The Economic Benefits of Legalizing Marijuana

Over the past several years, states have been voting to decriminalize marijuana, making it legal for both medicinal and recreational purposes—and also making it a big business. Taking a leaf out of Colorado or Washington's book, four states—New Jersey, South Dakota, Montana, and Arizona—passed measures in 2022 to make marijuana consumption for recreational purposes legal. Mississippi also voted to allow medical marijuana.

Still, state legislation remains heavily divided on the topic. Since the 2020 election, South Dakota Circuit Judge Christina Klinger ruled that the measure was unconstitutional. In November 2021, the South Dakota Supreme Court agreed and ruled against pot legalization. On the other hand, Arizona has collected more than $284 million of tax revenue since the legalization of marijuana in the state.

Key Takeaways

  • There has been a growing popular movement in the United States to legalize marijuana for medicinal and recreational uses, with several states adopting such measures already.
  • One motivation for legalization is the economic benefits that can come from the regulated commercial availability of marijuana.
  • Increased tax revenues, job growth, and investment opportunities all are powerful incentives to push for legalization.
  • As of November 2022, 21 states allow for personal consumption of marijuana, while 37 states allow medical usage.
  • Although the collection of tax revenue has yet to start in many of these states, a total of $3.7 billion of proceeds were collected in 2021, more than double tax revenue generated in 2019.

All told, more and more states are moving to legalize marijuana (whether for medicinal or recreational use, or both). The legal changes have spawned a burgeoning industry of legal cannabis companies, including those that aim to research and develop cannabis-based medical products, those that are working to distribute and grow marijuana, and many others. But there are still some holdouts. In the 2022 midterm elections, for instance, two states voted to legalize marijuana (Maryland and Missouri), while three states voted down ballot measures to do so (North Dakota, South Dakota, and Arkansas).

Following the 2022 midterms in November, 37 states allow the use of medical cannabis products, with 21 states and the District of Columbia allowing the use of non-medical cannabis products for personal or recreational consumption. More states are continuing to propose new legislation to encourage legal activity. For instance, Delaware is circulating HB 305, a bill that would make marijuana legal for adults.

At the federal level, things are also looking more progressive. In October 2022, President Biden pardoned all prior federal offenses of simple possession of marijuana and asked the Justice Department to review the current classification of marijuana as a Schedule I controlled substance. These efforts could pave the way to nationwide decriminalization in the near future.

The economic benefits of legalizing weed have already been apparent as the first states have moved to change their legal positions. Overall, legal marijuana could mean a big push for state economies and big bucks for both the state and the federal governments. Though state law and federal law remain divided on the issue. let's explore some of the key economic benefits of legal marijuana.

Impact on Tax Revenue

Better-than-expected sales of marijuana in Colorado and Washington over the past several years have resulted in buoyant tax revenues. In 2021, Washington collected $559.5 million of legal marijuana revenue, over $85 million more revenue than 2020. Meanwhile, Colorado collected $423 million of marijuana tax revenue in 2021, up almost 10% from the year prior.

In 2019, total tax revenue collected by all states topped $1.7 billion. Two years later, the total dollar revenue had more than doubled. Aggregate revenue for all states hit $3.7 billion for legal, adult-use cannabis sales, and this does not include revenue generated for statewide budgets, cities, and towns. In addition, six states that have approved marijuana use had not started collecting marijuana tax revenue in 2021.

Should marijuana become legal on a federal level, the benefits to the economy could be exceptional: A report from cannabis analytics company New Frontier suggests that federally legal pot could generate an additional $105.6 billion in aggregate federal tax revenue by 2025.

Colorado began collecting marijuana tax revenue in 2014. In 2021, its total-to-date collections have surpassed $2 billion.

U.S. map showing states where marijuana is legal
Source: National Conference of State Legislatures.

Income and Jobs

Setting up marijuana nurseries and dispensaries would be the first step for the states that voted in favor of medical marijuana. These would not only create jobs but also set the ball rolling for economic activity in the pot industry in these areas. In the case of states like California and Nevada where such infrastructure already exists, the economic impact has become more quantifiable as the sector has matured.

An RCG Economics and Marijuana Policy Group study on Nevada says that legalizing recreational marijuana in the state could support over 41,000 jobs till 2024 and generate over $1.7 billion in labor income. The ICF study estimates at least 81,000 additional direct, indirect, and induced jobs in California as a result of legalized marijuana sales. It also projects an increase in total labor income by at least $3.5 billion.

New Frontier's report predicting the impact of federally legal marijuana suggests that nationwide legalization could generate 1 million jobs by 2025. These jobs would likely come from the quickly growing industry that would spring up across the nation. Workers would be needed to farm, process, distribute, and sell marijuana-based products.

Further, there would be ample opportunities for secondary industries that are related to legal cannabis although not directly involved in its production and distribution. These might include software developers, financing services, construction companies, and many others.

Investment Opportunities

Legal marijuana presents the possibility of tremendous benefits to economies on a local and a national scale. It also could help to secure the investment portfolios of investors across the country and further afield as well. While marijuana remains illegal on the federal level, it is difficult for investors to capitalize on the growth of the industry.

The number of marijuana-related companies trading on public stock exchanges is minuscule, and while investors do have the option of working with over-the-counter exchanges, many of the most successful businesses in the early legal cannabis space have been based in Canada or other countries.

Should marijuana become legal on the national level, marijuana companies would be free to list their stocks on all U.S. exchanges, thereby enhancing liquidity and opening up access to many more investors. Should the growth rates for the cannabis space continue as they have in recent years, it's likely that investors would express a keen interest in the industry.

As of 2022, the largest marijuana exchange-traded fund (ETF) was AdvisorShares Pure US Cannabis ETF (MSOS) with over $1 billion of assets under management.

Saved Money

When considering the economic benefits of legal marijuana, it's important to think of the money that might be saved as well as revenue that could be generated through such a process. Currently, federal marijuana enforcement costs several billion dollars per year. A 2013 report by the American Civil Liberties Union found that the costs at that time were approximately $3.6 billion per year.

The more states that legalize cannabis, the lower the cost of enforcement would likely be; if marijuana were to be legalized on a national level, these costs would likely drop considerably. If marijuana were removed from the list of controlled substances, far fewer court cases involving the substance would go to trial, resulting in fewer incarcerations and, in turn, more money saved.

Legalized marijuana also stands to benefit medical consumers of cannabis-based products. As marijuana becomes legal in more and more parts of the country, it's likely that the price will drop overall as a result of commoditization.

This may not immediately seem like good news for overall tax revenue or for marijuana companies looking to maximize profits. However, individuals utilizing marijuana-based products for medical treatment would stand to benefit considerably from lower prices for these items.

How Many States Have Legalized Marijuana?

As of 2022, 37 states have legalized the medical use of marijuana, with 21 of those allowing recreational use as well. The District of Columbia, Guam, Puerto Rico, and the U.S. Virgin Islands also allow medical use by qualified individuals.

How Much Money Are States Collecting in Marijuana Tax Revenue?

In 2021, the states that legalized marijuana for personal consumption generated $3.7 billion in annual tax revenue. This revenue does not include city revenue or proceeds distributed to smaller municipalities.

What Is the Economic Impact of Legalizing Marijuana?

States that legalize marijuana have recognized various economic benefits. There are direct tax proceeds generated for the state. States employ thousands of employees of oversee the production, distribution, and management of the sector. There are also potential savings to the legal enforcement of the substance if certain criteria are no longer considered illegal.

The Bottom Line

There is ample pushback against the idea of legalizing marijuana across the country. Critics cite the potential for confusion among law enforcement officers aiming to keep up with shifting regulations, a concern about increased homelessness or youth use of the substance, the potential for decreased property values, and much more. Some are opposed to changing the regulatory status of marijuana simply because it means a change to the status quo.

All of these reasons combine to decrease the likelihood that marijuana will become legal at a national level any time soon. However, as more and more states move to individually decriminalize cannabis use in various ways, and as the economic benefits of a legal marijuana industry take effect, there are also many compelling reasons to consider nationwide legalization.

Article Sources
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  1. Ballotpedia. "Marijuana on the Ballot."

  2. PBS. "South Dakota Supreme Court Rules Against Pot Legalization."

  3. Arizona Department of Revenue. "Marijuana Tax Collection."

  4. National Conference of State Legislatures. "State Medical Cannabis Laws."

  5. Delaware General Assembly. "House Amendment 1 to House Bill 305."

  6. The White House. "Statement from President Biden on Marijuana Reform."

  7. National Conference of State Legislatures. "Regulating Marijuana: Taxes, Banking and Federal Laws."

  8. Washington State Treasurer. "Washington Marijuana Revenue."

  9. Colorado Department of Revenue. "Marijuana Tax Reports."

  10. Marijuana Policy Project. "Cannabis Tax Revenue in States that Regulate Cannabis for Adult Use."

  11. New Frontier Data. "Cannabis Taxes Could Generate $106 Billion, Create 1 Million Jobs by 2025."

  12. RCG Economics. "Economic Benefits of Legalized Adult-Use Marijuana in Nevada."

  13. ICF. "The Economic Impacts of Marijuana Sales in the State of California."

  14. AdvisorShares. "AdvisorShares Pure US Cannabis ETF."

  15. American Civil Liberties Union. "Report: The War on Marijuana Is Black and White."

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