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Legalizing Marijuana in California: Why It Won't Lessen the State's Tax Woes


Friday, August 14, 2009

Among the many creative ideas to redress California's budgetary plight are proposals (including at least one that is currently pending in the legislature) to legalize, and then regulate and tax, recreational marijuana use. In this column, I explain that whether or not legalizing marijuana is a decent idea (a topic on which I don't know enough to express a view), legalization wouldn't generate any significant state tax receipts for the foreseeable future.

According to the California State Board of Equalization, legalizing and taxing marijuana transactions -- an idea backed (according to a Field poll in April) by 56 percent of Californians -- could generate $1.4 billion of annual state revenue. That is a non-trivial amount, even in a large state like California, where yearly general fund revenue expenditures are in the ballpark of $100 billion. The Board's estimates presumably rely on some empirical data about the overall amount of (currently illegal) marijuana sales and marijuana use in the state, and on some guesses about the number of people who would report and pay taxes on their marijuana activities if those activities were no longer criminal under California law.

But it is at this second step – which concerns the likely extent of reporting and detection of the production, sales, or use of marijuana in California -- where the public discussion (including discussion by gubernatorial candidates) thus far has been very incomplete.

Federal Law: The Missing Link In The Tax Reporting Chain

The piece that haslargely been missing from the policy debate over legalizing and taxing marijuana at the state level is federal law. All marijuana production, distribution, sales and consumption remains illegal under federal law, and that won't change anytime soon. A majority of the U.S. Supreme Court in Gonzales v. Raich made clear, less than a decade ago, that Congress enjoys the constitutional power to criminalize all marijuana cultivation, possession and use. Congress can even regulate and prohibit the growing and consumption of small amounts of marijuana at home for ostensible medicinal purposes. What Raich means is that if marijuana activity is to be decriminalized at the federal level, such a change will have to come from Congress, not the courts.

And in Congress, the prospects for decriminalization seem dim. Even if a majority of Americans (or close to it) were to mirror Californians' attitudes and favor decriminalization of the use of small amounts of marijuana for recreational purposes (and I don't know if polls really show that they would), it is improbable that Congress would act to change existing law. One important reason is the makeup of the Senate. All federal laws (including those that repeal or amend laws already on the books) must obtain the support of a majority of Senators as well as House members, and it seems likely that pro-legalization sentiment is and will remain weak in a large number of (admittedly smaller) socially conservative states. Thus, getting a majority of Senators, even if there were a majority of House members and Americans more generally, on board for marijuana decriminalization legislation would appear to be a tough task.

And as long as the specter of federal criminal sanctions remains, the reporting (and thus the taxation) of marijuana activity will likely be low in those states that decriminalize marijuana under state law. Even if a marijuana seller or user complies with state law, unless and until he could be confident that his sale or use would not land him in federal prison, he is heavily deterred from reporting and paying state taxes on that sale or use.

None of this means that the federal government can force states to keep marijuana illegal. Indeed, states can decriminalize marijuana, under state law, if they so choose; they simply cannot obstruct or interfere with federal efforts to enforce federal laws that Congress enjoys the power to pass, even if federal enforcement frustrates state policy or taxation objectives.

Federal Enforcement Resources and Attitudes

Of course, the deterrent effect created by federal law depends not just on what Congress has done, but also on what the federal executive branch does by way of criminal enforcement. And, as Professor Rob Mikos and others have pointed out, federal law enforcement resources are limited in this respect, so that some people may be willing to report and pay state taxes on some activities that are illegal under federal law simply to avoid state tax liability and related penalties. But relying on an absence of federal enforcement resources is obviously a dangerous game to play, when the stakes include a possible trip to the federal penitentiary.

Some decriminalization advocates might point to the fact that in the dozen or so states that have decriminalized medicinal marijuana (as opposed to recreational marijuana), many dispensaries have been open and overt about their activities (so as to comply with state law), even though such openness risked federal investigation and prosecution. But the federal government's attitude about state decriminalization of medicinal marijuana has been ambivalent, and the federal government has at various times sent mixed messages about how vigorously it would try to crack down on state-approved dispensaries. Recently, the Obama administration has signaled, albeit not always clearly, that such state-approved dispensaries will not be a high enforcement priority at the federal level. This move seems designed to encourage those involved with medicinal marijuana to go about their state-approved business without too much fear.

Importantly, there is no indication that the Administration's attitude about non-medicinal -- that is, recreational -- marijuana use would be at all similar. And politically, a public statement of non-enforcement by the Administration with respect to non-medicinal use would seem very costly.

A rejoinder might be that not long ago it might also have seemed politically unlikely that the feds would refrain from targeting medicinal dispensaries – and yet that has come to pass. That brings us to a big point about the relationship between state and federal law in this and other areas: Often, state laws have short-term effects that are more political than tangible, but state-level political messages can then set the stage for more practical long-term legal change at the federal level. As Professor Mikos has observed, if states decriminalize recreational use, then marijuana "may seem more beneficial and less dangerous or wicked simply [by virtue of the fact that] it's now permitted by state law." That dynamic is essentially what happened in the area of medicinal marijuana use, where a dozen or so states (along with last year's election results) have helped shape federal enforcement attitudes, and helped generate the current seemingly hands-off federal attitude.

There is some truth to all this, and for these important reasons, the question of state decriminalization is a worthy issue for California and other states to discuss and consider. But legalization will not provide even a partial answer to state budget problems any time soon, and thus it should not really be discussed or sold as a fiscal cure.

Vikram David Amar, a FindLaw columnist, is the Associate Dean for Academic Affairs and Professor of Law at the University of California, Davis School of Law. He is a 1988 graduate of the Yale Law School, and a former clerk to Justice Harry Blackmun. He is a co-author, along with William Cohen and Jonathan Varat, of a major constitutional law casebook, and a co-author of several volumes of the Wright & Miller treatise on federal practice and procedure. Before teaching, Professor Amar spent a few years at the firm of Gibson, Dunn & Crutcher.

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