Federal Reserve Bank Says States With Legal Marijuana See ‘Broadly Distributed’ Economic Boost But Also Bump In ‘Social Costs’

States that legalize marijuana for adults see moderate economic gains after the policy change is implement but also experience an increase in social costs including substance use disorders, chronic homelessness and arrests. That’s the upshot of a new report recently published by researchers at the Kansas City arm of the Federal Reserve Bank.

“Although some of our estimates are noisy,” authors wrote in the new paper, “our findings suggest that the economic benefits of legalization are broadly distributed, while the social costs may be more concentrated among individuals who use marijuana heavily.”

Among the signs of economic improvement after cannabis legalization that were identified by the economists were a 3 percent increase in average state income, a 6 percent rise in housing prices and a 2 percent bump in population. In terms of social costs, however, substance use disorders climbed by 17 percent, chronic homelessness rose by 35 percent and arrests went up 13 percent in legal states.

States that legalized earlier, authors noted, “experienced similar social costs but larger economic gains, implying a potential first-mover advantage” over states that jumped on the bandwagon by implementing cannabis reform later.

Between 2017 and 2022, the number of jobs directly in the marijuana industry has grown from less than 125,000 to more than 425,000, the Fed paper says, citing an industry report. “While this still makes up less than 0.3 percent of total U.S. employment,” it notes, “the industry did make up more than 4 percent of total employment growth between 2017 and 2022.”

In terms of state revenue from legal marijuana, the report says, new money from legal cannabis is often offset by decreases in other revenue sources.

“Tax collections related directly to marijuana sales increased,” it says, “but tax collections from alcohol and tobacco sales declined following legalization. On net, we do not find a significant effect on overall tax revenues or general sales tax revenues.”

In Illinois, for example, total tax revenue in fiscal year 2023 was $420.9 million, according to state data released earlier this month—more than alcohol, but lower than the $435.1 million from cannabis sales in fiscal 2022.

A 3 percent rise in average state income per capita was “driven mainly be increases in proprietors’ income,” the Federal Reserve Bank researchers found. Population growth and housing prices also ticked up more sharply in states with adult-use cannabis.

Meanwhile, self-reported marijuana usage increased by 28 percent post-legalization, the Kansas City Fed report found, accompanied by a rise substance use disorders. And chronic homelessness rose by 35 percent, “consistent with frequent anecdotes from residents and policymakers in states with legalized marijuana,” although that finding was “just outside of statistical significance.”

“Although overall crime rates did not significantly change, arrests for both violent and property crimes rose,” it says, “suggesting a potential increase in law enforcement activity.”

Authors also flag that the increase in arrests “occurred without significant increases in crime possibly due to more funding to public safety from marijuana tax revenue.”

The three-person team cautions that the report “does not provide a comprehensive cost-benefit analysis of recreational marijuana legalization,” noting that “such an analysis would need to investigate a much larger set of potential benefits and social costs that are presently unobservable or unmeasurable, and take into account potential behavioral responses to legalization such as moral hazard and adverse selection.”

Still, the report says that its estimate of the size of the economic benefits from legalization “could be used to approximate the amount of funding that could be set aside for social programs that would help offset the costs.”

“Widely distributed benefits versus more concentrated costs indicate that policymakers should be cautious in discounting the existence of potential costs of recreational legalization,” it continues. “In addition, states which recently legalized recreational use or are considering it may likely expect more muted potential benefits relative to the first-mover states (Colorado and Washington), but still have to deal with higher social costs of increased marijuana usage.”

Speculating as to why states that legalized earlier saw greater economic benefits, authors write that it may be “due to it being less novel or less of a perceived amenity or actual demand shock from ‘marijuana tourism’ compared to the first states that legalized recreational use.”

The paper, “Economic Benefits and Social Costs of Legalizing Recreational Marijuana,” was written by Jason P. Brown, Elior Cohen and Alison Felix, and published by the Federal Reserve Bank of Kansas City in late September.

A year ago, the same branch published a separate report that found marijuana legalization had a “significant” economic impact in states—generating jobs, boosting tax revenue and making real estate more valuable. It also acknowledged that federal prohibition has created unique “challenges,” particularly as it concerns the current lack of access to traditional banking systems.

In early 2020, the Kansas City Fed also released a report focusing on Colorado’s experience with legalization. That publication concluded that the cannabis market was primed to continue to grow as public support for legalization increased.

That same year, the St. Louis division of the Fed published a separate report outlining the potential benefits and consequences of state-level marijuana legalization, noting the economic impact of the policy change as well as the possibility that people will use cannabis as a substitute for alcohol.

Late last month, officials at the U.S. Census Bureau published a report showing that legal cannabis states had collected more than $5.7 billion in marijuana tax revenue over an 18-month period, a figure it intends to update quarterly going forward. Census also recently updated its survey of private businesses to better capture marijuana-related economic activity.

The agency also published a new interactive map detailing the proportion of state revenue made up by marijuana tax money. While Oregon by far relied heaviest on marijuana tax dollars—at times making $1 in every $20 in tax revenue from cannabis—states including Michigan, Illinois, Alaska and Colorado consistently saw marijuana revenue make up at least 1 percent of state income over the past two years.

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Photo courtesy of Brian Shamblen.

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