Pubdate: Sun, 03 Oct 2010
Source: Philadelphia Inquirer, The (PA)
Copyright: 2010 Philadelphia Newspapers Inc
Contact:  http://www.philly.com/inquirer/
Details: http://www.mapinc.org/media/340
Authors: Jeffrey A. Miron, Kate Waldock
Note: Jeffrey A. Miron is senior lecturer and director of 
undergraduate studies at Harvard University and a senior fellow at 
the Cato Institute. Kate Waldock is a doctoral candidate in economics 
at the Stern School of Business at New York University

MAKING AN ECONOMIC CASE FOR LEGALIZING DRUGS

State and federal governments face a daunting fiscal outlook. The 
national debt stands at 60 percent of GDP, its highest level since 
World War II. Under current projections this ratio will rise to more 
than 75 percent of GDP by 2020 and continue increasing thereafter. 
States are also facing severe budget shortfalls.

Politicians and the public express concern about the debt, but 
standard proposals for expenditure cuts or tax increases garner 
little support. Understandably, therefore, some politicians, 
commentators, interest groups, and citizens have embraced 
unconventional approaches to closing fiscal gaps, such as legalizing drugs.

Legalization would reduce state and federal deficits by eliminating 
expenditure on prohibition enforcement - arrests, prosecutions, and 
incarceration - and by allowing governments to collect tax revenue on 
legalized sales.

This potential fiscal windfall is of particular interest because 
California, which is facing a budget shortfall of $19.9 billion for 
fiscal 2011, will vote Nov. 2 on a ballot initiative that would 
legalize marijuana under California law. Advocates of the measure 
have suggested the state could raise billions in annual tax revenue, 
in addition to saving criminal-justice expenditure or reallocating 
this expenditure to more important priorities. Should the California 
measure pass and generate the forecasted budgetary savings, other 
states would likely follow suit.

In our recent study, just released by the Cato Institute, we estimate 
the impact of legalization on federal, state, and local budgets. The 
report concludes that drug legalization would reduce government 
expenditure about $41.3 billion annually. Roughly $25.7 billion of 
this savings would accrue to state and local governments, and roughly 
$15.6 billion to the federal government. About $8.7 billion of the 
savings would result from legalization of marijuana, $20 billion from 
legalization of cocaine and heroin, and $12.6 billion from 
legalization of all other drugs.

Legalization would also generate tax revenue of roughly $46.7 billion 
annually if drugs were taxed at rates comparable to those on alcohol 
and tobacco. About $8.7 billion of this revenue would result from 
legalization of marijuana, $32.6 billion from legalization of cocaine 
and heroin, and $5.5 billion from legalization of all other drugs.

These estimates should be taken with several large grains of salt. 
The markets for illegal drugs are opaque, and different approaches to 
estimating either the size of this market or the effect of 
legalization can therefore vary substantially. Further complicating 
matters, different approaches make different implicit or explicit 
assumptions about exactly what policy change is under consideration, 
such as whether legalization applies nationwide, under both federal 
and state law (the scenario we consider), or in just one state, just 
for marijuana, and just under state law (the California experiment). 
Our estimates are in the middle of available numbers.

The fact that legalization would generate a fiscal dividend does not, 
by itself, make it a better policy than prohibition. Legalization 
would have many effects, and opinions differ on whether these are 
desirable on net. Both sides in this debate, however, should want to 
know the order of magnitude of the fiscal benefit that might arise 
from legalization.

Our results imply that the budgetary implications of legalization are 
neither trivial nor overwhelming. Legalization will not solve 
America's fiscal woes; the budget effects are small in comparison 
with current deficits. Yet the budgetary benefits are more than mere 
rounding error; for those with mixed feelings about prohibition vs. 
legalization, these benefits might be a deciding factor.

Several specific aspects of our estimates bear comment.

Roughly half the budgetary savings comes from reduced 
criminal-justice expenditure on drug prohibition. For this component 
of the effect to show up in government budgets, policymakers would 
have to lay off police, prosecutors, prison guards, and the like. 
Such a move would be politically painful, so it might not occur. 
Reduced expenditure on enforcing prohibition can still be beneficial 
if those criminal-justice resources are redeployed to better uses, 
but that outcome is not easy to achieve.

Only about $17.4 billion in budgetary improvement can be expected to 
come from legalizing marijuana in isolation. Yet the current 
political climate gives no indication that legalization of other 
drugs is likely in the short term. So the budgetary impact from the 
politically possible component of legalization - marijuana - seems modest.

None of these considerations weakens the broader case against drug 
prohibition, which has always rested on the crime, corruption, and 
curtailment of freedom and civil liberties that are the side effects 
of attempting to fight drug use with police officers and prisons. 
What our estimates do provide are two additional reasons to end drug 
prohibition: reduced expenditure on law enforcement, and an increase 
in tax revenue from legalized sales.
- ---
MAP posted-by: Keith Brilhart