The Budgetary Implications of Drug Prohibition

By Jeffrey A. Miron Department of Economics, Harvard University

Executive Summary

  • Government prohibition of drugs is the subject of ongoing debate.
  • One issue in this debate is the effect of prohibition on government budgets. Prohibition entails direct enforcement costs and prevents taxation of drug production and sale.
  • This report examines the budgetary implications of legalizing drugs.
  • The report estimates that legalizing drugs would save roughly $48.7 billion per year in government expenditure on enforcement of prohibition. $33.1 billion of this savings would accrue to state and local governments, while $15.6 billion would accrue to the federal government. Approximately $13.7 billion of the savings would results from legalization of marijuana, $22.3 billion from legalization of cocaine and heroin, and $12.8 from legalization of other drugs.
  • The report also estimates that drug legalization would yield tax revenue of $34.3 billion annually, assuming legal drugs are taxed at rates comparable to those on alcohol and tobacco. Approximately $6.4 billion of this revenue would result from legalization of marijuana, $23.9 billion from legalization of cocaine and heroin,
    and $4.0 billion from legalization of other drugs.
  • State-by-state breakdowns provide a rough indication of legalization’s impacts on state budgets, but these estimates are less reliable than those for the overall economy.
  • Whether drug legalization is a desirable policy depends on many factors other than the budgetary impacts discussed here. Rational debate about drug policy should nevertheless consider these budgetary effects.
  • The estimates provided here are not definitive estimates of the budgetary implications of a legalized regime for currently illegal drugs. The analysis employs assumptions that plausibly err on the conservative side, but substantial uncertainty remains about the magnitude of the budgetary impacts.