This is a myth, nobody actually makes money off of prisons right now. (except prison employees, but they don't have any say over how prisons run, so they don't count for these purposes)
If it's true that no prisons make a profit, why are there still private prisons? Not necessarily contradicting you, but maybe they should look into their business plan if they're not making profit.
In thinking about this earlier, I couldn't come up with another commonly available product for which no sales tax is collected. The best I could come up with is yard sale items. Illegal income is supposed to be reported for income tax, but I don't think there's any law that says illegal sales are supposed to be reported for sales tax. (Income tax activists claim there's no law that income tax has to be reported at all, but that's another issue. The fact is income tax evasion, where the source of income is illegal, is prosecuted, whereas I'm not aware of any case of prosecution for evading sales tax on sale of illegal products.)
If the government collected just 6% sales tax on reported marijuana sales, that alone would be a huge revenue stream. Add to that income tax, as pro-legalization activists do, and the argument becomes stronger. I'd like to see figures on state revenue from medical marijuana, minus expenditures for grants for marijuana research. This article claims $200 million dollars of medical marijuana sales are subject to sales tax in California.
If you're morally opposed to marijuana, the state revenue argument won't hold much sway. If we could make money by killing babies, we wouldn't support it. But if you're opposed on purely pragmatic, utilitarian, grounds, then the untapped revenue stream (and the costs of prisons, which in whole do not produce profit--and drain productivity by warehousing citizens who might otherwise be productive) must be persuasive.
