TaxProf Blog

Editor: Paul L. Caron, Dean
Pepperdine University School of Law

Thursday, September 20, 2012

The Federal Tax Revenue Consequences of State Legalization of Marijuana?

Marijuana Doug Berman (Ohio State) of our sister Sentencing Law & Policy blog asks What Will be the Real Tax Dynamics If (When?) a State Legalizes Marijuana?:

The question in the title of this post is prompted by this effective new AP piece, which is headlined "Pot Could Be Tax Windfall, but Skeptics Abound." ... I vaguely recall from my 2L tax class that the definition of income for federal tax purposes includes even ill-gotten gains.  Thus, those making money currently on medical marijuana sales in various states should already be paying federal income tax even though they are violating federal criminal laws.  Consequently, if (when?) a state legalizes all marijuana sales and allows more persons legally to earn income, there ought also be a benefit to the federal tax coffers as well even if federal criminal law does not change anytime soon.  (Dare I joke that maybe Mitt Romney will come to endorse pot legalization initiatives with the hope of reducing the percentage of voters who pay no federal income tax?)

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As I may have commented earlier, I have just finished reading "Last Call" by Daniel Okrent, a history of Prohibition. The relationship between the alcohol tax, and the income tax, is easy to prove. Alcohol excise taxes accounted for 30% of federal revenue, before the Constitution was amended to allow an income tax. "Dry" politicians were lobbied by the Anti-Saloon League to vote for the 16th Amendment income tax, paving the way for the 18th Amendment.

The movement for repeal of Prohibition was led by millionaire industrialists, like Pierre duPont, who recruited supporters by pointing out that alcohol taxation would allow reduction or repeal of income taxes.

It's not the income tax on marijuana dealers, but the excise tax on the product they sell, that would balance the federal budget. Perhaps that is a reason Paul Ryan is reluctant to oppose repeal of marijuana Prohibition.

Politicians are as insane now, about banning drugs that remain readily available, as they were in the 1920s about banning liquor. Legalization may not come in my lifetime, but I predict it will for my grandchildren -- and if they have to use drugs, I hope it's marijuana and not alcohol.

Posted by: Bob | Sep 20, 2012 11:42:29 AM

"but the excise tax on the product they sell, that would balance the federal budget."

Its very difficult to believe the Feds could ever balance the budget no matter how much their revenue increases. They will always find out new ways to spend the additional money to garner support from their patrons or increase the budgets of their offices. What politician or bureaucrat wants a smaller budget than their predecessor?

Posted by: Steve | Sep 21, 2012 9:14:00 AM