Daniel Stein says the salvation of U.S. taxpayers could be marijuana. As Washington breaks the bank on Wall Street bailouts, President Barack Obama’s stimulus package and other spend-now, pay-later measures, most observers agree that politicians will eventually need to increase revenue or cut spending to cover the federal government’s debts.

Stein believes Washington could begin to balance its books now if politicians would take a serious look at his industry. The owner of two retail outlets that he claims generate $1 million in revenue annually, Stein says he pays around $80,000 a year in sales taxes to the state of California. But the federal government, which does not acknowledge Stein’s sales as legitimate commerce, gets nothing from his business.

Sound odd? Not if you know that Stein sells marijuana. In fact, because federal authorities have spent time trying to close his and other medical-marijuana clubs, Washington is losing money on him. Imagine how much the feds would save if they stopped cracking down on sellers, Stein says. “Cannabis is good for the economy,” he said. “It’s been here the whole time, but it’s had a bad rap the entire time.”

As more people begin to see the merits in Stein’s logic, that bad rap is changing. While legalization, decriminalization and the medical use of marijuana continue to be debated in terms of public health, lawmakers and policy analysts are increasingly touting the economic benefits of regulating and taxing weed, which the Office of National Drug Control Policy says is the most popular illegal drug in the U.S.

Critics of legalizing marijuana say the potential economic benefits of regulating and taxing the drug would obscure the less-tangible, long-term downsides of making it more prevalent in society. “The argument wholly ignores the issue of the connection between marijuana and criminal activity and also the larger picture of substance abuse,” said David Capeless, the district attorney of Berkshire County in Massachusetts and the president of the state’s district attorneys association. “It simply sends a bad message to kids about substance abuse in general, which is a wrong message, that it’s not a big deal.”

A 2004 report by the drug policy office said drugs cost Americans more than $180 billion related to health care, lost productivity and crime in 2002. That study lumped the effects of marijuana in with more-dangerous drugs, such as cocaine and heroin. But marijuana advocates say history is on their side. They muster arguments similar to those that led to repealing Prohibition during the Great Depression. “In the early 1930s, one of the reasons that alcohol was brought back was because government revenue was plummeting,” Harvard economist Jeff Miron said. “There are some parallels to that now.”

Definitive figures on the size of the untapped marijuana market don’t exist. It’s a gray market, after all. But there are plenty of studies indicating we are not talking about chump change.

In a 2007 study, Jon Gettman, a senior fellow at George Mason University’s School of Public Policy, valued the American marijuana trade at $113 billion annually. Between drug enforcement and potential taxes, the federal government and the states were losing almost $42 billion a year by keeping marijuana illegal, the study indicated. Gettman is a former staff member of NORML, the National Organization for the Reform of Marijuana Laws, a nonprofit that lobbies on Capitol Hill for marijuana legalization.

“It’s a very large, significant economic phenomenon, and it is diverting an incredible amount of money from the taxable economy,” Gettman said. Miron says he is interested in the topic as a libertarian who believes the government shouldn’t ban any drugs. He offers more-conservative numbers, estimating that federal and state treasuries would gain more than $6 billion annually if marijuana were taxed like alcohol or tobacco. At the same time, relaxing laws against use of marijuana would save nearly $8 billion in legal costs, he says.

The Obama administration seems to be inching toward a more permissive stance on marijuana. Last month, U.S. Attorney General Eric Holder announced he would end raids on clubs like Stein’s, fulfilling a pledge Obama had made on the campaign trail. “It’s a major break from the ‘just say no’ mentality,” said Allen St. Pierre, the executive director of NORML, referring to Holder’s announcement.

Stein is somewhat relieved. The raids had been wreaking havoc on California’s budding marijuana industry, he says. Two years ago he was forced to move one of his clubs, The Higher Path, to a new location on Sunset Boulevard in Los Angeles, after the Drug Enforcement Administration sent his landlord a letter saying agents could seize the building. “Medical marijuana is very, very satisfying, but it’s very nerve-racking and dangerous,” Stein said. St. Pierre says 13 states have adopted laws to allow medical marijuana, while an additional handful have decriminalized possession, meaning the penalties associated with marijuana are negligible.

Of course, critics of decriminalization are also vocal. Calvina Fay, the executive director of the Drug Free America Foundation, says Gettman, Miron and others fail to account for marijuana’s adverse side effects, from lethargy to impaired driving to tendencies among weed smokers to try more-serious drugs. “Those who are using drugs are less productive than those who aren’t,” Fay said. A spokesman for the drug policy office declined to comment, saying the office wanted to wait until the Senate has confirmed Obama’s drug czar nominee, Seattle Police Chief Gil Kerlikowske.

But according to the FBI’s most recent data, approximately 870,000 people nationwide were arrested on marijuana violations in 2007. Nearly 15 million Americans use marijuana on a monthly basis, according to the latest National Survey on Drug Use and Health. The same study found that more than 100 million Americans had tried marijuana at least once in their lives. Advocates of decriminalization say those statistics argue against the vision of mass lassitude put forward by their opponents.

“Most people either did the drug themselves or their friends did,” Miron said. “They know those extremes are not right.”

California has come closest to outright legalization of the marijuana industry. Sacramento already collects around $18 million in sales taxes a year from $200 million worth of medical-marijuana purchases, according to data supplied by California’s State Board of Equalization. Now Assemblyman Tom Ammiano, a San Francisco Democrat, is sponsoring new legislation that would legalize marijuana completely — and tax it. The state estimates the proposal could generate $1.3 billion a year.

“The war on drugs has failed,” Ammiano said. “It seems to me there is across both aisles that assessment, and California is in an egregious economic abyss. The economic situation makes (legalization) viable.” The pro-marijuana lobby argues that U.S. agriculture could expand significantly if farmers were allowed to openly cultivate weed. In a 2006 study, Gettman calculated that marijuana was one of the biggest cash crops in the U.S., with 56 million plants worth almost $36 million.

In the United Kingdom, where restrictions on marijuana research are less onerous than in the U.S., companies such as GW Pharmaceuticals are moving quickly to develop other drugs from the plant. In the company’s 2008 annual report, GW executives said they had received approval to market Sativex, a cannabis-derived painkiller, in Canada. The report said the company is seeking approval of the drug from European regulators and is working with the U.S. Food and Drug Administration as well.

A spokesman for the company, John Dineen of the London public-relations firm Financial Dynamics, says executives would prefer not to be quoted in a story about the economic consequences of marijuana legalization. David Goldman, a patron of the Green Cross, a medical-marijuana dispensary in San Francisco, had no such compunctions. To Goldman, medical marijuana looks like a godsend that should be studied and expanded. After groin surgery a few years ago, he found he had troubling reactions to other painkillers, and he turned to marijuana.

“The constant pain is something I need to accept and is something for which cannabis has been invaluable,” he said. “Why should we cede medical cannabis research to the U.K. when some of the best minds in medicine are in this country?”

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