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. As marijuana usage increases after the passage of the law, so too does the spread; a one percent increase in use leads to a seven basis point increase in the spread.
The authors find empirical evidence that state’s borrowing costs are higher for states with higher corruption, better temperatures for cultivating the plant, and greater population of individuals more likely to use marijuana such as youth, African Americans, and urban residents. This suggests that bondholders are ascribing greater risk to states that will have increased marijuana usage. Furthermore, they find that states that passed medical marijuana laws have greater spending on police, correctional facilities, health, and public welfare. In comparison, during the same time period, states that liberalized marijuana did not have greater spending in other areas such as highways, natural resources, and parks and recreation.
“MML drives up states’ expenditures, increases states’ financial burdens, and thus adversely affects states’ debt servicing capacities and credit risks.” the authors conclude.
This paper was prepared for the 2020 Municipal Finance Conference on July 13 & 14, 2020. The conference is a collaboration of the Brookings Institution’s Hutchins Center on Fiscal and Monetary Policy, the Brandeis International Business School’s Rosenberg Institute of Public Finance, Washington University in St. Louis’s Olin Business School, and the University of Chicago’s Harris Institute of Public Policy. It aims to bring together academics, practitioners, issuers, and regulators to discuss recent research on municipal capital markets and state and local fiscal issues.