Implications of Cannabis Legalization for the US Federal Budget
Alex Brill, Brian J. Miller and Stan Veuger | Cato Institute
While the details of future federal legislation and executive actions to legalize, regulate, and tax cannabis remain unknown, such policies could have significant impacts on the federal budget. New excise taxes, regulatory fees, and changes in the labor supply could affect tax liabilities and thus government revenue. Effects on outlays could include reduced expenditures on prohibition enforcement and increased expenditures on cannabis product regulation and prescription cannabis (depending on how it is regulated). Consequences for key public health and social outcomes, such as crime, traffic fatalities, and educational achievement, could also have both positive and negative budgetary implications.
Our research identifies the main federal budgetary impacts of federal legalization of cannabis and estimates their magnitude when possible. This exercise assumes that cannabis is regulated and that both medical and recreational cannabis will be taxed, with states and localities following suit. It improves upon the limited prior research in this area by analyzing a much wider set of sources of federal revenue and spending.
Our key findings on the revenue side are that the largest potential effect arises from an increase in labor force participation, which prior research suggests may result from workers using cannabis as a form of pain management therapy. Increases in government revenue from an excise tax on cannabis could also be significant even after accounting for expected offsetting factors. Existing evidence suggests that legalizing cannabis could reduce alcohol consumption and thus decrease alcohol tax revenues. Other changes to revenue—including revenue from the corporate income tax on cannabis producers or Food and Drug Administration fees—are likely to be less significant.
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