LOS ANGELES (Reuters) - With California teetering perpetually on the edge of financial ruin, marijuana activists have seized the moment, claiming that legalizing and taxing pot could help bail out the cash-strapped Golden State.

But critics are slamming the proposal, saying the social costs of a free-smoking state far outweigh the money it would bring in, and that a promised windfall from taxing marijuana sales couldn’t possibly plug California’s massive budget gap.

Voters are likely to confront the issue next year. Marijuana advocates say they have collected more than enough signatures, over 680,000, to qualify for November’s ballot with a proposal to make California the first U.S. state to legalize possession and cultivation of pot for recreational use.

Passage remains far from certain, even in socially permissive California.

Fifteen years after Californians led the nation in approving the use of cannabis for medical purposes, fierce political debate is raging over a recent mushrooming of medicinal pot dispensaries in Los Angeles and other cities.

In northern California towns like Arcata and Eureka, where pot has long been part of the social fabric and local economy, illicit growers have reportedly stepped up production to meet rising demand generated by the proliferation of clinics around the state of 38 million.

‘PROHIBITION IS CHAOS’

Under the latest initiative, simple possession of an ounce (28.5 grams) or less of marijuana, currently a misdemeanor offense punishable by a $100 fine, would be legal for anyone at least 21. It also would be lawful to grow limited amounts in one’s own home for personal use.

While sales would not be legalized outright, cities and counties could pass laws permitting commercial distribution subject to local regulations and taxes. Retail sales would still be limited to an ounce for adults 21 and older.

Slideshow ( 5 images )

A Field Poll in April found 56 percent of California voters favor legalizing recreational marijuana and taxing it as a new revenue source to ease the budget crunch.

The state tax board found that California could collect $1.4 billion a year in taxes from a legalization bill proposed by Assemblyman Tom Ammiano, a San Francisco Democrat.

He backs the referendum as a prelude to his own statewide bill, saying that outlawing pot has proven a failure.

“Prohibition is chaos, and at least with regulation you have some control,” Ammiano said.

But critics warn that the social harms of legalizing cannabis -- from declines in work production and academic achievement to a rise in traffic and job accidents -- would likely trump any economic benefits.

“The carnage in this country due to alcohol and tobacco use is enormous,” said Joel Hay, professor of pharmaceutical economics and policy at the University of Southern California. “Why we would want to increase the use of another product that creates this kind of damage is hard to fathom.”

Hay questions the accuracy of revenue projections for Ammiano’s bill, based largely on a 2006 Harvard University study that valued California’s annual marijuana crop of an estimated 8.6 million pounds (3.9 million kg) at $13.8 billion a year.

‘DEALING WITH CONSEQUENCES’

Slideshow ( 5 images )

“I don’t know that their numbers are correct. But whether it’s a billion or a half billion (dollars in revenue), that number will be swamped by the cost to the state of dealing with all the consequences,” Hay said.

The tax board’s estimate assumes marijuana’s street price would drop by half if legalized but that demand would rise.

Still, the $1.4 billion in revenues projected for the Ammiano bill would make only a small dent in California’s budget shortfall, estimated at $21 billion for 2009-10.

Supporters say many of the benefits of legalizing pot are harder to quantify. They argue that ending prosecutions of marijuana possession would free up strained law enforcement resources and strike a blow against drug cartels, much as repealing prohibition of alcohol in the 1930s crushed bootlegging by organized crime.

Stephen Gutwillig, California head of the Drug Policy Alliance, said current law “makes criminals out of otherwise law-abiding citizens.”

State figures show misdemeanor marijuana possession arrests topped 61,400 in California last year, he said, up 127 percent from 1990, while arrests for all other crimes fell 40 percent.

The ballot measure’s leading advocate, Richard Lee, owner of several marijuana-related businesses in Oakland, also said legalization could be for California what gambling long was for Nevada -- an added tourist attraction.

Lee argued that if alcohol, which he calls “a more dangerous drug” than marijuana, can be taxed and regulated by the government, “we can surely do it with cannabis.”

But veteran political consultant Steve Smith said Lee’s measure had an uphill fight.

“What you like to have going in is 60 percent support, because the high point of a proponent’s campaign generally is when they start,” he said. “If they’re in the mid-50s, they have a chance of passage but it won’t be easy.”