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The Budgetary Impact of Ending Drug Prohibition, Cato White Paper No. 30 | Prohibition Of Drugs | Drugs
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the drug war. Legalization means reduced expenditure on enforcement and an increase in tax revenue from legalized sales.
would save roughly $41.3 billion per year in government expenditure on enforcement of prohibition. Of these savings, $25.7 billion would accrue
to state and local governments, while $15.6 bil-
lion would accrue to the federal government.
The report also estimates that drug legalization would yield tax revenue of $46.7 billion
Professor Miron earned his Ph.D. from the Massachusetts Institute of Technology and chaired the economics department at Boston University prior to joining the Harvard faculty. Katherine Waldock is a doctoral candidate at the
the increases in tax revenue that would result
from legalizing drugs. The report concludes
that drug legalization would reduce government expenditure by about $41.3 billion
annually. Roughly $25.7 billion of this savings
would accrue to state and local governments,
and roughly $15.6 billion would accrue to the
federal government. Approximately $8.7 billion of the savings would result from legalization of marijuana, $20.0 billion from legalization of cocaine and heroin, and $12.6 from
legalization of all other drugs. Legalization
would also generate tax revenue of roughly
$46.7 billion annually if drugs were taxed at
rates comparable to those on alcohol and
tobacco. Approximately $8.7 billion of this
revenue would result from legalization of marijuana, $32.6 billion from legalization of
cocaine and heroin, and $5.5 billion from
legalization of all other drugs.
This report will begin with an explanation
of our estimation methodology. We will then
set forth and explain our estimates of the
expenditures that can be saved by ending
drug prohibition, and then explain our estimate of the tax revenue that would accrue by
ending drug prohibition. The report will conclude with a brief discussion of the implications of our research findings.
State and federal governments in the
United States face a daunting fiscal outlook.
The national debt currently stands at 60 percent of GDP, its highest level since World
War II, and under current projections this
ratio will rise to more than 75 percent of
GDP by 2020 and continue increasing thereafter.1 States are also facing severe budget
shortfalls.2
Both politicians and the public express
concern about the debt, but the standard proposals for expenditure cuts or tax increases
garner little support. Understandably, therefore, some politicians, commentators, interest
groups, and citizens have embraced unconventional approaches to closing fiscal gaps,
such as legalizing drugs. Legalization would
reduce state and federal deficits by eliminating
expenditure on prohibition enforcement—
arrests, prosecutions, and incarceration—and
by allowing governments to collect tax revenue on legalized sales.
This potential fiscal windfall is of particular interest because California, which is facing a budget shortfall of $19.9 billion for fiscal year 2011, will vote in November 2010 on
a ballot initiative that would legalize marijuana under California law.3 Advocates of the
measure have suggested the state could raise
“billions” in annual tax revenue from legalized marijuana, in addition to saving criminal justice expenditure or re-allocating this
expenditure to more important priorities.4
And should the California measure pass and
generate the forecasted budgetary savings,
other states would likely follow suit.
The fact that legalization might generate
a fiscal dividend does not, by itself, make it a
better policy than prohibition. Legalization
would have many effects, and opinions differ
on whether these are desirable on net. Both
sides in this debate, however, should want to
know the order of magnitude of the fiscal
benefit that might arise from legalization.
This report estimates and discusses the
reductions in government expenditure and
Analyzing the budgetary impact of legalization requires a number of assumptions
about exactly what policy change is being
examined. The implications of legalization by
one state, with prohibition maintained in all
other states and by the federal government, are
likely to differ from legalization by a number
of states because competition between states
would undermine the tax revenue that might
accrue to a single state if it were the only legal
source of drugs. Legalization by the federal
government is likely to have substantially different impacts than legalization by states with
federal prohibition still in place, since federal
prohibition might hamper state legalization
in prosecutorial and judicial resources from
eliminating drug prosecutions; and the reduction in correctional resources from eliminating drug incarcerations.6 Other savings in government expenditure might result from
legalization, but these are minor or extremely
difficult to estimate with existing data.7
To estimate the state and local savings in
criminal justice resources, this report uses the
following procedure. It estimates the percentage of state and local arrests for drug violations and multiplies this percentage by the
state and local budget for police (subject to
one adjustment discussed below). It estimates
the percentage of state and local felony convictions for drug violations and multiplies
this percentage by the state and local budget
for prosecutors and judges (subject to one
adjustment described below). It estimates the
percentage of state and local incarcerations
for drug violations and multiplies this percentage by the state and local budget for prisons. It then sums these components to estimate the overall reduction in state and local
government expenditures. Under plausible
assumptions, this procedure yields a reasonable estimate of the cost savings from drug
This report therefore considers the following policy change: simultaneous legalization
by all states and the federal government. This
policy change is not currently on the table,
nor is it likely to occur in the near future. But
this hypothetical case is analytically tractable
because it circumvents the need for assumptions about cross-border effects or about
state versus federal impacts of legalization.
More importantly, this hypothetical provides
an upper bound on the expenditure savings
and revenue increases that might occur from
The policy change considered here—legalization—is more substantial than decriminalization, which means repealing criminal penalties against simple possession but retaining
them against drug smuggling and selling. The
budgetary implications of legalization exceed
those of decriminalization for three reasons.5
First, legalization eliminates arrests for drug
trafficking in addition to arrests for simple
possession. Second, legalization saves prosecutorial, judicial, and incarceration expenses;
these savings are minimal in the case of decriminalization. Third, legalization allows taxation
of drug production and sale.
The estimates provided here should not
be taken as precise estimates of the budgetary
implications of a legalized regime for currently illegal drugs. The analysis employs
numerous assumptions, some that plausibly
bias the estimates downward and some that
plausibly bias the estimate upward. Thus, the
estimates reported here should be considered
“ballpark figures” that indicate what order of
magnitude of fiscal benefit policymakers
should expect from legalization.
Portion of State and Local Police Budget
Devoted to Drug Prohibition
The first cost of drug prohibition is the
portion of state and local police budgets
devoted to drug arrests. This report calculates
that expenditure in two steps. It first calculates the percentage of drug arrests due to
prohibition. It then multiplies this percentage
by state and local expenditure on police,
adjusted downward by approximately 9.6 percent to account for police activity unrelated to
making arrests.8
Table 1 calculates the fraction of state and
local arrests due to drug prohibition. Line 1
gives the total number of state and local
arrests in 2007. Line 2 gives the number of
such arrests for drug law violations. Line 3
gives the fraction of arrests due to drug law
violations, defined as Line 2 divided by Line
1. Line 4 gives the percentage of drug arrests
State and Local Expenditure
The savings in state and local government
expenditure that would result from drug legalization consist of three main components: the
reduction of expenditures of police resources
from eliminating drug arrests; the reduction
Percentage of Arrests Due to Drug Prohibition, 2007
2. Arrests for Drug Violations
3. % of Arrests, Drug Violations
4. % of Drug Arrests, Sale/Man
6. % of Drug Arrests , Possession
Sources: Total arrests and arrests for drug violations: U.S. Department of Justice, Crime in the United
States: Estimated Number of Arrests (Washington: Federal Bureau of Investigation, Uniform Crime Reporting Program, 2007), http://www.fbi.gov/ucr/cius2007/data/table_29.html. Drug violation and sale/
manufacturing percentages: U.S. Department of Justice, Crime in the United States: Persons Arrested
(Washington: Federal Bureau of Investigation, Uniform Crime Reporting Program, 2007), http://www.
fbi.gov/ucr/cius2007/arrests/index.html.
alone,” meaning those in which a drug violation rather than some other charge is the reason for the arrest. This issue arises mainly for
possession rather than trafficking. Few hard
data exist on the fraction of “stand-alone” possession arrests, but previous research studies
suggest it is between 33 percent and 85 percent.10 To err on the conservative side, this
report assumes that 50 percent of possession
arrests are due solely to drug possession rather
than being incidental to some other crime.
Thus the resources utilized in making these
arrests would be available for other purposes if
drug possession were legal. Line 8 of Table 1
therefore shows Line 7 divided by 2; this is the
fraction of possession arrests attributable to
Whereas Table 1 presents an overview of
the percentages of drug arrests in the United
States based on type of violation, Appendix A
presents the same data broken down by individual state. Appendices C-G then use these
fractions to calculate expenditures attributable to drug prohibition at the state level.
Total police expenditure for the U.S. is indicated in the first part of Table 2. Line 1 gives
total state and local expenditure on police in
due to sale or manufacturing violations. Line
5 gives the percentage of overall arrests due to
sale/manufacturing violations, defined as
Line 3 times Line 4. Line 6 gives the percentage of drug law violations due to possession
violations. Line 7 gives the percentage of
overall arrests due to possession violations,
defined as Line 6 times Line 3.
The information in Lines 5 and 7 is what
is required in subsequent calculations, subject to one modification. Some arrests for
drug violations, especially those for possession, occur because the arrestee is under suspicion for a non-drug crime but possesses
drugs that are discovered by police during a
routine search. This means an arrest for drug
possession is recorded, along with, or instead
of, an arrest on the other charge. If drug possession were not a criminal offense, the suspects in such cases would still be arrested on
the charge that led to the search, and police
resources would be used to approximately
the same extent as when drug possession is a
criminal violation.9
In determining which arrests represent a
cost of drug prohibition, therefore, it is appropriate to count only those that are “stand-
arrests are due
solely to drug
possession rather
State and Local Expenditures Attributable to Drug Prohibition, Billions of 2008 dollars
Police Budget, S/M violations
Police Budget, Possession violations
Police Budget, Drug Violations
% Felony Convictions, Drug Violations
Judicial Budget, Drug Violations
Corrections Operating Budget
% of Prisoners, Drug Charges
10. Correct. Budget, Drug Violations
11. Gross S/L Expend, Drug Prohibition
12. Net S/L Expend, Drug Prohibition*
Sources: The data on felony convictions are from Matthew Durose and Patrick A. Langan, Felony Sentences in State Courts, 2000, Bureau of Justice Statistics,
Office of Justices Programs, U.S. Department of Justice, NCJ 198821 (2003), p. 2. The data on prisoners are from U.S. Department of Justice, Prisoners in
2007: Estimated Number and Percent Distribution of Prisoners under Jurisdiction of State Correctional Authorities (Bulletin NCJ 219416) (Washington:
Federal Bureau of Investigation, 2008), http://www.albany.edu/sourcebook/pdf/t600012005.pdf. The data on budgets are from U.S. Census Bureau, State and
Local Government Finances by Level of Government and by State (2008), http://www.census.gov/govs/estimate/0600ussl_1.html. Budgets were originally
reported for 2005–2006 and were converted to 2008 dollars with U.S. Department of Labor, “Consumer Price Index—All Urban Consumers” http://
www.bls.gov/cpi/home.htm#data.
*See Appendix M.
percent of the overall judicial and legal budget, to account only for felony and misdemeanor cases. This fraction came from individual state data on judicial workloads for
eight states.11
The second portion of Table 2 calculates
the judicial and legal budget due to drug prohibition.12 Line 5 gives 41.7 percent of the
state and local judicial and legal budget in
2008, which represents the fraction of that
budget that is spent on felony and misdemeanor cases. Line 6 gives the percent of
felony convictions in state courts due to drug
law violations.13 Line 7 gives the state and
local judicial and legal budget due to drug
prosecutions, equal to the product of Line 5
and Line 6.
FY 2008, adjusted for non-arrest activities.
Line 2 gives police expenditure due to arrests
for sales/manufacturing. Line 3 gives police
expenditures due to possession. Line 4 gives
total police expenditure due to drug violations, defined as Line 2 plus Line 3.
Portion of State and Local Judicial and
Legal Budget Devoted to Drug
The second main cost of drug prohibition
is the portion of the prosecutorial and judicial budget devoted to drug prosecutions. A
possible indicator of this percentage is the
fraction of felony convictions in state courts
for drug offenses. This indicator likely overstates, however, because the judicial and legal
budget encompasses domestic relations, civil,
and other case types that are unrelated to
criminal activity. We therefore use the fraction of felony convictions multiplied by 41.7
Portion of State and Local Corrections
Budget Devoted to Drug Prohibition
The third main cost of drug prohibition is
arrested for drug violations (e.g., financial
accounts, cars, boats, land, and houses), with
the proceeds used to fund police and prosecutors.16 Second, some drug offenders pay
fines, which partially offset the expenditure
required to arrest, convict, and incarcerate
these offenders. Appendix M shows that this
offsetting revenue has been at most $0.5 billion per year in recent years at the state and
Line 12 therefore shows the net state and
local expenditure on drug prohibition for
2008 after subtracting out revenue from
seizures and fines.17 For all drugs, the estimate is $25.7 billion; for marijuana, $5.4 billion; for cocaine and heroin, $11.7 billion;
and for other drugs, $8.7 billion.18
the portion of the corrections budget devoted to incarcerating drug prisoners. A reasonable indicator of this portion is the fraction
of prisoners incarcerated for drug offenses.
The third portion of Table 2 calculates the
corrections budget due to drug prohibition.14
Line 8 gives the overall corrections budget.
Line 9 gives the percent of state prisoners
incarcerated for drug law violations. Line 10
gives the corrections budget devoted to drug
prisoners, equal to the product of Line 8 and
Line 9.15
Overall State and Local Expenditure for
Enforcement of Drug Prohibition
Line 11 of Table 2 adds Lines 4, 7, and 10
to estimate total state and local government
expenditure for enforcement of drug prohibition. The figures in lines 11 are overstatements of the savings in government expenditure that would result from legalization, for
two reasons. First, under prohibition the
police sometimes seize assets from those
Table 3 provides the state-by-state breakdown of state-and-local expenditure on drug
prohibition for the year 2008, net of seizures
and fines. Appendixes C–G provide state-by-
State-Level Expenditures Attributable to Drug Prohibition, Thousands of 2008 Dollars
25,684,407
5,386,753
11,682,223
fines, which
arrest, convict,
and incarcerate
state breakdowns for the components of
In addition to reducing government expenditure, drug legalization would generate tax
revenue from the legal production and sale of
drugs. To estimate the revenue, this report
employs the following procedure. First, it estimates current consumer (retail) expenditure
on drugs under prohibition. Second, it estimates the consumer expenditure likely to
occur under legalization. Third, it estimates
the tax revenue that would result from that
expenditure based on assumptions about the
kinds of taxes that would apply to legalized
Federal Expenditure for
This section estimates federal expenditure
on drug prohibition enforcement. The estimate relies on data from the Office of Drug
Control Policy and equals $16.5 billion for
2007.19 Adjusting this number for inflation
between 2007 and 2008 gives an estimate of
$17.1 billion for 2008.
As with state and local revenue, this figure
should be adjusted downward by the revenue
generated from federal seizures and fines.
Appendix M indicates that this amount has
been at most $1.5 billion in recent years,
implying a net expenditure for the federal government of about $15.6 billion.
Table 4 allocates this $15.6 billion to different drug categories using the percentage
of DEA arrests by drug. The fourth line
shows that approximately $3.4 billion of the
federal expenditure on drug prohibition is
due to marijuana prohibition, $8.4 billion to
cocaine and heroin, and $3.9 billion to other
Consumer Expenditure on Drugs under
The first step in determining the tax revenue under legalization is to estimate expenditures on drugs under current prohibition.
ONDCP provides estimates of this expenditure for 2000.20 These estimates are controversial and rely on a range of assumptions about
the drug market. Many analysts have estimated
the marijuana market, in particular, to be
10–30 times larger than the ONDCP estimates.
We make three adjustments to the ONDCP
estimates. First, we scale them up by the
Federal Drug Prohibition Expenditure, Billions of 2008 Dollars
1. Federal Expenditure (2008)
2. Number of DEA arrests (2007)
3. Percentage of DEA arrests, by Drug
4. Federal Expenditure, by Drug
Sources: The data on the fraction of DEA arrests by drug are from U.S. Department of Justice, Federal Drug-Related
Arrests, United States, 2003–2008 (Washington: National Drug Intelligence Center, 2009), http://www.usdoj.gov/ndic
/pubs31/31379/appendb.htm#TableB1. Federal expenditures were originally reported in 2007 dollars and were adjusted
for inflation to 2008 dollars with Office of National Drug Control Policy, National Drug Control Strategy (Washington:
ONDCP, 2009), http://www.whitehousedrugpolicy.gov/publications/policy/10budget/fy10budget.pdf.
State and Federal Tax Revenues from Drug Legalization, Billions of 2008 Dollars
Consumer Expenditure by Drug, 2000
Consumer Expenditure by Drug, 2008
Assumed Percent Decline in Price
Assumed Elasticity
Percent Decline in Expenditure, Legalization
Consumer Expenditure, Legalization
Consumer Expenditure, Sin Taxation
Revenue from Sin Taxation
Consumer Expenditure Subject to Standard Taxation
Revenue, Standard Taxation
Sources: http://www.whitehousedrugpolicy.gov/publications/pdf/american_users_spend_2002.pdf; and http://www.census.gov/popest/states/NST-ann-est.html.
Consumer expenditures were originally reported in 2000 dollars and were adjusted for inflation to 2008 dollars with http://www.bls.gov/cpi/home.htm#data and
for increase in drug usage based on estimates from Monitoring the Future, 2009, http://monitoringthefuture.org/pubs/monigraphs/vol2_2008.pdf; Table 418, State
and Local Excise Revenue from Alcohol and Tobacco, http://www.census.gov/compendia/statab/cats/state_local_govt_finances_employment.html; Table 457,
Federal Excise Tax Revenue from Alcohol and Tobacco, http://www.census.gov/compendia/statab/cats/federal_govt_finances_employment/federal_budget-receipts_outlays_and_debt.html.
expenditure on drugs would change as the
result of legalization. A simple framework in
which to consider various assumptions is the
supply and demand model. To use this model to assess legalization’s impact on drug
expenditure, it is necessary to state what
effect legalization would have on the demand
and supply curves for drugs.
This report assumes that the demand for
drugs would not shift.25 This assumption
likely errs in the direction of understating the
tax revenue from legalized drugs since the
penalties for possession potentially deter
some persons from consuming. Any increase
in demand as a result of legalization, however, would plausibly come from casual users,
since most heavy users are already consuming despite prohibition. Any increase in use
might also come from decreased consumption of alcohol, tobacco, or other goods, so
increased tax revenue from legal drugs would
be partially offset by decreased tax revenue
from other goods. “Forbidden fruit” effects
increase in population and the increase in the
overall price level from 2000 to 2008.21 Second,
we adjust for changes in use rates between
2000 and 2008, which varied by drug.22 Third,
we inflate the ONDCP estimates to account
for underreporting. Considerable evidence
suggests that underreporting of illicit drug use
is not extreme in the National Household
Survey on Drug Abuse, the data source utilized
by ONDCP, but the evidence does suggest
underreporting in the range of 20–30 percent.23 We inflate the ONDCP estimates by 25
percent to account for underreporting.24
Table 5, line 1, gives the ONDCP estimates
for 2000, adjusted for underreporting. Line 2
gives these estimates adjusted for inflation,
population growth, and changes in use rates
The second step in estimating the tax revenue from legalization is to determine how
that economists use to describe the degree of
responsiveness of consumers to price changes,
which can vary considerably depending on the
product. Evidence concerning this elasticity is
limited because appropriate data on drug
price and consumption are not readily available. Existing estimates, however, suggest an
elasticity of at least -0.5 and plausibly more
than -1.0.34 Estimates for other drugs, as well
as for alcohol and tobacco, generally suggest
an elasticity in the range of -0.5 to -1.0. If the
demand elasticity equals -1.0, then expenditure will remain constant. If demand is less
elastic, then expenditure will decline.35 This
report assumes an elasticity of -0.5, as shown
in Table 5, line 4.
Table 5, line 5, shows the implications of
these assumptions about the decline in price
combined with an elasticity of -0.5 for the
amount of expenditure that would occur for
legalized drugs, assuming the economic
activity in legalized drugs markets is subject
to standard income and sales taxation. The
estimates in line 5 do not assume the presence of a sin tax on legalized drugs.
from prohibition might also tend to offset
the demand-decreasing effects of penalties
for possession.26 Thus, the assumption of no
change in demand is plausible.27
If demand does not shift due to legalization, any change in quantity and price must
result from changes in supply conditions. Two
main effects would operate.28 On the one hand,
drug suppliers in a legal market would not
incur the costs imposed by prohibition, such as
the threat of arrest, incarceration, fines, asset
seizure, and the like. Other things equal, therefore, costs and prices would be lower under
legalization. On the other hand, drug suppliers
in a legal market would bear the costs of tax
and regulatory policies that apply to legal
goods but that black market suppliers normally avoid.29 This implies an offset to the cost
reductions resulting from legalization. Further, changes in competition and advertising
under legalization can potentially yield higher
The magnitude of legalization’s impact on
price is therefore likely to differ across drugs,
given differences in supply conditions and in
the degree to which prohibition is enforced.
For marijuana, the best available evidence
comes from comparisons of prices between
the U.S. and the Netherlands. Although marijuana is still technically illegal in the Netherlands, the degree of enforcement is substantially below that in the United States, and the
sale of marijuana in coffee shops is officially
tolerated. The regime thus approximates de
facto legalization. Existing data suggest that
retail prices in the Netherlands are roughly
50–100 percent of U.S. prices.30 This report
assumes that legalized prices for marijuana
would be 50 percent of current prices. For
cocaine, available evidence suggests that prices
might fall to 20 percent of the current level; for
heroin, the evidence suggests prices might fall
to 5 percent of the current level.31 For other
drugs, this report assumes that prices fall to 5
percent of the current level.32 Table 5, line 3,
shows these assumptions.
The effect of any price decline that occurs
due to legalization depends on the elasticity of
demand for drugs.33 “Elasticity” is a concept
Tax Revenue from Legalized Drugs
To estimate the tax revenue that would
result from drug legalization, it is necessary
to assume a particular tax structure. This
report assumes that legalized drugs would be
taxed at rates comparable to alcohol and
tobacco. This means that the legalized drug
market would be subject to “sin” taxation as
well as standard income and sales taxation.36
Imposing a high sin tax can force a market
underground, thereby reducing rather than
increasing tax revenue. Existing evidence,
however, suggests that relatively high rates of
sin taxation are possible without generating
a black market. Cigarette taxes in many
European countries, for example, account for
70–80 percent of the price.37
To estimate the revenue from sin taxation,
this report assumes that state and local plus
federal governments impose excise taxes on
legalized drugs at a rate equal to 50 percent of
the retail price. This implies that excise taxation accounts for 33 percent of the final price
would be taxed at
drugs would also
to consumers.38 An excise tax of 50 percent on
top of the legalized, retail price would increase
(tax-inclusive) expenditure by 25 percent given an assumed elasticity of -0.5. Line 7 of
Table 5 shows total expenditure on legalized
drugs under these assumptions, while line 8
shows the revenue from sin taxation.39
Legalized drugs would also generate tax
revenue because the income earned by the producers would be subject to standard income
and sales taxation. The amount of income
earned is roughly equal to the amount of
expenditure. For most legal goods, tax revenue
as a fraction of expenditure is approximately
30 percent.40 This figure includes the sales taxation of roughly 5 percent imposed by most
state governments as well as income taxation
imposed by state and federal governments.
This 30 percent tax share is consistent with
the estimates derived above on the relation
between prices under prohibition and prices
in a legalized market since those prices were
based on comparisons that incorporated any
costs of legal goods due to standard taxation.
This 30 percent should be applied to an
amount equal to 75 percent of the legalized,
pre–sin tax expenditure. This is because while
the sin tax raises expenditure given that
demand is inelastic, the 50 percent higher
price combined with an elasticity of -0.5 leads
to a 25 percent reduction in (tax-exclusive)
expenditure. Assuming constant costs therefore means that expenditure should be 75
percent of pre–sin tax expenditure. Table 5,
lines 9 and 10, provide these calculations.
Table 5, line 11, adds the revenue from sin
taxation and standard income/sales taxation
to provide estimates of the total tax revenue
that would accrue from a regime in which
drugs are legal but taxed and regulated similarly to alcohol and tobacco. For all drugs,
the estimate is $46.7 billion. Of this, $8.7 billion would be attributed to marijuana, $32.6
billion to cocaine and heroin, and $5.5 billion to other drugs. In lines 12 and 13, we
attribute two-thirds of this revenue to federal
tax collection and one-third to state/local tax
collection because that is roughly the ratio
for existing tax revenues.
Table 6 provides state-by-state breakdowns
State Drug Tax Revenue—Population Method, Millions of 2008 Dollars
10,852.17
Summary of Expenditures and Revenues from Drug Legalization, Billions of 2008
legalization on
budgets would
ment budgets, policymakers would have to lay
off police, prosecutors, prison guards, and the
like. Because such a move would be politically
painful, it may not occur. It is certainly true
that reduced expenditure on enforcing drug
prohibition can still be beneficial if those
criminal justice resources are re-deployed to
better uses, but that outcome is difficult to
Third, only about $17.4 billion in budgetary improvement can be expected to come
from legalizing marijuana in isolation. Yet
the current political climate gives no indication that legalization of other drugs is achievable in the short term. So the budgetary
impact from the politically possible component of legalization—marijuana—seems fairly
None of these considerations weakens the
critique of drug prohibition since that critique
has always rested mainly on other considerations, such as the crime, corruption, and curtailment of civil liberties that have been the
side-effects of attempting to fight drug use
with police officers and prisons.42 What the
estimates provided here do provide are two
additional reasons to end drug prohibition:
reduced expenditure on law enforcement and
an increase in tax revenue from legalized sales.
of all the estimates provided in this section,
assuming these revenues are proportional to
population. These should be regarded as subject to more uncertainty than the national estimates due to data limitations. Alternatively,
Appendix Table I utilizes the state-level estimates of drug consumption rates from the
2006 and 2007 National Survey on Drug Use
and Health to provide state level estimates
based on state use rates.41 Given the sample
sizes involved in estimating these use rates, the
estimates based on population are plausibly
Table 7 summarizes all the estimates of
expenditure reductions and tax increases for
both the federal government and the sum of
all state governments. Three aspects of these
estimates stand out.
First, the total impact of drug legalization
on government budgets would be approximately $88 billion per year.
Second, about half of the budgetary improvement from legalization is due to reduced
criminal justice expenditure. But for this component of the impact to show up in govern-
State-by-State Arrest Data
Drug Violation Total Arrests
Sales and Manufacturing Arrests
Sources: Uniform Crime Reports Drug Arrest Data 2007. Florida (1995): http://fisher.lib.virginia.edu/collections/stats/crime/. Minnesota (2006): http://www.
icpsr.umich.edu/cocoon/NACJD/STUDY/23780.xml.
Notes: For data considerations on the 2007 Crime in the US report: http://www.fbi.gov/about-us/cjis/ucr/crime-in-the-u.s/2007.
No 2007 arrest data were received from the District of Columbia’s Metropolitan Police Department. The only agency (Metro Transit Police) in the District of
Columbia for which 12 months of arrest data were received has no attributable population.
No 2007 arrest data were received from Hawaii. However, arrest totals for this state were estimated by the national UCR Program and were included in Table
29 “Estimated Number of Arrests, United States, 2007.”
No 2007 arrest data were received from the New York City Police Department. However, arrest totals for this area were estimated by the national UCR
Program and were included in Table 29 “Estimated Number of Arrests, United States, 2007.”
State-by-State Sale/Manufacturing and Possession Data
% of Total Arrests, Sales and Manufacturing
1/2 * % of Total Arrests, Possession
Contuned next page
Sources: Uniform Crime Reports Drug Arrest Data 2007. Florida (1995): http://fisher.lib.virginia.edu/collections/stats/crime/. 3. Minnesota (2006):
http://www.icpsr.umich.edu/cocoon/NACJD/STUDY/23780.xml.
State and Local Expenditures Attributable to Drug Prohibition, Thousands of 2008 Dollars
on Drug Violations
% Felony
1,947,729
13,456,466
3,865,783
6,086,644
3,832,982
1,664,230
2,191,695
% Corrections,
13,727,037
2,676,772
2,299,773
1,683,629
1,407,655
2,789,161
2,566,394
5,083,807
81,034,269
4,284,116
17,268,302
Sources: Police Expenditure and Judicial Budget: 2005–2006 State Government Finance Data, US Census: http://www.census.gov/govs/estimate/. Felony
Convictions: http://ojp.usdoj.gov/bjs/pub/html/scscf04/tables/scs04101tab.htm. Corrections Budget: http://www.census.gov/govs/www/estimate06.html; http://
www.albany.edu/sourcebook/pdf/t600012005.pdf. Budgets were originally reported for 2005–2006 and were converted to 2008 dollars with http://www.bls.gov/
5,794,240
3,050,636
1,701,582
2,080,407
72,904,099
14,216,299
26,110,800
cpi/home.htm#data. Net S/L Expenditure was calculated using total seizures and fines of $426,393,100. Seizures and fines numbers are explained in
Appendix M, and are adjusted for inflation to 2008. Note there is a 9.6% downward correction for police officers without general arrest capabilities and a 58.3%
downward correction for nonfelony or misdemeanor trials (see Appendix J).
Expenditures Attributable to Heroin/Cocaine Prohibition, Thousands of 2008 Dollars
1,379,567
Convictions: http://ojp.usdoj.gov/bjs/pub/html/scscf04/tables/scs04101tab.htm. Corrections Budget: http://www.census.gov/govs/www/estimate06.html;
http://www.albany.edu/sourcebook/pdf/t600012005.pdf. Budgets were originally reported for 2005–2006 and were converted to 2008 dollars with http://
7,326,862
11,876,162
www.bls.gov/cpi/home.htm#data. Net S/L Expenditure was calculated using total seizures and fines of $426,393,100. Seizures and fines numbers are explained
in Appendix M, and are adjusted for inflation to 2008. Note there is a 9.6% downward correction for police officers without general arrest capabilities and a
58.3% downward correction for nonfelony or misdemeanor trials (see Appendix J).
Expenditures Attributable to Marijuana Prohibition, Thousands of 2008 Dollars
2,667,436
www.albany.edu/sourcebook/pdf/t600012005.pdf. Budgets were originally reported for 2005–2006 and were converted to 2008 dollars with http://www.bls.
1,664,149
gov/cpi/home.htm#data. Net S/L Expenditure was calculated using total seizures and fines of $426,393,100. Seizures and fines numbers are explained in
Expenditures Attributable to Synthetic Prohibition, Thousands of 2008 Dollars
http://www.albany.edu/sourcebook/pdf/t600012005.pdf. Budgets were originally reported for 2005–2006 and were converted to 2008 dollars with
4,527,872
http://www.bls.gov/cpi/home.htm#data. Net S/L Expenditure was calculated using total seizures and fines of $426,393,100. Seizures and fines numbers are
explained in Appendix M, and are adjusted for inflation to 2008. Note there is a 9.6% downward correction for police officers without general arrest capabilities and a 58.3% downward correction for nonfelony or misdemeanor trials (see Appendix J).
Expenditures Attributable to Prohibition of Other Drugs, Thousands of 2008 Dollars
1,194,188
4,350,419
State Drug Tax Revenue—Population Method in Millions of 2008 Dollars
Source: State population estimates (2008): http://www.census.gov/popest/national/files/NST-EST2008-alldata.csv.
State Drug Tax Revenue—Consumption Method in Millions of 2008 Dollars
12,672.46
Source: Use proportion (2007): http://www.oas.samhsa.gov/2k7state/AppB.htm#TabB-1.
Adjudications Expenditures Attributable to Misdemeanor/Felony Cases
The unit of measurement for workload
varied across reports—for California it was
measured by judicial need, and for the other
states it was measured in units of time. The
fraction of felony and misdemeanor cases for
each state was taken by dividing the workload for felony and misdemeanor cases by the
workload for all cases. These numbers were
then adjusted by state weights based on population. The weighted average for the
amount of judicial and legal workload attributable to felony and misdemeanor cases was
41.66%.
Since we weight the judicial and legal budget by the proportion of felony cases (and not
all cases) that are drug-related, we must
accordingly adjust state and local adjudications expenditures to reflect the proportion
of cases spent on felonies and misdemeanors.
We assume that the proportion of felony cases that are drug-related can be applied to misdemeanor cases as well. There is no aggregate
report that reflects the proportion of adjudications expenditures that goes to felony and
misdemeanor cases, so we collected data
from eight existing state reports.
357,262.1
Misdemeanor Population
0.437888199 36,961,664
0.6731833
0.320551285
0.02358909
6,136,036.78
16,567,588
0.370363917
0.05478212
2,504,782
0.523161028
0.03272185
5,295,909
12,711,403
0.41662663
0.06967674
1,131970
6,213,660
0.182174435
0.03314362
8,607,237
23,945,697
0.359448171
0.10299048
0.480290647
0.0099128
0.386313039
Source: All reports can be found at http://www.ncsconline.org/wc/CourTopics/StateLinks.asp?id=87&topic=WorkLd.
Percentage of Incarcerated Drug Offenders by Drug Type (Marijuana)
drug incarcerations by drug, we looked at
prisoner population statistics from every
state. Only six states classified drug offenders by type of drug, and of those six, only
three were specific enough to make distinctions among heroin, cocaine, and other
In order to use all available data, we first
constructed a weighted average (by state population) for the proportion of drug offenders
that were incarcerated for a marijuana offense.
This number came out to be 8.2%, as demonstrated below.
While there is data available on the fraction
of drug sales and manufacturing arrests by
drug type, there is no aggregate statistic for the
fraction of drug-related incarcerations by drug
type. This was problematic for calculating corrections expenditures by drug because offenders are not necessarily incarcerated in the same
proportion by drug for which they are arrested. This is because some offenses, such as possession of heroin, might be considered more
punishable than others, such as possession of
In order to calculate a proportion for
76,415,359
Sources: California: http://www.cdcr.ca.gov/Reports_Research/Offender_Information_Services_Branch/Annual/Cal
Pris/CALPRISd2008.pdf. Colorado: http://www.doc.state.co.us/sites/default/files/opa/StatRprt_FY09.pdf. Georgia:
http://www.dcor.state.ga.us/Reports/Annual/pdf/inmadmFY2009.pdf. Illinois: http://www.idoc.state.il.us/subsections/
reports/annual_report/FY09%20DOC%20Annual%20Rpt.pdf. Indiana: http://www.in.gov/idoc/files/CY2009Offender
Population.pdf. Minnesota: http://www.corr.state.mn.us/publications/documents/drugbackgrounder.pdf.
Percentage of Incarcerated Drug Offenders by Drug Type (Non-Marijuana)
final proportions were then normalized to
account for the inclusion of marijuana. The
final weighted share for heroin and cocaine
offenders is 51.5%, for synthetic drug offenders
is 25.7%, and for all other drug offenders is
14.6%. This is demonstrated in the table below.
After the proportion of drug offenders
incarcerated for marijuana was calculated, we
came up with similar state-level proportions for
the three states with data on other drugs, except
excluding marijuana. These were then weighted
by the populations of these three states. The
0.456778755
26.53885
9.729387
9.409642
0.298492072
19.31244
4.596778
5.939992
0.244729173
10.25415
13.68036
Including marijuana:
0.538404
Sources: Georgia: http://www.dcor.state.ga.us/Reports/Annual/pdf/inmadmFY2009.pdf. Indiana: http://www.in.gov/idoc/files/CY2009OffenderPopulation.pdf.
Minnesota: http://www.corr.state.mn.us/publications/documents/drugbackgrounder.pdf.
* Opiates were categorized as heroin; “cocaine and narcotics” were categorized as cocaine and heroin. When unspecified, drugs were categorized as “other,”
even though this category might be overestimated because the original figures might have included heroin, cocaine, or synthetic drugs. “Legend drugs” and
“Indiana schedule IV substances” are categorized as synthetic drugs. For Minnesota, it was assumed that half of all drugs categorized as “other” were heroin
Revenue under Prohibition from Seizures and Fines
ever, estimate using a sample of states that
state forfeiture revenue per capita was roughly $1.14 during the 1994–2001 period. This
implies aggregate state forfeiture revenue of
$342 million. Adjusting for inflation implies
a number around $400 million.
Fines. In 2007, the total quantity of fines
and restitutions ordered for drug offense cases in U.S. District Courts was just under $38.1
million.1 Assuming the ratio of state/local to
federal fine/restitution revenue is similar to
ratio of state/local to federal seizure revenue
implies that state and local fine/restitution
revenue from drug cases is about $10 million.
Seizures. In 2007, U.S. attorneys received
$1.3 billion of forfeiture. This overstates revenue related to drugs because the figure
includes seizures for all reasons, such as violation of gun laws, intellectual property laws,
and the like. There may also be doublecounting between the DEA seizures and the
U.S. Customs seizures.
State and local data on forfeiture revenue
are not readily available. Katherine Baicker
and Mireille Jacobson, “Finders Keepers:
Forfeiture Laws, Policing Incentives, and
Local Budgets” (manuscript, Department of
Economics, Dartmouth College, 2004), how-
See http://www.albany.edu/sourcebook/1995 /pdf/t531.pdf.
7. For example, under current rules regarding
parole and probation, a positive urine test for
drugs can send a parolee or probationer to prison,
regardless of the original offense. These rules
might change under legalization, implying additional reductions in government expenditure.
The authors would like to acknowledge a grant
from the Criminal Justice Policy Foundation in
support of research into the budgetary costs of
drug prohibition. The authors also wish to thank
Ting Zhang, Saria Sheikh, and Sanja Misra for
providing excellent research assistance.
8. Only 90.4 percent of paid full-time and parttime police officers have general arrest powers.
See the 2003 Sample Survey of Law Enforcement
Agencies at http://www.icpsr.umich.edu/cocoon/
NACJD/STUDY/04411.xml.
1. Congressional Budget Office, The Budget and
Economic Outlook: Fiscal Years 2010 to 2020 (Washington: CBO, 2010), p. xii; Office of Management
and Budget, Analytical Perspectives: Budget of the U.S.
Government, Fiscal year 2011 (Washington: OMB,
2010): p. 47.
9. To the extent it takes additional resources to
process an arrestee on multiple charges rather
than on a single charge, there is still a net utilization of police resources in such cases due to prohibition. In addition, there is typically a lab test to
determine the precise content of any drugs seized
when there is an arrest on drug charges, implying
utilization of additional resources due to prohibition. A different issue is that in some cases, police
stops for non-drug charges that discover drugs
and produce an arrest on drug charges might not
have led to any arrest in the absence of the drug
charge (e.g., because of insufficient evidence).
2. Elizabeth McNichol and Nicholas Johnson,
“Recession Continues to Batter State Budgets:
State Responses Could Slow Recovery,” Center on
Budget and Policy Priorities, May 27, 2010.
3. See Office of the Governor, “2010–2011 Budget Proposal: Solving California’s $20 Billion Deficit”, Fact Sheet, http://gov.ca.gov/index.php?/
fact-sheet/14147/. Marijuana would still be prohibited under federal law, which raises constitutional issues as well as complications for estimating the fiscal impact of legalization.
10. Jeffrey A. Miron, “The Effect of Marijuana
Decriminalization”; Peter Reuter, Paul Hirschfield,
and Curt Davies, “Assessing the Crack-Down on
Marijuana in Maryland,” (manuscript, University
of Maryland, 2001). Minchin Lewis, Report on the
Syracuse Police Department Activity for the Year Ended
June 30, 2002 (Department of Audit, City of
Syracuse, 2004) reports that in 2002 the fraction of
stand-alone arrests was 90.5 percent in Syracuse,
4. See “Yes on Prop 19,” http://www.taxcannabis.
org/index.php/pages/about.
5. See, for example, the estimates in Jeffrey A.
Miron, “The Effect of Marijuana Decriminalization on the Budgets of Massachusetts Governments, with a Discussion of Decriminalization’s
Effect on Drug Use,” Report to the Drug Policy
Forum of Massachusetts (October 2002) versus
those in Jeffrey A. Miron, “The Budgetary Implications of Marijuana Legalization in Massachusetts,”
Report to Change the Climate (August 2003).
11. Appendix J contains more information on the
methodology employed to arrive at this percentage.
6. This report addresses only the criminal justice
costs of enforcing drug prohibition; it does not
legalization. The narrower approach is appropriate
because the decision to prohibit drugs is separate
from the decision to subsidize prevention, education, and treatment. Drug legalization might nevertheless cause some reduction in government
expenditure for demand-side policies. For example,
legalization would likely mean reduced criminal
justice referrals of drug offenders to treatment; this
category accounted for 15–50 percent of drug
treatment referrals in 2006, depending on the drug
category (U.S. Department of Health and Human
Services, 2006, Appendix Table D, p. 14). Thus, the
approach adopted here implies a conservative estimate of the reduction in government expenditure
from drug legalization.
12. These calculations are for the aggregate of all
state and local expenditure in this category
because state-level data on the percent of prosecutions due to drug laws are available.
13. This figure is not available by drug. The calculations here assume that the fraction of felony convictions by drug equals the fraction of sale/manufacturing arrests by drug. One study suggests that
this assumption overstates judicial and legal budget due to marijuana prohibition because marijuana charges are less likely to be prosecuted than other drug charges. See Beau Kilmer et al., “Altered
States? Assessing How Marijuana Legalization in
California Could Influence Marijuana Consumption and Public Budgets,” Rand Drug Policy
Research Center Occasional Paper no. 315, 2010.
14. This report excludes the capital outlays por-
tures); Department of Treasury ($57.3 million and
$1,546.8 million for other expenditures); D.C.
Court Services and Offender Supervision ($78.5
million); Department of the Interior ($6.6 million);
and The Federal Judiciary ($1,025.3 million).
Patrick Murphy et al., Improving Anti-Drug Budgeting
(Santa Monica, CA: Rand, 2000) examine the
methods used by ONDCP to estimate this expenditure. They conclude that methodological problems render parts of the estimates biased, by substantial amounts in some cases. However, these
issues do not imply major qualifications to the
data considered here. Murphy et al. find that the
anti-drug budgets of the Coast Guard and the
Bureau of Prisons are accurate reflections of the
resources expended, whereas the reported expenditure of the Department of Defense probably
underestimates its anti-drug budget. The overestimates that they identify occur for demand-side
activities. The 2003 National Drug Control Strategy
adopted a new methodology for estimating the
federal drug control budget. This new methodology implies a substantial reduction in supply side
expenditure (Office of National Drug Control
Policy, National Drug Control Strategy, pp. 33–34).
For the purposes of this report, however, the old
methodology is more appropriate. For example,
the new approach excludes expenditures on incarceration of persons imprisoned for drug crimes.
tion of the corrections budget since the available
data do not indicate the average rate of such
expenditures. This biases the estimates downward. Further, these calculations are for the aggregate of all state and local expenditure in this category because state-level data on the percent of
prisoners due to drug laws are not available.
15. The proportion of drug offenders who are incarcerated by drug is not necessarily equivalent to the
proportion of sales/manufacturing arrests by drug,
since certain drugs might be considered more serious than others. This proportion, however, is not
available for all states. In order to come up with an
estimate of percentages by drug, we gathered individual state data on incarcerated drug offenders
from six state-specific reports. All six included information on the number of marijuana prisoners, but
only three reports contained information on the
number of incarcerated prisoners for heroin,
cocaine, and other drugs. Appendix K gives more
information on this weighting methodology.
16. Most seized assets are ultimately forfeited.
17. Since these data are not available by drug, the
estimates assume that seizure and fine revenue
are roughly proportional to gross expenditure.
18. Inflation rate data used throughout the paper
are from the U.S. Department of Labor, Consumer
Price Index—All Urban Consumers (Bureau of
Labor Statistics, http://www.bls.gov/cpi/home.
htm#data). As a check, it is useful to compare the
estimate provided here to that derived from an
alternative methodology. Office of National Drug
Control Policy, State and Local Spending on Drug
Control Activities, Washington, 1993, reports survey
evidence on drug prohibition enforcement by state
and local authorities for the years 1990/1991.
Adjusting these data for inflation and the percent
attributable to drug prohibition yields an estimate
similar to that reported above. The 1990 estimate is
$23.02 billion for state and local drug expenditures
on police/adjudications/corrections combined,
and the 1991 estimate is $24.96 billion.
20. Office of National Drug Control Policy, What
America’s Users Spend on Illegal Drugs (Cambridge,
MA: Abt Associates, 2001); Table A, p. 3.
21. Inflation data came from http://www.bls.gov/
data/inflation_calculator.htm, and population
data from http://www.census.gov/popest/states/
NST-ann-est.html.
22. Usage rates have increased slightly between
2000 and 2008. Prevalence rates for usage of all
illicit drugs have increased from 30.8 percent to
33.8 percent; for marijuana usage, from 27.9 percent to 28.6 percent; for cocaine, from 5.4 percent
to 6.0 percent; for heroin, from 0.4 percent to 0.5
percent; for other drugs, from 11.6 percent to 14.3
percent. See Monitoring the Future 2009, p. 151,
http://monitoringthefuture.org/pubs/mono
graphs/vol2_2008.pdf.
19. Office of National Drug Control Policy,
National Drug Control Strategy (Washington, 2009),
pp. 14 and A1, http://www.whitehousedrugpoli
cy.gov/publications/policy/10budget/fy10bud
get.pdf. This consists of expenditures in the following categories: Department of Defense ($1,242.7
million); Department of Homeland Security
($2,934.8 million and $65.0 million for other
expenditures); Department of Justice ($2,921.1
million and $4,996.7 million for other expenditures); ONDCP ($421.7 million); Department of
State ($1,125.7 million and $3.0 million for other
expenditures); Department of Transportation
($2.7 million and $25.7 million for other expendi-
23. Beau Kilmer and Rosalie Liccardo Pacula,
Estimating the Size of the Global Drug Market: A
Demand-Side Approach—Report 2 (Santa Monica,
CA: RAND Corporation, 2009), http://www.rand.
org/pubs/technical_reports/TR711/.
24. Some evidence suggests that underreporting
is lower for marijuana than for harder drugs, but
for simplicity we apply the same adjustment
across drugs. This could mean our marijuana estimates are too large.
report marijuana prices for Australia that are similar to or higher than those in the United States.
Since Australian drug policy is noticeably less strict
than U.S. policy, this observation is consistent with
the view that legalization would not produce a dramatic fall in price.
25. To be explicit, we assume no shift in the
demand curve. If the supply curve shifts, the
quantity demanded will change.
26. The “forbidden fruit” effect refers to the idea
that some people use drugs because they are illegal.
If drugs are made legal, these consumers might
well stop spending their dollars on drugs.
31. The results in Jeffrey A. Miron, “Do Prohibitions Raise Prices?” pp. 522–30 come from two
kinds of evidence. The first is analysis of the relation between farm gate prices and retail prices for
“similar” goods such as coffee or chocolate. The
second is examination of prices for legal versions of
currently illegal drugs, such as those for medical
versions of cocaine and opiates like morphine.
27. Regulation aimed at drug use and sale (e.g.,
age limits on purchase or licensing and zoning
restrictions on sale) might also reduce demand
relative to prohibition because legal sellers face a
stronger incentive to obey such regulation than
underground sellers, who are already hiding their
actions from authorities.
32. The report assumes a 5 percent value for other drugs because direct evidence is not available,
and this assumption errs on the conservative side.
28. Jeffrey A. Miron, “Do Prohibitions Raise
Prices? Evidence from the Markets for Cocaine
and Heroin,” Review of Economics and Statistics 85,
no. 3 (2003): 522–30.
33. The elasticity of demand is the percentage
change in the quantity demanded that results
from a one percentage point change in the price.
For example, an elasticity of -0.5 means that if
price falls by 10 percent, the quantity demanded
will increase by 5 percent. An “elastic” demand
curve is one for which the elasticity is large (in
29. The underlying assumption is that the marginal costs of evading tax and regulatory costs is
zero for black market suppliers who are already
conducting their activities in secret.
30. Robert MacCoun and Peter Reuter, “Interpreting Dutch Cannabis Policy: Reasoning by Analogy
in the Legalization Debate,” Science 278 (1997):
47–52. Authors report gram prices of $2.50–$12.50
in the Netherlands and $1.50–$15.00 in the U.S.
They speculate that the surprisingly high prices in
the Netherlands might reflect enforcement aimed
at large-scale trafficking. Lana D. Harrison,
Michael Backenheimer, and James A. Inciardi,
“Cannabis Use in the United States: Implications
for Policy,” in Peter Cohen and Arjan Sas, eds.,
Cannabisbeleid in Duitsland, Frankrijk en do Verenigde
Staten (Amsterdam: Centrum voor Drugsonderzoek, Universiteit van Amsterdam, 1995), pp.
231–36. Harrison et al. note that ONDCP data on
marijuana prices in the U.S. are similar to prices
charged in Dutch coffee shops. Office of National
Drug Control Policy, The Price of Illicit Drugs: 1981
through Second Quarter of 2000 (Washington: Abt
Associates, 2001b) reports a price per gram for
small-scale purchases of roughly $9 in the second
quarter of 2000, while European Monitoring
Centre for Drugs and Drug Addiction, Annual
Report 2002 (2002), http://annualreport.emcdda.
u.int/pdfs/2002_0458_EN.pdf, suggests a price of
2–8 Euros per gram, which is roughly $6 on average. Various web sites that discuss the coffee shops
in Amsterdam suggest prices of $5–$11 per gram
in recent years. These comparisons do not adjust
for potency or other dimensions of quality.
Kenneth W. Clements and Mert Daryal, “Marijuana Prices in Australia in 1990s” (manuscript,
Economic Research Centre, Department of Economics, The University of Western Australia, 2001)
34. See Charles T. Nisbet and Firouz Vakil, “Some
Estimates of Price and Expenditure Elasticities of
the Demand for Marijuana among U.C.L.A.
Students,” Review of Economics and Statistics 54
(1972): 473–75. Their estimates that use survey
data imply price elasticities of -0.365 or -0.51 in the
log and linear specifications, respectively, while the
purchase data imply price elasticities of -1.013 and
-1.51. The estimates based on purchase data are
plausibly more reliable. Moreover, as they note,
these estimates are likely biased downward by standard simultaneous equations bias. Clemens and
Daryal (1999) estimate a price elasticity of -0.5 for
drugs using Australian data. Estimates of the
demand for “similar” goods (e.g., alcohol, cocaine,
heroin, or tobacco) suggest similar elasticities.
Rosalie Liccardo Pacula et al., “Drugs and Youth,”
Paper no. 7703 (2000). Pacula et al. summarize the
literature on the relation between drug use and factors that can affect use, such as legal penalties.
They conclude the evidence is mixed but overall
indicates a moderate response of drug consumption to “price.” The papers summarized do not provide measures of the price elasticity. The results
reported by Pacula et al. suggest an elasticity of
drug participation between 0.0 and -0.5; this
understates the total elasticity, which includes any
change in consumption conditional on participation. The literature since Nisbet and Vakil is thus
consistent with the elasticity estimate assumed
local excise tax receipts from alcohol and tobacco
were $5.7 billion and $15.8 billion, respectively
(See Appendix Table A of U.S. Census 2007, http:
//www2.census.gov/govs/estimate/0700ussl_1.txt
). This implies total excise taxation on alcohol and
tobacco of $14.3 billion and $23.4 billion, respectively. In this same year, consumer expenditure on
alcohol and tobacco were $54.9 billion ($457 per
consumer unit for 120,171 units) and $33.8 billion ($323 per consumer unit for 120,171 units),
respectively (See U.S. Department of Labor 2007,
ftp://ftp.bls.gov/pub/special.requests/ce/stan
dard/2007/cusize.txt). These figures imply that
excise taxation accounts for roughly 26 percent
(alcohol) and 69 percent (tobacco) of expenditure.
35. The phrase “if demand is less elastic” can be
read as “if demand is less responsive (to price).”
36. R. Keith Schwer, Mary Riddel, and Jason
Henderson, “Fiscal Impact of Question 9: Potential
State-Revenue Implications” (Center for Business
and Economic Research, University of Nevada, Las
Vegas, 2002). Schwer et al. estimate the tax revenue
from marijuana legalization in Nevada assuming
“sin” taxation. Their estimates are not readily comparable to those presented here because they consider the situation in which one state legalizes marijuana while other states and the federal
government prohibit marijuana. The same comment applies to Scott W. Bates, “The Economic
Implications of Marijuana Legalization in Alaska”
(report for Alaskans for Rights & Revenues, Fairbanks,
Alaska, 2004), who estimates the tax revenue from
marijuana legalization in Alaska. See Stephen T.
Easton, “Marijuana Growth in British Columbia,”
Public Policy Sources, Fraser Institute Occasional
Paper no. 74, 2004. Easton estimates the tax revenue from marijuana legalization in Canada under
the assumption of sin taxation. His estimates are
comparable but modestly higher than those presented here, adjusted for the different size of the
U.S. and Canadian economies. See Michael R.
Caputo and Brian J. Ostrom, “Potential Tax Revenue from a Regulated Drug Market: A Meaningful Revenue Source,” American Journal of Economics
and Sociology 53 (1994): 475–90. Authors provide
estimates for the overall economy that are similar
to those obtained here.
39. These amounts are not necessarily attainable
given the characteristics of drug production. Small
scale, efficient production is possible, so the imposition of a substantial tax might encourage a portion of the market to remain underground.
Whether such production is illicit depends on the
details of a legalization law. Plausibly, growing
small amounts for personal use would not be subject to taxation or regulation, just as growing small
amounts of vegetables or herbs is not subject to
taxation or regulation. The evidence suggests that
the magnitude of such production would be minimal. In particular, alcohol production switched
mostly from the black market to the licit market
after repeal of Alcohol Prohibition in 1933.
The assumption of a constant demand elasticity in response to a price change of this magnitude is also debatable; more plausibly, the elasticity would increase as the price rose, implying a
larger decline in consumption and thus less revenue from excise taxation.
37. U.S. Department of Health and Humans
Services, Reducing Tobacco Use: A Report of the Surgeon
General, Tobacco Taxation Fact Sheet (2000), http://
www.cdc.gov/tobacco/data_statistics/sgr/sgr_2000
/00_pdfs/CDC-60100788-Tax.PDF. But see Patrick
Fleenor, “Cigarette Taxes, Black Markets, and
Crime: Lessons from New York’s 50-Year Losing
Battle,” Cato Institute Policy Analysis no. 468
40. In 2001 total government receipts divided by
GDP equaled 29.7 percent. See the 2003 Economic
Report of the President, http://www.gpoaccess.gov/
usbudget/fy04/pdf/2003_erp.pdf, Tables B-1 and
B-92, pp. 276 and 373.
41. Tables can be found at http://www.oas.samh
sa.gov/2k7state/AppB.htm#TabB-1.
38. These assumptions imply an amount of sin
taxation as a percent of expenditure that is similar
to what currently occurs in the U.S. for alcohol
and tobacco. In 2007, federal excise tax receipts
from alcohol and tobacco were $8.6 billion and
$7.6 billion, respectively (See Table 457 of U.S.
Census 2009, http://www.census.gov/compen
dia/statab/tables/09s0457.pdf), and state and
42. See Jeffrey A. Miron, Drug War Crimes: The
Consequences of Prohibition (Oakland, CA: Independent Institute, 2004); James Ostrowski, “Thinking about Drug Legalization,” Cato Institute
Policy Analysis no. 121 (May 25, 1989).
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Sign up to vote on this titleUsefulNot usefulThe Budgetary Impact of Ending Drug Prohibition, Cato White Paper No. 30 by Cato Institute0.0 (0)EmbedDownloadDescriptionState and federal governments in the United States face massive looming fiscal deficits. One policy change that can reduce deficits is ending the drug war. Legalization means reduced expenditure on...State and federal governments in the United States face massive looming fiscal deficits. One policy change that can reduce deficits is ending the drug war. Legalization means reduced expenditure on enforcement and an increase in tax revenue from legalized sales.This report estimates that legalizing drugs would save roughly $41.3 billion per year in government expenditure on enforcement of prohibition. Of these savings, $25.7 billion would accrue to state and local governments, while $15.6 billion would accrue to the federal government.Approximately $8.7 billion of the savings would result from legalization of marijuana and $32.6 billion from legalization of other drugs.The report also estimates that drug legalization would yield tax revenue of $46.7 billion annually, assuming legal drugs were taxed at ratescomparable to those on alcohol and tobacco. Approximately $8.7 billion of this revenue would result from legalization of marijuana and $38.0 billion from legalization of other drugs.Interests: Types, Research, Business & EconomicsRead on Scribd mobile: iPhone, iPad and Android.Copyright: Attribution Non-Commercial (BY-NC)Download as PDF, TXT or read online from ScribdFlag for inappropriate contentShow moreShow less
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