Social Costs v Tax

Another myth pushed by drug advocates is “Let’s tax it and use the money to provide addiction services and build schools and hospitals and houses and (insert a great cause in here)…”

If alcohol and tobacco are any indication, tax revenue from marijuana sales will fall well short of the costs.

TOBACCO – A report published the Ministry of Health in 2016 estimated that the total cost of smoking to New Zealand’s health and welfare systems was $2.5 billion in 2014. Tobacco excise tax currently raises approximately $1.5 billion gross per year. A 2016 Treasury report stated that excess healthcare costs for smokers over non-smokers in New Zealand are almost $2 billion.

ALCOHOL – Alcohol-related harm in New Zealand has been recently estimated to cost approx. $5 billion per year. This equates to a cost of $14.5 million every day. Excise tax revenue from alcohol in 2016 was $661 million.

MARIJUANA – The marijuana industry is quick to (over)estimate large amounts of revenue from pot sales, but it rarely, if ever, discusses the societal costs of legalisation. Legalisation also results in administrative and enforcement costs, similar to alcohol regulation.

Other societal costs not referred to by drug supporters include: greater other drug use, greater marijuana use among underage students, property and other economic damage, controlling an expanded black market, sales to minors, public intoxication, and other burdens. No policy is without its costs. Legalisation will result in significant costs to society.

And it doesn’t take a rocket-scientist to figure out the logic:

  1. Legalisation would drive prices down (decrease revenue)
  2. Lower prices would increase use and harm
  3. Tax revenue would be well lower than harm costs
  4. Regulation and tax administration costs would be high
  5. Tax evasion would be high

Trends have already surfaced in Colorado & Washington state, suggesting that, like tobacco and alcohol, costs outweigh revenues:

  • Over half the pot money promised for drug prevention, education & treatment in Washington State never materialised.
  • Bureaucracy consumes a significant portion of Colorado marijuana tax revenue.

“Colorado has a booming black market.”
U.S. Attorney for District of Colorado Bob Troyer – September 2018

Will cannabis users suddenly line up to pay for a now taxed product? The ‘black’ or ‘grey’ market of prostitution, tobacco, alcohol and prescription drugs also continue as the most trafficked goods and services alongside the regulated industry, for the simple reason that people do not want to pay more or be regulated.    

A report by the Washington Post last year argued that high taxes on legal marijuana in California could have the potential to turn many consumers away from the state’s cannabis shops and toward the black market. The credit rating agency Fitch Ratings warned; “The existing black market for cannabis may prove a formidable competitor to legal markets if new taxes lead to higher prices than available from illicit sources.” Colorado, Oregon and Washington all reduced tax rates after the commencement of legalization to shift customers back toward the legal market.

Here in New Zealand, drug advocates and media got excited when a Treasury official, in a document prepared for a brainstorming session, suggested the Government could save more than $500 million a year legalising marijuana. The report suggested tax from legal marijuana could be worth $150m, with annual savings of $400m from lower policing costs.

But researchers say that the alleged reduction in law enforcement and justice expenditure have not been realised overseas, with crime increasing and an increase in the costs of added regulation for non-compliance. Furthermore, the budget estimates do not cover the additional health and education on cannabis harms and the fact that the illegal drug trade will inevitably continue to thrive under more regulation and taxation. Drug dealers and other criminals who derive huge profits from the drug trade will not cease criminal activity in the face of legalisation. The costs of regulating and then policing that industry, will only compound the costs of policing the illegal market, as seen in Colorado.

“The perfect day will be when we don’t collect a cent from tobacco tax because nobody is smoking.”
Ex-NZ Prime Minister Helen ClarkMarch 2018

 “The tax revenue collected from alcohol pales in comparison to the costs associated with it… Tobacco also does not carry its economic weight when we tax it… Though I sympathise with the current budget predicament and acknowledge that we must find innovative solutions to get us on a path to financial stability it is clear that the social costs of legalizing marijuana would outweigh any possible tax that could be levied. In the United States, illegal drugs already cost $180 billion a year in health care, lost productivity, crime, and other expenditures. That number would only increase under legalisation because of increased use.”
Gil Kerlikowske, President Obama’s Drug Czar, Why Marijuana Legalisation Would Compromise Public Health and Public Safety (2010).