Altered State? Assessing How Marijuana Legalization in California Could Influence Marijuana Consumption and Public Budgets

The RAND report summarized here addresses two primary questions:

1. How would legalization affect marijuana consumption?
2. How would legalization affect public budgets?

Limitations of the RAND Report

• The RAND report projections are based on conservative estimations of the values for multiple variables. Please see the full report for details on estimations and models.
• Projections about the impact of legalizing marijuana in California on consumption and public budgets are thus subject to considerable uncertainty.

Background on California Marijuana Policy

• 1913: California was one of the first states to prohibit marijuana, predating the federal Marihuana Tax Act of 1937 by nearly 25 years.
• 1975: California was one of the first states to reduce the maximum sentence for possessing small amounts of marijuana from incarceration to a small fine ($100).
• 1996: California was the first state to allow marijuana to be grown and consumed for medicinal purposes. By the end of 2009, it was estimated that about 500-600 dispensaries were operating throughout the city of Los Angeles.
• 2010: California will become the third state to vote on whether marijuana should be legalized and taxed-and potentially the first to pass such legislation.

Background on International Marijuana Policy

• In no country is it completely legal to produce, sell, and use marijuana irrespective of quantity.
• All but two countries have retained some penalty for marijuana use. Mexico and the Netherlands are the only countries in which it is clear that all penalties for use by adults have been removed.
• In no Western country is a user at greater risk of being criminally penalized for using marijuana than in the United States.

Summary of RAND Report Projections

• Cannabis legalization would plausibly lead to a 58 percent increase in consumption.
  • Increased consumption would result from price reduction and removal of legal penalties.
  • Based on current prevalence rates, a 58% increase in consumption would likely generate an additional 305,000 users meeting DSM-IV criteria for marijuana abuse or dependence in California, for a total of 830,000.
• The price of marijuana will substantially decline, likely by more than 80 percent.
  • The pretax retail price is likely to decline to $38 dollars per ounce of sinsemilla-grade marijuana. Taking into account anticipated fees and taxes; the final retail cost would be approximately $91 dollars.(3)
• Marijuana taxation will be determined independently by each city and county in California.
  • The RAND report projects an average taxation rate of $50 per ounce.
  • High taxation could create strong incentives for tax evasion and thus contribute to continuation of a black market for marijuana.
  • High taxation may create incentives for users to switch to higher-potency forms of marijuana to minimize cost.
• It is unlikely that increased treatment costs will have much of an impact on the bottom line in terms of net budgetary cost of marijuana legalization.
  • Increased treatment admissions would result in a $1.5 million increase in cost, of which perhaps $1 million would fall on the taxpayer.
  • Increased Emergency Department episodes would result in a $1.9 million to $2.6 million increase in cost. Even if we assume worst-case estimates, the ultimate cost to taxpayers is on the order of tens of millions of dollars, which is relatively small compared to estimates of criminal-justice expenditures or potential tax revenue.
• Tax revenues from legalization could be dramatically lower or higher than the $1.4 billion often estimated
  • Uncertainty about the federal response to California legalization can swing estimates in either direction.
  • The RAND report projects that total tax revenues for California are likely to be closer to $0.8 billion.
• Potential unintended consequences were found by RAND
  • California governmental revenues could benefit from smuggling marijuana into other states.
  • If counties and cities lower their marijuana tax rates to capture an increased share of the market, a “race to the bottom” could result.

1. Altered State? Assessing How Marijuana Legalization in California Could Influence Marijuana Consumption and Public Budgets. 2010. By: Beau Kilmer, Jonathan P. Caulkins, Rosalie Liccardo Pacula, Robert J. MacCoun, Peter H. Reuter. The RAND Corporation is a nonprofit institution that helps improve policy and decision-making through research and analysis. All RAND occasional papers undergo rigorous peer review to ensure that they meet high standards for research quality and objectivity.
2. This summary was prepared by Timmen Cermak, MD, President of the Californian Society of Addiction Medicine, and Itai Danovitch, MD. Portions are direct quotes, although quotation marks have been left out to make the text more readable.
3. The current price for sinsemilla-grade marijuana in California is approximately $300-$450 per ounce