Published on 04-02-2025
In 1996, states began enacting laws to legalize marijuana for medicinal uses, notwithstanding its prohibition under federal law. As of the November 2024 election, 39 states, three territories, and the District of Columbia have approved such legislation, most recently Nebraska. At the same time, the acceptance of marijuana among residents is evolving due to its legalization for medical and recreational purposes, altering public opinions of its health and legal risks.
Although extensive research exists regarding the social and health implications of heightened marijuana consumption due to its liberalization, there is limited understanding of its impact on state budgets. In the article “Marijuana Liberalization and Public Finance: A Capital Market Perspective on the Passage of Medical Use Laws,” published in the Journal of Accounting and Economics, Gus De Franco, the Emanuel T. Weiler Professor at Purdue’s Mitch Daniels School of Business, examines the effect of medical marijuana law (MML) implementation on the borrowing costs of state governments.
The research, coauthored by Stephanie F. Cheng of Tulane University and Pengkai Lin of Singapore Management University, examines municipal borrowing costs from the perspective of investors who determine pricing based on states’ anticipated financial conditions and economic outlooks. From that viewpoint, factors related to the short- and long-term financial viability of local governments ought to be incorporated into municipal bond pricing.
Analyzing a sample of trading data from 2005 to 2018, the study finds that states' borrowing costs increase by 7 to 9 basis points when state-level legislation legalizing medical marijuana is enacted. This basis-point increase raises a state's interest cost by $7.35 million in dollar terms for the average yearly total issuance amount. In addition, MMLs result in a 0.2-notch reduction in states' credit ratings and a 4-basis point rise in the underwriter's gross spreads, aligning with the notion that underwriters impose elevated fees due to the assumption of riskier bond inventories. These findings suggest that municipal bond investors regard MMLs as generating a net economic detriment rather than a net advantage.
The research indicates that heightened consumption is a crucial factor explaining the elevated state bond spreads, aligning with economic theory regarding substance use, which posits that legalizing marijuana enhances local consumption by augmenting its availability and diminishing its perceived risks. It also illustrates that states could be incurring greater expenditures on marijuana-related costs, including public welfare, law enforcement, and incarceration, subsequent to enacting such legislation.
