A proposition to regulate and tax marijuana is on the California ballot. Its backers say it can raise up to $1.4 billion in revenue and help reduce the state's huge deficit. But the tax makes no economic sense.
Backers of the November ballot initiative to legalize marijuana in California are selling the idea based on economics: The state is in dire financial straits; taxing and regulating the drug – much like alcohol – could raise $1.4 billion for state coffers.
That estimate comes from the California Board of Equalization, which administers the state's sales taxes. The source gives the economics argument an air of credibility. Even so, voters shouldn't inhale it.
The board's estimate "is based on a series of assumptions that are in some instances subject to tremendous uncertainty and in other cases not validated," said Rosalie Liccardo Pacula of the RAND Corporation, in testimony before the state Assembly. Dr. Pacula is an economist who has studied drug policies for 15 years.
One of the highly questionable assumptions is that a legal market can sustain a proposed $50-an-ounce tax on marijuana. The black market can easily undercut that tax, siphoning sales away from legal distributors and eroding tax revenues.
This is exactly what happened in Canada with cigarette taxes. In the 1990s, a mere $2 price difference between Canadian and US cigarettes created such a smuggling problem that Canada repealed its tax hike.