PAYING WITH OUR SINS

THE Obama administration's drug czar made news last week by saying he
wanted to end all loose talk about a "war on drugs." "We're not at
war with people in this country," said the czar, Gil Kerlikowske, who
favors forcing people into treatment programs rather than jail cells.

Here's a better idea -- and one that will help the federal and state
governments fill their coffers: Legalize drugs and then tax sales of
them. And while we're at it, welcome all forms of gambling (rather
than just the few currently and arbitrarily allowed) and let
prostitution go legit too. All of these vices, involving billions of
dollars and consenting adults, already take place. They just take
place beyond the taxman's reach.

Legalizing the world's oldest profession probably wasn't what Rahm
Emanuel, the White House chief of staff, meant when he said that we
should never allow a crisis to go to waste. But turning America into
a Sin City on a Hill could help President Obama pay for his ambitious
plans to overhaul health care and invest in green energy. More taxed
vices would certainly lead to significant new revenue streams at
every level. That's one of the reasons 52 percent of voters in a
recent Zogby poll said they support legalizing, taxing and regulating
the growth and sale of marijuana. Similar cases could be made for
prostitution and all forms of gambling.

In terms of economic stimulation and growth, legalization would end
black markets that generate huge amounts of what economists call
"deadweight losses," or activity that doesn't contribute to increased
productivity. Rather than spending precious time and resources
avoiding the law (or, same thing, paying the law off), producers and
consumers could more easily get on with business and the huge
benefits of working and playing in plain sight.

Consider prostitution. No reliable estimates exist on the number of
prostitutes in the United States or aggregate demand for their
services. However, Nevada, one of the two states that currently
allows paid sex acts, is considering a tax of $5 for each
transaction. State Senator Bob Coffin argues further that imposing
state taxes on existing brothels could raise $2 million a year (at
present, brothels are allowed only in rural counties, which get all
the tax revenue), and legalizing prostitution in cities like Las
Vegas could swell state coffers by $200 million annually.

A conservative extrapolation from Nevada to the rest of the country
would easily mean billions of dollars annually in new tax revenues.
Rhode Island, which has never explicitly banned prostitution, is on
the verge of finally doing so -- but with the state facing a $661
million budget shortfall, perhaps fully legalizing the vice (and then
taking a cut) would be the smarter play.

Every state except Hawaii and Utah already permits various types of
gambling, from state lotteries to racetracks to casinos. In 2007,
such activity generated more than $92 billion in receipts, much of
which was earmarked for the elderly and education. Representative
Barney Frank, Democrat of Massachusetts, has introduced legislation
to repeal the federal ban on online gambling; and a 2008 study by
PriceWaterhouseCoopers estimates that legalizing cyberspace betting
alone could yield as much as $5 billion a year in new tax revenues.
Add to that expanded opportunities for less exotic forms of wagering
at, say, the local watering hole and the tax figure would be vastly larger.

Based on estimates from the White House Office of National Drug
Control Policy, Americans spend at least $64 billion a year on
illegal drugs. And according to a 2006 study by the former president
of the National Organization for the Reform of Marijuana Laws, Jon
Gettman, marijuana is already the top cash crop in a dozen states and
among the top five crops in 39 states, with a total annual value of
$36 billion.

A 2005 cost-benefit analysis of marijuana prohibition by Jeffrey
Miron, a Harvard economist, calculated that ending marijuana
prohibition would save $7.7 billion in direct state and federal law
enforcement costs while generating more than $6 billion a year if it
were taxed at the same rate as alcohol and tobacco. The drug czar's
office says that a gram of pure cocaine costs between $100 and $150;
a gram of heroin almost $400; and a bulk gram of marijuana between
$15 and $20. Those transactions are now occurring off the books of
business and government alike.

As the history of alcohol prohibition underscores, there are also
many non-economic reasons to favor legalization of vices: Prohibition
rarely achieves its desired goals and instead increases violence
(when was the last time a tobacco kingpin was killed in a deal gone
wrong?) and destructive behavior (it's hard enough to get help if
you're a substance abuser and that much harder if you're a criminal
too). And by policing vice, law enforcement is too often distracted
at best or corrupted at worst, as familiar headlines about cops
pocketing bribes and seized drugs attest. There's a lot to be said
for treating consenting adults like, well, adults.

But there is an economic argument as well, one that Franklin
Roosevelt understood when he promised to end Prohibition during the
1932 presidential campaign. "Our tax burden would not be so heavy nor
the forms that it takes so objectionable," thundered Roosevelt, "if
some reasonable proportion of the unaccountable millions now paid to
those whose business had been reared upon this stupendous blunder
could be made available for the expense of government."

Roosevelt could also have talked about how legitimate fortunes can be
made out of goods and services associated with vice. Part of his
family fortune came from the opium trade, after all, and he and other
leaders during the Depression oversaw a generally orderly
re-legalization of the nation's breweries and distilleries.

There's every reason to believe that today's drug lords could go
legit as quickly and easily as, say, Ernest and Julio Gallo, the
venerable winemakers who once sold their product to Al Capone.
Indeed, here's a (I hope soon-to-be-legal) bet worth making: If
marijuana is legalized, look for the scion of a marijuana plantation
operation to be president within 50 years.

Legalizing vice will not balance government deficits by itself --
that will largely depend on spending cuts, which seem beyond the
reach of all politicians. But in a time when every penny counts and
the economy needs stimulation, allowing prostitution, gambling and
drugs could give us all a real lift.