Liberalizing marijuana will incur substantial costs for state borrowing

Liberalizing marijuana has generated debates among the press, health officials, legislators, and social activists. Although marijuana is illegal under federal laws, 33 states and the District of Columbia have legalized the use of medical marijuana. While the debate continues on legalizing marijuana for non-medical use at the state and federal level, a paper presented at the 2020 Municipal Finance Conference finds that the passage of medical marijuana laws increases state government borrowing costs.   

In “Marijuana liberalization and public finance: A capital market perspective on a public health policy,” Stephanie Cheng, Gus De Franco, and Pengkai Lin of the Freeman School of Business at Tulane University evaluate the impact of the passage of medical marijuana laws on municipal bond spreads from 1990 to 2018.   

After controlling for differences in bonds’ contractual features and changes in state economic conditions, the passage of medical marijuana laws increases the yield on state borrowing relative to yields on Treasuries of the same maturity by seven basis points (0.07 percentage points) compared to states that do not. “In dollar terms, MML [medical marijuana laws] increases a state’s interest cost by $7.35 million for the average total issuance amount per year,” the authors calculate. [Read More @ Brookings]