Financial Regulatory Forum

ANALYSIS – California, other U.S. states eye marijuana tax to raise cash

By Reuters Staff
March 31, 2010

By Kim Dixon and Lisa Lambert

WASHINGTON, March 30 (Reuters) – The color of money may soon turn a new shade of green as U.S. states across the country consider legalizing and then taxing marijuana to cure chronic budget problems.

California came the closest to taxing tokes last week by putting an initiative on its November ballot. The top marijuana-producing state could raise $1.3 billion annually, according to the California Board of Equalization, which collects taxes.

As the state struggles to close its multibillion dollar deficit, supporters say the legalization fight will be close, though the scope of potential conflicts with federal law is uncertain.

“If you can tax it, it’s just one more way to make money for the government,” said Linsey Isaacs, a 20-year-old rental agent in New York City, who does not smoke marijuana. “To me it’s better than cigarettes, healthwise, and if they can tax cigarettes, then I don’t see anything wrong with taxing marijuana.”

California’s current budget gap may be large at $20 billion, but it is not unique, and the outcome will be closely watched. The National Governors Association says the recession will not end in some states until 2012.

As California moves closer to a vote on the legalizing marijuana, which most states banned in the 1930s, the push is finding backers for different reasons.

“A lot of the arguments now are about taxing and economics,” said Matthew Gever, an analyst with the National Conference of State Legislatures.

Similar voter initiative efforts are underway in Washington and Oregon for 2010, and Nevada for 2012. New Hampshire, Massachusetts and Rhode Island are all considering legislation to legalize and regulate the drug, and states as conservative as Virginia and South Dakota are debating decriminalization.

Backers say the debate is gaining steam for a variety of reasons: a softening of attitudes, the spread of legal clinics for medical marijuana use and frustration with the drug war. Supporters say reducing the amount of money spent on marijuana law enforcement would help state budgets.

In October, polling firm Gallup found 44 percent of Americans favored legalization, echoing other recent surveys. That’s up from 31 percent a decade ago.

A 2005 study by Harvard University economist Jeffrey Miron estimated that legalizing marijuana would save $7.7 billion per year in spending on enforcing the drug laws, with the bulk of that, $5.3 billion, at the state and local level.

WILL OTHERS FOLLOW?

Not everyone sees California’s initiative as the state’s economic salvation, and supporters still expect a close fight.

Measure opponent and lobbyist John Lovell said he doubts the revenue estimates from supporters and argues it could cost California billions in lost business from the U.S. government, which requires those doing work with the government to maintain drug-free work places.

“If you talk to businesses that have federal contracts … they’re worried about this,” Lovell said.

Each time California or Oregon has stepped closer to making marijuana legal, others have made the same move four to five years later, said Allen St. Pierre, a spokesman for the National Organization for the Reform of Marijuana Laws.

Other states could follow California’s lead, as more than a dozen did after it approved medical marijuana in 1996.

One New York gubernatorial candidate, Kristin Davis, the “Manhattan Madam” who supplied escorts for former Governor Eliot Spitzer, is a fan.

“Californians have figured out what New Yorkers need to figure out,” said Davis, a libertarian.

In Oregon, backers of legalization are collecting signatures for a potential November ballot initiative that would use some of the tax revenue to build new industries such as producing hemp as a bio-fuel.

There may be some federal influence, too. President Barack Obama has said he will not prosecute patients who use marijuana for medical reasons.

Law Enforcement Against Prohibition, a group of enforcement officials backing legalization, says requests for officials at state hearings has risen steadily since early 2009.

“The fact that state legislatures in places like Virginia are holding hearings on the topic of decriminalizing marijuana is unprecedented,” said Tom Angell, a spokesman for the group.

Some residents of Nevada began a campaign in January to put a marijuana measure on the ballot in 2012. But lawmakers could also take up the measure in their next session. Nevada voters rejected two other marijuana measures in 2002 and 2006.

To be sure, no state likely has the financial might of California, which boasts high-profile campaign commercials and well-heeled backers. St. Pierre said the Washington state effort could be hindered by a lack of the wealthy marijuana advocates who influence California politics.

Toni More, a 29-year-old Howard University student from Los Angeles currently living in the Washington, D.C., said a tax would help during the current economic climate, especially because the market for the drug is universal.

“There’s no doubt about it that it would generate a lot of revenue. I guess it’s a common pastime for a lot of people — black, white, various economic backgrounds,” she said.

(Additional reporting by Jasmin Melvin and by Jim Christie in San Francisco; Editing by Padraic Cassidy) ((lisa.lambert@thomsonreuters.com; +1-202-898-8328; Reuters Messaging: lisa.lambert.reuters.com@reuters.net))

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