Based on a retail price of $7.87 a gram, a pound of marijuana
is worth $3,570 and the commodity is worth $7,871,480 per
metric ton. At this price the annual supply of 14,349 mt of
marijuana available in the United States is worth $112.9 billion.
The diversion of money spent on marijuana has a considerable
impact on the fiscal budgets of all levels of government in
the United States, especially through the diversion of this
amount of money from the licit and taxed sectors of our economy
to the illicit, untaxed, and unregulated illegal economy that
thrives on these considerable expenditures.
The economist Joseph Schumpeter described entrepreneurial
activity as a force of creative destruction on the economy.
Entrepreneurs introduced new combinations of goods and services,
and these attracted capital, diverting it from old combinations
of goods and services. In the process this reallocation or
redirection of spending diminished the value of the economic
activity that loses the revenue to the new innovations. The
creation of new economic channels effectively destroys many
old channels of economic activity, a process defining the
concept of creative destruction.
The market in marijuana in the United States is illicit,
illegal, and as such it diverts capital away from the channels
of the licit or legal economy, especially the channels from
which local, state, and the federal government collect tax
revenue. In this respect the emergence and growth of the illegal
marijuana market is an act of creative destruction on the
ability of government to collect tax revenue. Certainly some
of the capital diverted into the marijuana market seeps back
into the licit economy, but this phenomenon is no different
from legal spending being re-circulated. The difference is
that the initial purchase of marijuana, and a large portion
of the redistribution of the purchase price, travels through
economic channels which essentially avoid contributions to
It is obvious to most Americans that marijuana is not taxed,
and that therefore there would be additional revenue for government
if it were legal and taxed like other commodities. What is
less apparent to most Americans is that the large, illicit
market in marijuana costs government considerable revenue
through its diversion of capital from the legal economy into
the illicit economy. The primary budgetary impact of illegal
marijuana sales is not the loss of potential tax revenue on
marijuana, but the loss of actual tax revenue from the diversion
of capital to the untaxed illegal market.
The 14,349 metric tons of marijuana purchased in the United
States annually is worth $112.9 billion. If those funds were
spent on legal commodities rather than marijuana those economic
transactions would produce billions in tax revenues for local,
state, and the federal government.
For example, according to the 2002 Economic Census by the
US Bureau of the Census, the average business in the United
States devotes 17.5% of its revenue to payroll. The money
spent on marijuana, consequently, removes $112.9 billion from
the gross domestic product, and results in a loss of payroll
expenditures by businesses of $19.7 billion. Allowing for
15% federal income tax, 15% social security tax (combining
individual and employer shares), and estimating a state income
tax rate of 4.7%, this results in a loss of $6.8 billion in
taxes for state and the federal government. Assuming an estimated
sales tax of 5.4%, the result is a loss of $6.1 billion in
tax revenue for state governments. Assuming an effective corporate
tax rate of 2.6% of gross revenue, the result is a loss of
$2.9 billion in tax revenue. This minimal model produces a
total loss of tax revenue of close to $15.9 billion.
A more accurate estimation of lost tax revenue can be acquired
through examination of current levels of government revenue
as a percentage of Gross Domestic Product (GDP). (See Table
15.) The diversion of funds into the illicit market in
marijuana costs government $31.1 billion in tax revenue annually.
Local, state, and the federal government receive 28.7% of
the GDP in tax revenue. If the money spent on marijuana were
instead spent on legal goods, it would add $112.9 billion
to the GDP, producing $11.6 billion in revenue to state and
local governments, $7.2 billion to the federal government
in social security and other social insurance premiums, and
$12.2 billion in other federal tax revenue. Marijuana Prohibition
results in the creative destruction of $31.1 billion in tax
In 2004 total US expenses on the criminal justice system
(police protection, the judiciary, and corrections) totaled
$193.5 billion(57). The cost allocation employed by the ONDCP
report on the costs of drug abuse is to calculate the cost
of drug law enforcement by using the percentage of drug arrests.
In 2004 marijuana arrests accounted for 5.5% of all arrests.
Consequently marijuana arrests cost taxpayers $10.7 billion
Taken together, the lost tax revenue from the diversion of
funds to the marijuana market and the cost of marijuana arrests
produce a budgetary cost to local, state and the federal government
of $41.8 billion.