Analysis of California Proposition 19

Proposition 19 is in direct conflict with federal law, which takes precedence over state law. Passage of Prop. 19 would trigger an expensive legal battle for California. And Prop. 19 is not likely to be strongly defended, since both the Democrat and Republican California Attorney General candidates oppose Prop. 19.

The Modesto Bee reports:

…by passing Proposition 19 and becoming the first state to legalize pot for recreational use, California would be in direct conflict with federal law.

They go on to state:

The Obama administration, which has taken a hands-off attitude on medicinal marijuana, says legalizing pot is “a nonstarter.”

Does California really want to vote itself an expensive fight with the U.S. Department of Justice? It would be a losing battle. While Prop. 19 claims it will add revenue to California, an expensive legal battle (consider the Obama Administration’s current attitude and statements) and loss (based on the federal preemption doctrine) are much more likely.

What is federal law on marijuana?

Marijuana is a Schedule I controlled substances and illegal under the Controlled Substances Act (CSA) was enacted into law by the Congress of the United States as Title II of the Comprehensive Drug Abuse Prevention and Control Act of 1970.

Why does federal law overide state law?

According to the Supremacy Clause (Article VI, clause 2) of the United States Constitution,

…the Laws of the United States…shall be the supreme Law of the Land;…any Thing in the Constitution or Laws of any state to the Contrary notwithstanding.

What does the Department of Justice and the Obama administration think about marijuana legalization?

A spokesman for the Justice Department told the New York Times:

“The federal government is committed to enforcement of the Controlled Substances Act and the Department of Justice will continue to focus its enforcement resources on significant traffickers of illegal drugs, including marijuana, in all states”

The same New York Times article also states:

…California’s Proposition 19 directly conflicts with the Controlled Substances Act and goes against the administration’s 2010 national drug strategy, which “firmly opposes the legalization of marijuana or any other illicit drug.”

This harm of Prop. 19 may be one of the least talked about thus far but it could be one of the most devastating. The San Bernardino Sun explains (the previous link is to the Google cache as the original article is now in the San Bernardino Sun archives which requires registration):

Proposition 19 would clobber many state agencies and businesses financially because it would conflict with the federal Drug-Free Workplace Act of 1988, which must be complied with by any recipient of a federal grant and any entity with a federal contract in excess of $100,000.

The Sacramento Bee reports:

…employers will have to…surrender federal contracts for violating the Federal Drug-Free Workplace Act.

The San Francisco Chronicle warns of a $40 Billion loss:

Because Prop. 19 protects marijuana use in the workplace, it would put California out of compliance with the federal Drug Free Workplace Act, according to research done by the California Chamber of Commerce. Compliance with that act is required for federal funding. California could lose up to $40 billion annually in federal aid and grants affecting schools, businesses and government contracts.

A loss of $40 billion annually in federal aid and grants is more than 20 times more costly than even the most rosy tax revenue estimates from the backers of Prop. 19. Voters need to do the math and come up with the right answer.

The Los Angeles Daily News predicts workplace conflicts under Prop. 19:

Proposition 19 should also make employers nervous, as it appears to give marijuana users a clear right to smoke on the job. It maintains “any law prohibiting use of controlled substances in the workplace or by specific persons whose jobs involve public safety,” which is good. But it precludes workplace drug testing by saying that employers can address only “consumption that actually impairs job performance by an employee.” And what does impairment really mean, anyhow?

And the San Fernando Business Journal highlighted similar concerns from the California Chamber of Commerce:

Those outcomes could include, the chamber said, higher levels of workplace accidents, which could ramp up workers’ compensation costs; the inability of employers to use positive marijuana drug test results to make employment and other workplace decisions; and the possibility that businesses could lose federal grants and contracts for not aligning with federal law, which considers marijuana an illegal drug.

They continued…

The legal analysis has concerned Douglas Morton, senior vice president of corporate development at Bobrick Washroom Equipment, Inc., a manufacturing company based in North Hollywood. Morton is also a board member of the Valley Industry & Commerce Association, or VICA.

“The primary safety concern would be in manufacturing. We are using machinery and we are using vehicles,” Morton said, adding that if the measure passes, a positive result for marijuana on a drug test would no longer be enough to prove fault by the employee.

“The concern, as indicated by CalChamber, is this is going to put a much larger burden on us to prove actual impairment, and we are concerned that the general safety of our workplace will decline depending on how the courts in California will interpret this law,” he added.

The LA Times adds to this as they report on employment lawyer Jennifer Shaw’s findings:

In her analysis, Shaw concluded that employers would not be able to ban toking at work. Rush noted the initiative bars the use of marijuana “in public or in a public place.” But Shaw said it’s not clear workplaces are public places, citing a recent court decision that concluded grocery stores were not.

Prop. 19 would provide an additional disincentive to new businesses and jobs coming to California. Forcing businesses to retain pot smoking employees unless the business can prove workplace impairment is a business and job killer, not a financial fix.

Pro-pot legalization activists often claim that Prop. 19 will generate $1.4 Billion in new revenue. Yet the funds that Prop. 19 would produce is very unclear — because no revenue will be raised unless a local government permits sales. California cities and counties are expressing their opposition to Prop. 19, signaling they will not permit retail marijuana sales in their jurisdiction.

Figure of $1.4 Billion Debunked

When asked to analyze the potential revenue impact of Prop. 19, the California Board of Equalization concluded:

[Proposition 19] does not contain any new responsibility, rule, or law applicable on a statewide level…it is not possible to estimate the potential revenue gain.

The official “No on Prop.19” campaign states:

The BOE report notes that while Proposition 19 states that the purpose of the Act “is to, in part, ‘tax and regulate cannabis in order to generate billions of dollars for our state and local governments,’” the Act itself “does not establish a statewide regulatory framework, nor does it impose an additional statewide tax on cannabis.”

The BOE’s finding debunks the notion promulgated by proponents that Proposition 19 will somehow generate “billions” in new tax revenue for the state of California.

The proponents of Proposition 19 had been using a figure of $1.4 billion that was generated when the BOE did an analysis of Assembly Bill 390 – the language of which is NOT included anywhere in Proposition 19.

$1.4 Billion Would Only Cover 7% of the 2009-2010 CA Budget Deficit

Even if $1.4 Billion was raised from Prop. 19, this amount would only cover 7.04% of California’s $19.9 Billion 2009-2010 state budget deficit. Compared to California’s overall revenue of around $136 Billion, $1.4 Billion would represent only a 1.03% increase in total revenue.

Would Marijuana Users Even Pay Taxes?

The Pasadena Star News points out that marijuana home-grows will supply marijuana but will be difficult to collect taxes from:

But there is a provision that allows people to cultivate marijuana in their yards and even on empty lots. And how is the state going to tax cannabis plants? Knock on everyone’s door and collect? Use Google Earth? Call Homeland Security? Will this really take the drug cartels out of the business?

The Ventura County Star concludes:

Drug dealers do not pay taxes now and they will not pay taxes if marijuana is labeled legal.

At Most, Legal Pot Would Bring in Only $445 Million or 2.3% of 2009-2010 Budget Deficit

CNBC looked at various studies on the retail size of the U.S. national market for marijuana and found that the best estimate is:

…between $35 and $45 Billion.

So, for the sake of the argument, let’s use a middle number of $40 Billion.

California is 12% (36.9 Million out of 307 Million people) of the U.S. population. Likewise, if California is 12% of the national pot market, that would make California’s marijuana market $4.8 Billion (if marijuana was sold in EVERY jurisdiction statewide). Using this rosy scenario, let’s look at what revenue this could generate:

Sales Tax Revenue: $348 Million
This is based on $4.8 Billion in sales at the current state sales tax of 7.25%. However, the state sales tax is scheduled to go down a full point on July 1, 2011; marijuana tax revenues would also decrease.

Income Tax Revenue: $71.8 Million
This is based on a scenario where marijuana retailers spending 40% of their revenue on employees making $37,000 a year (or about $18/hour) at the current California income tax rates.

Calculation: $4.8 Billion in revenue x 40% = $1.92 Billion in employee expenses x 3.74% tax rate = $71.8 Million. The income tax rate rate of 3.74% for this scenario is derived from estimating or calculating that:

1. Each employee makes $37,000 in gross pay
2. Is single (married workers would pay less)
3. Has no dependents (workers with children would pay less)
4. Has no deductions like mortgage interest deduction beyond the standard deduction
5. Each employee pays $1,385.24 in state income taxes, which is what someone with the above characteristics would pay in this scenario
6. $1,385.24 is 3.74% of $37,000

Corporate Tax Revenue: $35.2 Million
This is based on all pot shops being corporations and netting 8.3%, which is the average net income of U.S. corporations over the last 25 years. The current California corporation tax rate is 8.84%.

Calculation: $4.8 Billion in marijuana sales x 8.3% net income = $398.4 Million in profit x 8.84% tax rate = paying $35.2 Million in corporate taxes

The Bottom Line:
Adding revenues from marijuana sales (sales tax + income tax + corporate tax) totals $455 Million in state-level taxes, which amounts to only 2.3% of the state’s $19.9 Billion 2009-2010 state budget deficit. Compared to California’s overall revenue of around $136 Billion, $455 Million would represent only a 0.33% increase in total revenue. Less than $500 Million in state revenue is a sum vastly smaller than the oft-repeated $1.4 Billion claim. And remember, this is the “best-case” scenario for advocates of full-blown marijuana legalization. Yet the reality is a number of cities and counties have indicated they will not permit commercial marijuana sales. So even this $455 Million in revenue is a pipe-dream, with actual revenues being significantly lower.

Factoring Social Costs

Finally, if marijuana is anything like alcohol and tobacco, any tax revenue would be quickly offset by related increases in social costs, as the Ventura County Star reports:

Currently, for every $1 collected in taxes on alcohol and tobacco, $9 is spent in social costs, according to a study by the Center on Addiction and Substance Abuse at Columbia University.

The data is clear. Legalizing marijuana through Prop. 19 will not be the financial windfall it’s been hyped up to be. And the social costs and economic loss from increased drug usage would likely erase any revenue gains. If you were thinking about supporting legalized marijuana for economic reasons, the math says it is time to think again.