Could Marijuana Be the Revenue Fix That State Governments Need?



Tax revenue from the legalization of recreational use of marijuana could be one of the largest windfalls for state governments in recent history. The operative phrase here is “could be.”

It is no small secret that the fiscal situation in many states is tight, if not dire, and the ball is rolling on the legalization of marijuana, mostly as a medicine, but the recreational movement also has an enormous amount of momentum. It has been a long-standing argument of advocates that legalizing and taxing the drug could produce an enormous windfall for states. Economics teaches us that when the demand is there, creating a supply will yield economic activity, and the government could take a much-desired (and perhaps much-needed) cut of those cash flows.

Even in times of plenty, oiling the gears of the economic mechanism sounds like a strong argument. But now, mired in an (at best) underwhelming recovery, the argument carries a little more weight. In 2008, at the height of the crisis, the financial condition of state-level governments in the United States began to rapidly deteriorate. Revenues — mostly in the form of tax receipts — evaporated as unemployment surged. States tapped reserves, reached out for federal support, and increased taxes. Contributions to already underfunded pensions declined even further, increasing the overall liabilities of state governments.