09/29/2010 05:36 pm ET | Updated May 25, 2011

Drug Legalization -- a Windfall for State Budgets

Thoughts on The Budgetary Impact of Ending Drug Prohibition (Miron and Waldock, 2010)

On November 2nd, California voters will decide whether to end marijuana prohibition in their state. If Proposition 19 passes, California will find itself in uncharted waters. The federal government might claim that state-level legalization violates the federal Controlled Substances Act and therefore try to prevent implementation. Or, the measure might pass without federal pushback and become a boon to the state's finances. On the other hand, according to opponents, the measure might increase unwanted consequences from marijuana use, including greater consumption of "harder" drugs.

Hanging over the turmoil in California is the larger question of what this means for the rest of country. Perhaps within the next couple of decades, the nation may finally change its stance on drug prohibition, and for more than just marijuana.

A paper I co-authored with Jeffrey A. Miron, just released by the Cato Institute, examines the budgetary impact of legalization for all drugs, across all states and at the federal level. It is important to be explicit about what policy change is being considered because estimates can vary depending on the scale of the study. The most natural case to consider, because it avoids complicated issues of constitutional authority and trans-border smuggling, is the one where both the federal government and most or all state government legalize simultaneously.

One of our points is that legalization will both save money on law enforcement and generate tax revenue. Law enforcement costs encompass police, judicial trials, and correction facilities. These enforcement savings are significant, but harder to achieve than increased revenue because they require layoffs of police, prosecutors, prison guards, and so on. Even without any reduction in expenditure, of course, legalization would still free resources for more important criminal justice activities.

For California, we estimate that the legalization of marijuana will lead to $960 million in savings on enforcement and $352 million in additional tax revenue. To put things into perspective, California faces a $19.9 billion budget deficit for 2010-2011.

If marijuana is legalized across the nation, we predict $8.7 billion in law enforcement savings and $8.7 billion in tax revenue. If all drugs are legalized, the savings figure becomes $46.7 billion and the revenue $41.3 billion. A budgetary benefit of $88 billion per year is not chump change, especially given the current state of the economy.

Estimates of these budgetary benefits are naturally subject to considerable uncertainty; data from black markets are not especially reliable. But our estimates provide a broad-brush understanding of the financial side of the legalization debate. These estimates also show that marijuana legalization is a relatively modest piece of the overall impact.

Our second key point is that the debate over drug legalization should be about more than monetary impacts. Voters need to find a figure on this topic that they deem acceptable, whether it comes from our paper or from papers with a different scope, and then move on. The issue of drug prohibition is part of a much bigger picture, one which depends upon our fundamental views on the extent to which the government should have a say over individual choices.

Californians thus have not only the opportunity to mitigate their financial distress but also to show the U. S. what things will be like when people are free to make their own decisions about drug use. If Proposition 19 is successful, all eyes will be on California to determine whether less government oversight might, in fact, be better.