Myth: Prop. 19 will bring California $1.4 Billion in tax revenue

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.