislators in California have pot on their minds, too. That's
because the government of the biggest economy in the United States is
facing a massive budget deficit whose pain would be alleviated by
decriminalizing marijuana.

California's current deficit stands at a whopping $15 billion and is
expected to reach $42 billion next year. And the state run by Gov.
Arnold Schwarzenegger has virtually run out of cash. It recently
delayed $3.5 billion of payments to taxpayers and counties.

While nearly all U.S. states currently face budget shortfalls,
California's deficit is more than one-third of its general fund.
That's largely due to its dependence on income taxes, which slide
during a recession. And the state can't easily borrow due to the
government bond-market freeze. Moody's even warned it may downgrade
the state's rating.

There's no easy fix to the problem, as any solution likely requires
cutting benefits and social services-tough political choices for
Schwarzenegger. But the state does have an abundant natural resource
it may be able to draw on for help.

Marijuana is California's largest cash crop. It's valued at $14
billion annually, or nearly twice the value of the state's grape and
vegetable crops combined, according to government statistics. Indeed,
a recent report pegged marijuana as two-thirds of the economy of
Mendocino County, a ganja hotbed north of San Francisco. That's not
surprising-it costs $400 to grow a pound of pot that can sell for
$6,000 on the street.

But the state doesn't receive any revenue from its cash cow. Instead,
it spends billions of dollars enforcing laws pegged at shutting down
the industry and inhibiting marijuana's adherents. Of course, there's
a reason for that. Marijuana's social costs may include addiction and
rehabilitation treatment and lost productivity. Yet these are minute
compared with the extensive social costs of alcohol or tobacco.

Of course, just legalizing pot wouldn't automatically harvest
revenues for the state. An organized system of regulating sales and
collecting taxes would need implementing. And it's possible that
general drug use could rise, though the debate that pot is a gateway
drug to harder substances is inconclusive.

There's also the question of whether or not taxing marijuana would
simply create a black market that would again skimp the state on
taxes. The best corollaries here are cigarettes and alcohol. Rises in
"sin taxes" on them have decreased consumption-a positive-but don't
seem to have destabilized the legal market. Decriminalization could
lead to some job losses in law enforcement, though the countervailing
argument would see these forces put to work stopping harder crime.

So what are the numbers? A national legalization effort would save
nearly $13 billion annually in enforcement costs and bring in $7
billion in yearly tax revenues, according to a study by Harvard
University economist Jeffrey Miron. Since California represents 13
percent of the U.S. economy, those numbers suggest the state could
save $1.7 billion in enforcement costs and nab up to $1 billion in
revenues. That doesn't include any indirect revenues as, for example,
rural farming communities grow or marijuana tourism, which has been
lucrative for the Netherlands, takes off.

Put it all together, and California could potentially wipe some $3
billion off its budget deficit by letting its people puff and pay.
That still leaves it with a gaping $39 billion hole to fill, so the
state's problems go far beyond what a new cash crop can fix. But
anything to help soothe the state's chronic fiscal pain-even if
unpalatable to some-is worth considering.