Conflicting Fiscal Estimates on California's Marijuana Initiative

Since we just learned that Rand Paul allegedly kidnapped a girl in college and tried to force her to take bong hits, today seems like as good a day as any to ask the question of how legalizing marijuana could affect California's budget crisis.

The answer is complicated, and numbers from different state analyses contradict each other.

Supporters of legalization have claimed that California could raise between $1.3 and $1.4 billion if it legalizes pot. That's the figure the Yes on 19 campaign uses, quite prominently, on its website, asking in large type in the center of the page, "What would YOU do with $1.4 billion?"

The Yes on 19/Tax Cannabis website mistakenly lists the California Legislative Analyst's Office (LAO)--something like California's version of the Congressional Budget Office--as the source of the $1.4 billion figure, though in the fiscal-impact FAQ section it cites the correct source. The LAO produced a report on July 12, which is also posted on the Prop. 19 website, finding that Prop. 19 could yield "hundreds of millions of dollars" for the state and local governments. From the LAO's analysis:

...the magnitude of additional revenues is difficult to estimate. To the extent that a
commercial marijuana industry developed in the state, however, we estimate that the
state and local governments could eventually collect hundreds of millions of dollars
annually in additional revenues.

The $1.4 billion figure comes from an October 2009 study by the State Board of Equalization (the state's nonpartisan tax administration) of a bill by state Assemblyman Tom Ammiano that would legalize marijuana and set up a statewide wholesale and retail regulation scheme, calling for tracking mechanisms that would let the state tax wholesale and retail marijuana sales.

That's not how Prop. 19 works; the ballot measure would legalize marijuana for personal use statewide but would leave it up to counties to establish their own regulation and taxation schemes of retail marijuana sales. The LAO study notes repeatedly that Prop. 19's fiscal impact is largely uncertain since it's unclear how many counties would participate.

Prop. 19 is more likely to benefit local governments than it is to benefit the state, since counties are would be the governments doing the taxing. This is certainly not without merit, since, for instance, Oakland--one of the counties that might be most likely to regulate and tax legalized marijuana--laid off about 10% of its police force in July as it faced deficits. The state would see a trickle-up effect from any fiscal windfall counties may receive.

So $1.4 billion is an optimistic number; it may hold if every county in California decides to regulate and tax marijuana, as they could under Prop. 19. That's unlikely to happen, so $1.4 billion represents an unrealistic upward limit of Prop. 19's budgetary impact.

Another unknown is how the federal government will respond to legalization of marijuana in California, a development that would contradict federal drug laws. When the LAO studied Ammiano's plan last fall, it found the budgetary impact to be uncertain, since no one knows to what extent federal authorities will continue to enforce federal drug laws in California if the state decides to legalize.