DLester78 (89.87)

Marijuana and Economics

December 28, 2012 – Comments (7)

I am a financial advisor.  I don't encourage the use of any illegal substance nor do I care about politicians, public opinion poll's, or pot heads who want a legal way to get high. 

I do believe that marijuana is equally or less destructive as alcohol and tobacco to our economy, our families and our society as a whole.  In this discussion I wanted to take a border state (Arizona) and analyze the impact of taking an otherwise law-abiding productive citizen who works, pays taxes, and raises a family and placing that person in a prison for carrying any amount of marijuana.  There are other costs that are impossible to quantify... like the cost of a father or mother not being there for the children etc.  Trying to keep this simple will not be easy.

Some facts to start with:

Arizona's average cost annually to house an inmate = $22,166 per inmate per year

Arizona's 2012 state budget for the entire court system = $179 million.

Arizona Drug sentences range from 1 year to 5 years for Marijuana possession depending on a number of factors. Repeat offenders can get higher sentences as well.  The majority of first time Marijuana offenses do not end up in a prison sentence.  Most end up as drug treatment requirements, parole or supervised sentencing etc.

Fines for Marijuana in Arizona start at $750 and go up to $150,000 depending on the value of the marijuana in possession.

It is estimated that 20% of all convictions within the Arizona court system are related to drug busts.  I couldn't find data that indicated the specific percentage for just Marijuana.

Arizona state income tax for an individual making 75k per year = 4.24%

Arizona state income tax for an individual making 30k per year = 3.34%

Approximately 26 million American's use Marijuana each year.

Marijuana usage has increased as a % of population every year since 1990.  The crime rate has plummeted since then.  No data I found has shown a link between marijuana usage and proclivity to commit crime.  (I know that the usage itself is a crime... I am talking about other crimes.)

Nearly 750,000 american citizens are arrested each year for smoking Marijuana.

Now that the some facts are listed here, let me say that I don't believe that decriminalizing marijuana will bring major savings to our criminal justice system. 

I will use a plane as an example.  The cost to fly a plane for a major airline has a static cost... fuel, crew and fee's for airports etc. are all known in advance.  The variable cost is the peanuts, the free refreshments etc.  This represents a very small variance to the airline and they can forecast this fairly well based on historical usage of these types of costs. The criminal justice system works the same way.  The prisons, judicial system etc. wont all of a sudden shrink if there are less marijuana cases flowing through the system.  The same buildings, judges, court staff, prison contracts etc. are going to be there.  Some variable cost savings would be realized but when was the last time a government bureaucracy actually shrunk their own budget?  What I hypothesize is they will just be freed up to focus on important crimes or they will waste the savings.

There is a cost that can be quantified however.  The cost to the state in terms of revenue, both from taxing the marijuana as well as the income tax lost, sales tax, etc.  This should be easily quantifiable for us using some generous assumptions.

A male 35 year old making 75k per year will pay approximately $3,180 in state income tax.  If they are considered a felon after they finish whatever sentence, they will also have trouble finding a job that earns them anywhere close to that income.  So assume they can get hired on somewhere to make 30k per year. 

So if they spend 1 year in jail and they are convicted as a felon here are the costs to the state we can quantify.

Lost income tax revenue = $3,180

Annual cost for an inmate = $22,166

Cost to prosecute, process the offender? = Variable... but let's assume its a minimum of $5,000.

Lost income tax revenue for next 7 years = $15,204... (the calculation for this was ((75k x .0424) x 7) - ((30k x .0334) x 7).  I use 7 years since employers ask about felony convictions for last 7 years.

Lost Sales tax revenue? = If we assume he spends 30k per year on taxable items its Approximately 9.3% tax so $2,790 the first year. His consumption due to lower income would also go down while he has a felony on his record but let's keep it simple.

Other costs would be possible forfeiture of home (property taxes), potential state sponsored child care costs, lost revenue for licensing fee's etc. and the possiblility that prison might not be healthy for a non-violent criminal (ie health care costs for prison rape etc.)

If we just use the information above the cost to the society is listed as follows.

3180 + 22,166 + 5,000 + 15,204 + 2,790 = $48,340

There are many other ancillary costs that we would have a hard time quantifying here but I think this is within the ballpark of the actual economic impact of a conviction and sentencing of an otherwise productive adult at a state cost level.  Let alone a federal level.  As I said before I think the $22,166 would be spent no matter what because I don't trust government to cut any costs ever. So if you subtract that out you have a cost of $26,174.

If we taxed marijuana, the impact to our society has the potential to swing the opposite direction.

Not only would the above cost scenario be reduced for us but the tax revenues states and federal governments collect from tobacco gaming, and alcohol are staggering.  Arizona collects $2 for every pack of cigarettes sold... this is amazing if you think about it.  This yields over $300 million in taxes.   Pair that with the over $65 million that Arizona made in alcohol consumption taxes... you will see that its a major source of revenue for states.  They also tax gaming for a total of $181 million.

No one can accurately predict the tax revenue from marijuana but I don't think it would be insignificant.  I feel like it would be in line with the alcohol taxes since I believe most people would do it once, twice a week etc.  The data I read indicated that most people use marijuana sporadically vs daily.  The immediate impact would be the savings of all of the arrests and lost taxes we reveiwed above.  The other benefit could be a reduction in the amount of crime and violence along our borders.  I have known many people in my past that smoked marijuana.  I feel like the biggest risk is the possible breakdown of someone's drive to succeed.  This is hard to quantify but a real risk.  If abuse of any of the above sins becomes a detriment to society we need to have a method of dealing with it.  I just think people are doing it anyway and if we give people a safe way to use marijuana recreationally you would see healthier state budgets, you would see healthier federal budgets.  I don't think you would see a huge rise in usage since its pretty easy to get.  I personally don't like funding governement programs that are totally ineffective.  "The war on drugs" doesn't work, and like other government programs is fighting to justify its own existence.  Like prohibition, ultimately this will program will fail and end up being a giant waste of time and money for everyone.

I know I am missing many angles, viewpoints etc.  I do think that there is a loss to our economy though when we demonize a vice that clearly has a demand and is no more damaging than other forms of drug use that are legal, ie alcohol, tobacco, gaming etc.

Thanks,

Dlester78