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Should the Federal Government Legalize Marijuana? – Pros & Cons

In December 2020, during the waning days of the 116th Congress, the U.S. House of Representatives voted to legalize recreational cannabis use and cultivation in all 50 states.

The vote was overshadowed by a concurrent push for yet another round of badly needed coronavirus stimulus legislation, and the bill passed by the House — the Marijuana Opportunity Reinvestment and Expungement Act (MORE Act) — never received a vote in the U.S. Senate. Along with illicit opiates like heroin and powerful hallucinogens like peyote and LSD, cannabis remains a Schedule 1 controlled substance that’s illegal under federal law.

That might not be the case for much longer. Senate Majority Leader Chuck Schumer announced early in 2021 that major cannabis reform legislation would be a priority for the new Congress, according to Marijuana Moment. The legislation would likely merge several earlier cannabis reform bills to deschedule the substance, expunge low-level cannabis offenses, and establish a taxation regime for legal cannabis sales, according to a separate Marijuana Moment report.

The push came as four new states eliminated state criminal penalties for recreational cannabis use, bringing the total number of U.S. jurisdictions to do so to 16, according to a running tally by Esquire. Their number includes not only Democratic strongholds like Washington state and California but Republican-dominated states like South Dakota and Alaska.

The momentum is on cannabis legalization advocates’ side. As we look ahead to a potential sea change in U.S. drug policy, let’s consider the possible impacts of legal recreational marijuana on federal and state budgets and the broader U.S. economy.

The MORE Act: A Blueprint for Federal Cannabis Legalization

Citing comments by Sen. Schumer and U.S. Rep. Earl Blumenauer (D-Oregon), Marijuana Moment reports that the MORE Act is the likely “foundation” for a consolidated cannabis reform bill in the 117th Congress. This consolidated bill could contain elements of the Marijuana Freedom and Opportunity Act (MFO Act), a similar but less expansive legalization initiative first introduced in 2018.

Major provisions of the MORE Act include:

  • Removing marijuana from the list of scheduled substances under the Controlled Substances Act
  • Eliminating criminal penalties for the manufacture, distribution, and possession of marijuana
  • Establishing a federal trust fund that supports programs and services for communities impacted by U.S. drug policy, including cannabis prohibition
  • Imposing a 5% tax on cannabis products to be deposited into the federal trust fund — later amended to increase the tax rate to 8% and establish a variable tax rate based on cannabis prices
  • Permitting cannabis-related businesses and service providers to obtain Small Business Administration loans and services (currently not permitted under federal cannabis policy)
  • Eliminating certain cannabis-related convictions or criminal conduct as permitted rationales for the denial of federal public benefits to individuals
  • Eliminating certain cannabis-related convictions or criminal conduct as permitted rationales for the denial of benefits and protections under U.S. immigration law
  • Establishing sentencing review and conviction expungement processes related to federal cannabis offenses
  • Directing the U.S. Bureau of Labor Statistics to collect and publish demographic data on cannabis business owners and employees
  • Directing the Government Accountability Office to study cannabis legalization’s potential societal impacts

The MFO Act includes some additional provisions left out of the MORE Act:

  • Establishing a federal trust fund to assist women- and minority-owned cannabis businesses
  • Authorizing federal research on the implications of marijuana use for highway safety and public health
  • Authorizing federal restrictions on marijuana-related product marketing
  • Authorizing state and local governments to expunge or seal marijuana possession convictions

Several key provisions of the MORE and MFO acts directly concern the federal budget and the broader U.S. economy, including the establishment of a federal tax on cannabis sales and the opening of Small Business Administration loan programs to cannabis-related businesses.

Even provisions that aren’t explicitly financial could have significant economic and fiscal impacts. For example, expunging or sealing prior marijuana-related convictions could improve job prospects, earning potential, and economic mobility for those affected.

Possible Impacts of Cannabis Legalization on the Federal Budget and Debt

An analysis of the MORE Act by the nonpartisan Congressional Budget Office (CBO) projected the measure would increase net federal revenue by nearly $14 billion through 2030, according to Marijuana Moment. The CBO also projected the measure would reduce federal prison spending by $1 billion.

These expected revenues and cost savings represent a mere drop in the ocean of the national debt, which U.S. Debt Clock pegged at about $28 trillion in early 2021. They’re a bit larger as a share of the U.S. budget deficit, which fluctuates from year to year and was unusually large in 2020 — north of $3 trillion, compared with $1 trillion or less in recent prior years — due to federal pandemic stimulus spending, according to data from the Bipartisan Policy Center.

Cannabis Tax Revenue in Select U.S. States and Canada

Early data from states and countries that have already legalized marijuana put the CBO’s projections in context.

According to the Tax Policy Center, the two oldest state marijuana taxation regimes in Colorado and Washington state each accounted for about 1% of total state and local revenues (excluding federal transfer payments) in 2018. In four other states, cannabis taxes accounted for less than 1% of total state and local revenues in 2018.

A Politico investigation from 2019 finds state cannabis tax revenues largely falling short of expectations, with notable exceptions in Colorado and Nevada and a general caveat that revenues may reach or exceed longer-range projections as cannabis supplies increase and retail operations become more common.

A 2019 PolitiFact analysis suggests that state revenues do tend to ramp up after initial shortfalls attributable to early growing pains.

That story could play out in Canada as well. There, federal cannabis tax revenues came to just $18 million Canadian dollars (about $14.5 million U.S. dollars) in fiscal year 2019, the first during which recreational marijuana was legal there. That’s short of the Canadian government’s CA$35 million projection, according to the National Post.

In response, the government lowered its fiscal year 2020 revenue projection from CA$100 million to CA$66 million while blaming shortfalls on a bumpier-than-expected rollout of the legal sales regime. Longer-range forecasts remained rosy with projected federal tax revenues rising to CA$220 million by fiscal year 2023.

Whether the lower-than-expected early cannabis revenues play out in U.S. federal coffers is still anyone’s guess. What we do know is that annual federal cannabis tax revenues would need to hit $35 billion to account for 1% of the federal government’s $3.5 trillion revenue as of 2019, per the Tax Policy Center. The CBO’s projections put expected cannabis tax revenues at approximately $1.4 billion per year.

However, the federal government is far less reliant on consumption taxes than most states. There’s no federal sales tax, and federal excise taxes accounted for just 3% of federal revenues in 2019, according to the Tax Policy Center.

Just as important, the federal government isn’t legally required to balance its budget each year; state governments are. Bottom line: the federal government doesn’t need cannabis tax revenue as badly as states might.

Possible Impacts of Cannabis Legalization on the U.S. Economy

Federal cannabis legalization could add nearly 1.6 million U.S. jobs over a five-year span, according to a 2020 report by the pro-legalization cannabis analytics firm New Frontier Data.

Recent economic history does suggest that legal cannabis is a job creator. In states where cannabis is currently legal, employment in the industry increased by about 83,000 from 2018 to 2019, according to New Frontier Data, while Marijuana Business Daily projected that total U.S. cannabis industry employment would approach 300,000 by the end of 2020.

North of the border, Indeed Hiring Lab Canada noted a marked decline in cannabis-related job postings in 2019 and 2020 after a post-legalization surge, but retail hiring remains brisk as pot shops open across the country and sales activity shifts away from the black market.

Jobs aren’t the only indicator of legal marijuana’s economic potency. Marijuana Business Daily expects the cannabis industry to contribute nearly $80 billion to the United States’ economic output by 2022, up from just over $20 billion in 2017.

Legalization could be a boon for publicly traded cannabis companies’ share prices as retail investors and money managers flock to invest in cannabis stocks previously deemed too risky to touch. Rising interest from mainstream investors could spur more cannabis and cannabis-related companies to go public, producing big paydays for early investors, executives, and equity-compensated employees alike.

Possible Benefits of Marijuana Legalization

Proponents of marijuana legalization argue that the likely benefits far outweigh the potential costs.

1. Cannabis Businesses Would Have Better Access to the U.S. Financial System

By and large, the cannabis industry remains a no-go zone for mainstream U.S. financial institutions, even in states where recreational sales are legal. According to a 2018 report by McClatchy, approximately 70% of U.S. cannabis businesses were entirely unbanked. They relied on cash to cover all business-related expenses, including employee payroll, and could not accept credit or debit cards.

Needless to say, cash-only businesses that trade in an expensive, semi-illicit product are vulnerable to theft, armed robbery, and worse. The deadly spate of dispensary robberies that rocked Portland, Oregon, in 2020 and 2021 — reported by Willamette Week — is just one example of the risks these enterprises face. Similar stories have played out in California, Colorado, and elsewhere.

Risk-averse banks are unlikely to open their doors to cannabis businesses until the substance is legal at the federal level. Although no one expects newly “banked” dispensaries to be impervious to robberies and theft, enabling credit card payments and digital payrolls would certainly lower the financial stakes of a holdup or break-in.

And the MORE Act’s promise to make cannabis businesses eligible for Small Business Administration loans could reduce financing costs and fuel nascent enterprises’ growth.

2. The Cannabis Market Would Become More Efficient

The U.S. market for legal cannabis is woefully inefficient. Because the substance remains illegal at the federal level, interstate cannabis trade is prohibited — California-based cannabis growers can sell only to California-based retailers, just as Oregon-based growers can sell only to Oregon-based retailers, and so on.

Breaking down these siloed state cannabis markets could dramatically reduce cannabis wholesale and retail prices from approximately $200 to $300 per ounce to as little as $5 per ounce, according to a 2014 analysis by the Congressional Research Service.

Although low cannabis prices could have unintended consequences, such as increased rates of consumption and lower-than-expected tax revenues, a more efficient cannabis market characterized by free-flowing interstate commerce and robust private investment would be an economic boon.

3. Legalization Would Create a New Revenue Stream for the Federal Government

Tax revenue from cannabis sales won’t single-handedly close the yawning federal budget deficit, which hit $3 trillion in 2020. But, if estimates from the nonpartisan CBO are to be believed, it could make a meaningful dent in the deficit while funding new public safety and enforcement obligations created by legalization.

This revenue-generating potential is particularly welcome after multiple rounds of pandemic-related stimulus, the full costs of which have yet to be tallied.

4. Legal Cannabis Could Reduce Cartel Activity in the U.S.

The impact of cannabis decriminalization on the activities of international drug cartels is complex and controversial. But a 2015 report by Vice found little evidence to support Nebraska Attorney General Doug Peterson’s claims — the basis of a federal lawsuit — that Colorado’s cannabis industry was fueling Mexican and Russian criminal gangs’ activities in his state.

Vice also found that cannabis seizures declined sharply along the U.S.-Mexico border between 2011 and 2015 as the first states legalized recreational pot. At the very least, it appears that cartels aren’t directly benefiting from liberalized cannabis policy in the U.S. and Canada, and falling prices could hamper their efforts to undercut legitimate marijuana retailers.

5. Legalization Could Spur Long-Overdue Criminal Justice Reforms

The Congressional Budget Office estimated that the MORE Act would erase 73,000 person-years of federal prison time, per Marijuana Moment. That is, thousands of Americans convicted of cannabis-related offenses will cumulatively spend 73,000 fewer years in prison if the MORE Act passes into law.

That’s worth celebrating in purely moral terms, as cannabis offenses tend to be nonviolent and their enforcement disproportionately targets lower-income people of color. But it could also have economic knock-on effects, both by reducing incarceration costs by about $1 billion during the period examined by the CBO and by enabling formerly incarcerated people to contribute to society in ways they couldn’t behind bars.

And because many employers simply refuse to hire people with criminal records, the wholesale sealing or expungement of prior cannabis convictions could create a cohort of newly marketable employment candidates as well.

6. Legalization Could Create Financial Opportunities for Investors

U.S. investors in all 50 states can invest in cannabis stocks and potentially profit from the industry’s growth right now. Many financial advisors and analysts specialize in identifying high-quality cannabis stocks and funds that they expect to outperform the broader market, and more join them every month.

Still, because the present-day cannabis market is hampered by fragmentation, inefficiency, and poor access to mainstream finance, it’s not operating anywhere close to peak potential. That’s likely to change in a big way if and when cannabis becomes legal from coast to coast

Although individual cannabis companies’ fortunes will always rise and fall independently of the sector’s as a whole, legalization will create more — and more varied — opportunities for investors as new companies debut and the overall market expands.

Possible Drawbacks of Marijuana Legalization

Opponents of marijuana legalization question proponents’ rosy outlook for a post-normalization world.

1. Legalization Could Increase Impaired Driving Deaths, Injuries, and Enforcement Costs

Although studies of marijuana-impaired driving are hampered by lack of consistent testing, no agreed-upon THC concentration thresholds for determining impairment, and the fact that THC can remain detectable in the body for weeks after ingestion, data collected by the National Council of State Legislatures suggests that marijuana-impaired driving increased during the 2010s.

The consequences have been tragic. In Washington state, the number of drivers testing positive for THC after fatal road crashes doubled from 2012 to 2020. In Colorado, the same metric more than tripled between 2013 and 2016.

Marijuana-impaired drivers took to the road long before the first states legalized the drug for recreational use, of course, but widespread legalization and more liberal attitudes around its use have apparently created a permission structure.

A decades-long public health push like the successful — if incompletely so — campaigns against tobacco use and alcohol-impaired driving may be necessary to limit cannabis-related road carnage in the years ahead.

2. Legalization Could Increase Burdens on the Health Care System and Social Services

A White House report released during former President Barack Obama’s first term details the potential public health consequences of marijuana legalization.

The ills detailed by the report include the fact that more than 4 million people met diagnostic criteria for marijuana dependence or abuse in 2011, that marijuana is the second most common reason cited by those seeking substance abuse treatment, and that chronic marijuana use in youth may significantly decrease IQ scores later in life.

Anticipating arguments by proponents of revenue-raising cannabis taxes, the report notes that alcohol’s societal costs exceed total alcohol tax revenues by a factor of 15.

3. Productivity Could Fall As Cannabis Use Increases

Data cited by National Families in Action, an anti-cannabis group, indicates that U.S. employers’ substance-related productivity losses — including for absenteeism and poor job performance — approach $125 billion annually.

Meanwhile, a 2016 report by Smart Approaches to Marijuana, another anti-cannabis group, found rates of absenteeism, workplace accidents, workplace injuries, and workplace disciplinary issues anywhere from 55% to 85% higher in marijuana users than a control group.

Although these data don’t establish a direct correlation between cannabis use and lower productivity, it’s reasonable to expect higher rates of cannabis use — and higher rates of substance use and abuse in general — to correspond with poorer outcomes in the workplace.

4. Cannabis Use Among Minors May Increase Amid a Shift to Edibles

Marijuana use among minors hasn’t spiked dramatically in states where the substance is legal. For example, according to a 2019 Colorado youth survey summarized by Westword, about one in five Colorado high school students reported using cannabis within the past 30 days, in line with national averages.

Still, the proliferation of marijuana-infused food products, commonly called edibles, has some parents, educators, and child-safety advocates concerned. A 2016 report by the University of Washington School of Law’s Cannabis Law and Policy Project summarized by Science Daily suggests that colorful, whimsically shaped edibles and edibles branded with recognizable pop culture characters could appeal to children in ways that “traditional” cannabis delivery methods — smoking and vaping — do not.

5. Large-Scale Marijuana Agriculture Is Bad for the Environment

Large-scale marijuana cultivation consumes vast amounts of water and electricity. A paper prepared by an Oregon state legislative task force found that cannabis operations consume nearly twice as much water per plant as wine grape vineyards. The CBC reports that producing a pound of high-grade cannabis consumes as much electricity as the average Canadian household does in two months.

The cannabis industry’s absolute share of resource consumption remains low, accounting for less than 1% of total power usage in heavily cultivated Ontario in 2019, per the CBC. But the U.S. economy will need all the help it can get to reach President Joe Biden’s 2050 deadline for carbon neutrality.

Although keeping the substance on the federal controlled substances list won’t eliminate marijuana agriculture, there’s a persuasive environmentalist case to be made for limiting supply and avoiding the sorts of intensive, large-scale cultivation practices that increase other agricultural industries’ carbon footprints.

Final Word

With Democrats in control of the Presidency and both houses of Congress, the chances of major federal cannabis policy reform passing into law are higher than at any point in living memory.

As we’ve seen, legalizing marijuana would significantly impact public finances, criminal justice, and economic policy at the state and federal levels. Reasonable people can and do disagree about the magnitude and direction of those impacts, with some arguing that federal legalization would be a net benefit for society and the economy and others saying it’ll create more problems than it solves.

This sort of debate is healthy. And it’s certainly not the first of its kind. The ongoing conversation around whether to establish a national lottery to reduce the federal budget deficit is just one example of a familiar dynamic that pits proponents of raising revenue by expanding controversial “vice” industries like gambling and recreational drugs against those who warn of unacceptable societal and economic costs. However the cannabis legalization debate turns out, it won’t be the last of its kind either.

Brian Martucci writes about credit cards, banking, insurance, travel, and more. When he's not investigating time- and money-saving strategies for Money Crashers readers, you can find him exploring his favorite trails or sampling a new cuisine. Reach him on Twitter @Brian_Martucci.