State-level marijuana legalization

UCLA public policy students have solved an apparently insoluble problem: how to regulate and tax at the state level something that remains a federal felony.

Marijuana legalization initiatives at the state level – Prop. 19 in California in 2010, the proposals likely to be on the ballot in Colorado and Washington State this fall – run into a tricky set of problems. Marijuana, if legalized, ought to be regulated and taxed. But how can you tax and regulate, at the state level, something that remains a Federal felony? It might seem that all a state can do is what New York did with alcohol in 1923: repeal its state law entirely, leaving the business unregulated by the state and allowing the federal government to enforce its prohibition, or not.

In fact, it did seem that way to me when I proposed the design problem as an assignment to UCLA first-year public policy students as part of their introduction to policy analysis. I thought I was giving them a problem with no good solution; discovering that such problems exist is an important part of policy education, and the class was so extraordinarily strong I thought they were ready to absorb that rather daunting lesson early in their educations.

Well, it turns out I was right about the students, but wrong about the problem. Much to my surprise, one of the groups came up with a workable regulatory scheme (based on liquor stores) and another with a workable tax scheme (physical tax stamps). (A third group had the idea for a sunset provision, with a commission to propose revisions to whatever the new law was in light of experience.)

I wrote up the students’ ideas in a short memo and sent it around to some of the activists I know, with no perceptible result; the Washington and Colorado proposals don’t incorporate these ideas, and California is going nowhere.

At a reader’s request, I’m now posting the memo. Comments welcome.

Update Link fixed.

Footnote Since this was a class exercise, I can’t post the names of the brilliant people who did the actual work without their consent. If you were part of the class, and want your name on the document, please let me know. If you’re an employer looking to hire some of the smartest MPPs ever, I know where to find them.

Author: Mark Kleiman

Professor of Public Policy at the NYU Marron Institute for Urban Management and editor of the Journal of Drug Policy Analysis. Teaches about the methods of policy analysis about drug abuse control and crime control policy, working out the implications of two principles: that swift and certain sanctions don't have to be severe to be effective, and that well-designed threats usually don't have to be carried out. Books: Drugs and Drug Policy: What Everyone Needs to Know (with Jonathan Caulkins and Angela Hawken) When Brute Force Fails: How to Have Less Crime and Less Punishment (Princeton, 2009; named one of the "books of the year" by The Economist Against Excess: Drug Policy for Results (Basic, 1993) Marijuana: Costs of Abuse, Costs of Control (Greenwood, 1989) UCLA Homepage Curriculum Vitae Contact: Markarkleiman-at-gmail.com

61 thoughts on “State-level marijuana legalization”

  1. Marijuana tax stamps actually exist already–many states have them, apparently with the primary intent of slapping extra fines/jail time on users/dealers, and perhaps in some cases of using tax data to find dealers. The latter use appears to have been found unconstitutional (as requiring self-incrimination) in some areas. http://norml.org/legal/tax-stamps

  2. You might want to send the writeup to David Englin in the Virginia House. He’s sponsoring a measure to study having the State-owned liquor stores sell marijuana. The House is Republican-controlled, so the measure faces probably lethal opposition.

    1. Yes, Thanks, I have sent this discussion to Delegate Englin. His legislation will likely be heard in the House Rules Committee in Virginia next Thursday.

      http://lis.virginia.gov/cgi-bin/legp604.exe?121+ful+HJ140

      HOUSE JOINT RESOLUTION NO. 140

      Establishing a joint subcommittee to study the potential revenue impact on the Commonwealth of legalizing the sale and use of marijuana, with certain restrictions and conditions, and selling it through Virginia’s ABC stores.
      ———-
      Patron– Englin
      ———-

  3. Sometime in the mid-80s, the state of Kansas enacted a tax-stamp requirement on illegal drugs. It hasn’t been a big money-maker for the state. According to the Topeka Capital-Journal, sales of stamps peaked in 1994 at around $10,000. Drugs seized without valid stamps (the stamps are good for 90 days from issue) are subject to the amount of the unpaid tax plus a 100% penalty.

  4. A pretty obvious way around all of the problems would be to just have the state produce and sell the marijuana itself. There would be both legal and practical problems with the federal government trying to stop this– legally, it’s not clear under New York v. United States and the Printz case whether the federal government has any power to stop a state from selling its citizens a product, and practically, if the state wanted to utilize its law enforcement resources to ensure the distribution occurred, there’s nothing the federal government could do unless it wanted to start a shooting war with state police.

    1. I believe these legal issues were already covered in the Ed Rosenthal case where the city of Oakland worked with the growers to establish an official distribution network. The idea was to use the exclusion under Federal law for authorities being able to possess marijuana.

      The legal idea was knocked down in court, and local public officials are reluctant to take on the Feds. They don’t have confidence that enough people will want to engage in a shooting war with the Feds (over marijuana, no less) to properly back them up.

  5. 1. Drug tax stamps have been around for a long time, but as an enforcement tool rather than a revenue-collection device. This is a new idea.

    2. Cannabis is contraband under federal law. Distributing it is a crime. State officials operating state marijuana stores would be vulnerable to federal charges. I like the state-store idea as a way of allowing legal access without commercial promotion, but it’s a non-starter while the federal law is in place.

    1. Prof. Kleiman:

      You missed the import of my “practical” point. Sure, state officials would be vulnerable to federal charges (unless Printz and New York v. United States apply). But if a state were determined to do this, how, exactly, would you propose to arrest them? Do you think a President would risk a Little Rock-style confrontation with state officials (including armed state law enforcement) over ensuring that a state could not distribute marijuana to its own citizens? There’s a reason why those events are the exception rather than the rule in American history.

      In reality, if a state did this, there would be no federal arrests. The federal government might very well do things like try to get court orders shutting the operation down and the like, and there would probably be attempts to cut off funding to the state as well. All sorts of pressure tactics. And perhaps they would work. But there would never be an arrest.

    2. In the Kansas law, the stamps are sold anonymously (I’m not sure how this is operationalized), to avoid their use as an enforcement tool.

      The basic effect is to raise revenue. Either dealers buy the stamps, or when caught, they pay double the taxes that were due. The law puts 25% of the proceeds from seizures into the state general fund, and the remainder goes to the police agencies that made the bust, split equally among them. Revenues from the sales of the stamps go directly into the general fund.

      I was a resident of Kansas when the law was enacted, and it was played to the public as strictly a revenue-generation mechanism. Dealers can pay up front, or they can pay later. What is your take on that, Mark? Is it an enforcement tool or a revenue tool? Clearly, as a revenue tool the taxes are ineffective ($10K in the best year??). But it does provide substantial funding to police agencies.

      1. Those are simply punishment tools. Hysterical lawmakers have always followed a consistent pattern. The last laws they passed didn’t work, so they figure tougher ones will do it. Besides, who doesn’t get a little personal glee from taking money from drug dealers? As near as I can tell, the revenue they generate is negligible. Lawmakers rarely do any rational analysis of desired end results on drug laws.

        The original Marihuana Tax Act was a tax stamp idea. It was declared unconstitutional on Fifth Amendment grounds.

  6. There is the potential for a legal challenge to both the licensing and tax collection components might be subject to federal preemption. In Pack case, a California appellate court held a local medical marijuana permitting system to be preempted by federal law. The California Supreme Court recently took the case up on review and I think there is a good chance it will be overturned. But, if the appellate decision in Pack were upheld, I think the licensing system described in the memo would be subject to a similar preemption challenge. (More on Pack, with a link to the decision at: http://safeaccessnow.org/blog/?p=2174). The enforcement mechanism for the tax stamps may also be preempted: the officers purchasing marijuana undercover would be committing a federal offense (attempted possession and, possibly, possession). There is a federal immunity statute that may protect this sort of undercover enforcement purchase, but the issue has not been resolved in the courts. (See, for example, the Rosenthal case, discussing the immunity statute: http://www.ca9.uscourts.gov/datastore/opinions/2006/04/25/0310307.pdf). If the conduct was not immunized, then the state tax enforcement officials could be federally prosecuted for making purchases. Still, the sort of system outlined in the memo is on much surer legal footing than state-run distribution would be.

    On another note, cities and states have raised tax revenue from medical marijuana through standard sales taxes. (http://www.denverpost.com/news/marijuana/ci_16688199 ; http://www.prweb.com/releases/oakland_medical/cannabis_marijuana_laws/prweb8845291.htm ) Would the taxation and regulatory concerns related to federalism play out substantially differently in the legalization context than they have in the medical marijuana context? Strictly in terms of the legal arguments, I think that the federalism-related issues would be virtually identical.

    1. This misses what seems to me the brilliant insight of the UCLA students. The Supremacy Clause makes it impossible for a state to issue a license to violate a federal law. But the proposed scheme is entirely negative: the California law would simply make it a felony to sell marijuana without a liquor license. Clearly the state can issue liquor licenses; equally clearly, it can carve out an exemption to its own felony statutes. Since no California official would be giving anyone permission to do anything against the federal law, there would be nothing for the courts to enjoin.

      By the same token, California can sell excise-tax stamps, and California businesses can buy them, without breaking any law. If the Alcoholic Beverage Control Commission makes it a violation of the terms of one’s liquor license to sell marijuana without a tax stamp affixed, again that rule doesn’t permit anything. If it suspends or revokes a liquor license to punish the licensee for selling pot without a tax stamp (or to a minor, or after hours, or over the prescribed THC limit, or in any other way in violation of ABC rules), that’s just the exercise of its authority under the liquor laws.

      Now, I’m not a lawyer. But I know a couple. And no one I’ve talked to has come up with a way for the Feds to interfere with this, other than by sending agents to the stores to make undercover buys.

      1. The bigger problem, I think, ends up being the IRS. If expenses involved in production and sale of marijuana are not tax deductible — I hear that this is the case, but haven’t looked at the question myself — then you end up with a bunch of people getting taxed on gross rather than net. Which isn’t sustainable, apparently. And so you get widespread evasion, and the FBI comes to visit.

        We had quite the thing going here in Montana last year — storefronts, radio ads, marijuana stores that delivered — but the feds more or less shut it down with a series of raids in March.

        1. This, again, is why the solution is state sales (with, again, nice big burly armed state police officers at the facilities to ensure that the federal government doesn’t try to shut them down). States are constitutionally exempt from taxation.

          1. Big burly armed state policemen obstructing a federal investigation? Not likely. If the feds want to shut the operation down, they can and will. Here in Montana, they did so.

        2. In 1932, California passed two initiatives simply opting out of alcohol prohibition. Prohibition fell at the national level in 1933.

          If California simply opts out of marijuana prohibition, by whatever means, it will be obvious to everyone that the game is up. California is the world’s eighth largest economy. What are the Feds realistically going to do in the face of that? The IRS may give it their best effort but the political game is lost, and the IRS could never manage to chase that many people, anyway. It may take Congress a while to catch up to reality and adjust the tax laws, but reality will win in the end.

          The bigger thing to contemplate, from a California standpoint, is that when it is legalized, the farmers in the Central Valley of California will instantly own that market. Where is the best place in the world to grow anything? California’s current farm income is about 36 billion per year. If the marijuana crop is worth as much as the CAMP program estimates for their seizures, it will boost California farm income by about fifty percent. It could be a bigger bonanza than the Gold Rush.

      2. What about the other restrictions on liquor licenses? Iirc in many jurisdictions criminal convictions, connections to criminal enterprises, failure to walk on the right side of the street during a full moon etc are grounds for non-issuance or revocation of a license. So you might end up with very small pool of people who have the potential to be dealers without violating the state law.

        1. The rules on the liquor licenses would remain the same. The license would simply get someone out of a marijuana sales conviction. Marijuana sales while holding the license wouldn’t be grounds for revocation.

          The idea is to give sellers an incentive to comply with legal rules and pay their taxes without actually issuing permits – which are forbidden by the Feds. The liquor laws already include all the rules, and the incentive to abide by the rules. So just adjust the laws so that marijuana works the same as liquor. Put the bud beside the Budweiser, with the same set of rules.

        1. Provided the seller has a liquor license and has abided by its terms, then the maximum penalties for all such offenses would be reduced to what the cost of an annual license would have been.

        2. The policy scheme includes the repeal of California laws prohibiting marijuana sales. Would marijuana still be a “controlled substance” subject to 24200.5?

          1. Depending on the finesse of the Code massaging, conceivably, No. But there are other provisions in the ABC rules that refer simply to “narcotics” and “dangerous drugs” as malefactors, so maybe.

          2. The basic assumption is that the law would be changed to make marijuana equivalent to alcohol in all respects. That is, no longer a “controlled substance.” Tom Ammiano has been doing a lot of work on a bill that contains all the terms necessary to make that happen under state law.

      3. I agree completely with the memo that the UCLA students’ proposal regarding liquor licenses would make it more difficult for federal officials to sue to enjoin (or to prosecute) stores. But I think that the preemption issues would be very similar for this sort of licensing as it would be for marijuana-specific-licensing (e.g., of the sort in the Pack decision.) Regardless of how it is constructed–whether as an add-on the liquor licenses or a marijuana-specific license–the scheme would amount to a permit/license to sell marijuana under state law (neither system would purport to grant a license with respect to federal law.) I’m personally skeptical of the Pack decision and I think it is likely that the California Supreme Court will overturn it. But, if the Pack decision’s “authorization” theory stands, I think it would put any state licensing scheme in jeopardy of being preempted regardless of how it was constructed. Of course, preemption of a state law and direct prosecution or (or suits to enjoin) sellers are two different things. If the law were not preempted, then direct prosecution may be more difficult under the liquor license-scheme because it would be tougher to target entities. That said, the medical marijuana system operates via direct licenses/permits (e.g., as in Pack, Oakland, SF and many other cities) and the federal government has not sued to enjoin all of those licensees. I suspect that things would play out similarly if a state were to pass a legalization measure.

        I agree completely on your points re: the tax stamps. My only issue is the portion of the memo that says the scheme would be enforced via “mystery shoppers” sent out by the state. These individuals would be committing a federal offense (attempted possession and possibly possession) by purchasing marijuana. There is a more than colorable argument, I think, that they would fall under 21 USC 885(d)’s immunity provision. But, it would not be a slam dunk.

        All of this said, I do think this a unique and interesting proposal and may be on a better legal footing in some respects than other proposals. Still, I think that there would be legal vulnerabilities, particularly if Pack were upheld. I also think that other regulatory schemes–e.g., the types of systems states have used for medical marijuana regulation–would be likely to work much the same way under a legalization scheme. In California, for example, storefront dispensaries continue to operate and pay taxes where they are permitted locally (via standard sales taxes and medical marijuana-specific permits.) I imagine that if a state were to enact a similarly structured marijuana legalization system, things would be likely to play out similarly.

        1. As the original author of the scheme — the scheme does not have to “permit” anything. It can simply say that if certain conditions are met, then the normal sentencing is mitigate. Sales of marijuana can still be a “crime” but if you have an alcohol license then the maximum penalty is less. Sellers still have a big incentive to pay their taxes and comply with the law, but nothing is “permitted”. It is just “less illegal.”

          As for the Pack case, there is another case coming down the pike that will probably turn the whole medical marijuana thing on its head. Medical marijuana is now legal in Washington, DC. Since Congress has allowed it in WDC, then they can’t forbid it elsewhere. The case is in the works right now.

          May you live in interesting times.

  7. We’ll be voting on repealing the legislature’s messing with our medical marijuana initiative (passed in 2004) in Montana this fall.

    The feds cracked down on marijuana growers and distributors — suspicious timing seemed to be aimed at the lege — and some fools who don’t understand the Constitution brought suit in federal court. Shocker: it didn’t work. http://missoulian.com/news/local/molloy-says-federal-law-trumps-montana-s-medical-marijuana-law/article_84a4a4b8-45f6-11e1-b755-0019bb2963f4.html

  8. The tax stamp idea could be extended to cover the supply problem. An annual tax stamp (or pre-paid fine, leave it to the lawyers) to allow a certain amount of cultivation. Even without the rest of the scheme this would give the home-growers a good leaving alone and thus be a useful action in itself.

  9. Maybe the reason you didn’t get much of a reaction is because those proposals were already out there. I posted very similar ideas to the reform e-mail lists about a year ago. They have been under discussion for a while and I have even discussed the ideas with legislatures from other states. One of the ideas, in short, was to simply copy the alcohol laws and let the existing alcohol license function as a de facto marijuana license. That is, if you hold the alcohol license and abide by its rules then you don’t get prosecuted.

    There are also other ways to do it, without using the alcohol license.

  10. BTW, Mark, nothing is perfect, and these proposals aren’t entirely perfect, either. Since I came up with the ideas some time back, I have done some thinking and discussion on the benefits and drawbacks. So I think I am still ahead of the class. Why don’t you ask your students if any of them is on the DPFCA e-mail list. I posted the ideas there long ago.

  11. Another method of doing the same thing and licensing without licensing is to simply do sentence mitigation.

    That is, leave the current criminal laws for marijuana in place. However, if you can show that you didn’t sell to kids, paid your taxes, were generally a good person, etc., etc. then the maximum penalty is reduced to a once-a-year thousand dollar fine. If you are a really honest person, you can come in and pay the fine in advance.

    The Feds may bar issuing of licenses but they can’t tell a state what minimum penalties to enforce, or what the state can consider as mitigation in sentencing.

    And, BTW, Mark, you will want to take a look at what California did in 1932. They passed two initiatives. One established the Alcoholic Beverage Commission. The other simply repealed the California alcohol prohibition laws. With California out of the game, national prohibition fell the following year.

    And thanks for saying I had some brilliant ideas there. These ideas were discussed during the recent round of arguments for the various initiatives that might come to the ballot in California in 2012.

  12. Dear Professor Kleiman,
    Thanks for your perseverance on this issue over the years.

    There are a couple of things that haven’t been mentioned here. Elephants in the room as it were. One is that while we were successfully fighting, years ago, to keep Virginia from enacting punitive “tax stamp” legislation from passing we found in our research that more tax stamps were actually sold to stamp collectors than to anyone else. The drug dealers never actually see the stamps if they get caught with drugs and have to buy the stamps at a higher rate in court. That would be likely true with enforcement under the model your student describes as well although the tax not being designed to be punitive makes it more palatable to my Constitutional tastes.

    The second thing is that the alcohol industry probably won’t stand for this. Permit holders won’t likely be willing to risk their license in such experimentation with cannabis distribution and will fight hard against such a measure. Have you talked with any representatives of California’s liquor industry or representative of the liquor stores lobby?

    And while I have your attention, The Dutch model, that you allude to, is designed to separate hard drugs like alcohol from soft drugs like cannabis for many health based reasons. There are only a few coffee-shops in all of NL that even sell beer. You don’t seem to address this point either..

    All the best, Michael

    1. I am not a big fan of the tax stamp idea, myself. One reason is that it simply creates more work and a paper trail that the Feds could follow. Besides, tax stamps take forethought and, if somebody runs out of them, they are just likely to continue doing business and ignore the stamp requirement. Therefore, the idea would be legally OK, but practically unworkable. We would get better results if we simply put a sales tax on marijuana.

      As for the alcohol industry not going for it, that is a political problem, not a legal one. If the law is passed, I would bet that, with all the thousands of people with liquor licenses, some will take the chance. The liquor license is a state thing, and the license holders would only be subject to state law, and state law will have been changed to allow it. Then they will just have to worry about the Feds, and a lot of people have shown their willingness to take that chance.

      Besides, the numbers simply aren’t on the Feds side. The US Attorney for Northern California has already admitted that the fight against marijuana is “shoveling sand against the tide.” All that is really needed now is some clear demonstration that he got it right.

  13. Another method, that is very elegant. The entire thing can be achieved with a simple one-line initiative:

    Henceforth, marijuana offenses shall be treated as if they are alcohol offenses.

    That’s a very simple statement, and it would get lots of agreement. It is hard to make a logical argument against it. What would it mean?

    Permits or licensing – It doesn’t say anything about permits or licensing. Therefore, the Feds have no place to stand.

    Sales – An arrest for sales of marijuana would be treated as an arrest for alcohol. The first question to be answered would be whether they had an alcohol sales license and were complying with the terms of that license. If they are in compliance with their alcohol license, then no state prosecution for marijuana sales could be maintained.

    Kids – Giving mj to a kid would be treated the same as giving booze to a kid, and so forth.

    One problem with this method would be that some alcohol offenses depend on liquid amounts and there is no good equivalency of marijuana weight to alcohol volume. There would have to be details specified there.

    Another problem is in open container laws. Under this method, there is no such thing as a closed marijuana container (“closed” as in “sealed by a government tax stamp”) so any marijuana container in the passenger compartment of a car could lead to an arrest on the road. This would actually be stricter than the current California law.

    Another problem is in tax rates. Alcohol tax rates are applied by liquid amount and potency. Any attempt to make an weight to liquid equivalency of marijuana to alcohol quickly reveals that alcohol tax rates are absurdly low compared to tax rates the market would easily bear for marijuana. On taxation, the bottom line is that the only type of tax that works reasonably well for both alcohol and marijuana at the same time is a sales tax based on retail price.

  14. Another method is to simply repeal the state marijuana prohibition laws for people over 21 and do nothing.

    That is, repeal all the criminal laws as they pertain to adults. Then, let the normal market regulatory forces handle the rest.

    Farmers growing it would have to comply with the standard safety laws for growing food crops.

    Security of crops would not be a problem because any farmer that lets his crop get stolen isn’t going to be in business next year, anyway.

    Sales to kids would be treated under the existing marijuana penalties. Packaging, labeling, etc., would all be addressed under the existing laws for any food.

    This wouldn’t be the optimum plan, but it would still be better than the current mess. Licensing wouldn’t be as strict as using the alcohol license, but it wouldn’t be the end of the world, either. Perhaps its biggest drawback is that the public probably isn’t ready to accept no controls at all on marijuana.

    So, Mark, I untied your fabled Gordian Knot of Drug Policy about half a dozen different ways. Where do I pick up my MPP? Tell those high-ticket employers to call me right away.

    Thanks.

    1. I vote for this approach. It mirrors the approach California took in 1932, which was very successful. Nation-wide MJ legalization is inevitable and well-underway. This could speed things up considerably. We might as well get it over with instead of messing around with a patchwork of pseudo-legalization schemes.

      Well done, Clifford! If I were a high-ticket employer I’d be soliciting your resume. Alas, I am but a low-ticket employee.
      Your work reminds me of Richard Stallman’s approach to Free Software and how he wrote a license that subverts copyright law to enforce redistribution rights to a work for everyone who receives it instead of restricting them to the copyright holders.

      1. Thanks. The biggest problem I can see with the idea is the fact that most of the voters are not going to be eager to embrace a regime of no controls at all. I will grant you that having no rules at all would not produce a major disaster, but I think it would be hard to convince the electorate of that.

        This was discussed at some length during the process of the writing of the various initiatives now contending for the ballot. Some of the initiatives proposed that the mj laws be repealed but that there be a six-month delay in the execution of the law to give the legislature time to write new rules. During the discussion I pointed out that this is not something the voters will like. The odds are that the legislature won’t be able to write new laws in six months. Therefore, at the end of six months, there would be no laws at all.

        Some of the authors of these initiatives cried Hallelujah! at this prospect, with the idea that the public will accept this notion as readily as they do. I doubt that the public will accept it.

        That’s why I lobbied hard that the next initiative should simply state that the alcohol rules are replacing the marijuana rules. The rules for alcohol are pretty well worked out. The alcohol rules provide enough freedom for individuals to operate, while at the same time providing enough control that the voters feel comfortable people aren’t going run wild like marijuana zombies. That’s why you see things like the Regulate Marijuana Like Wine initiative today. People intuitively understand and accept the alcohol-type rules.

  15. I should add that, under any of these methods, the state could still levy special taxes on marijuana without affecting the validity of the scheme. The US Govt. has long taxed illegal products as well as the legal ones, so putting an extra ten percent sales tax on marijuana shouldn’t pose a problem with the Feds.

  16. SStamps are a great idea. “Currently, 47 states require proof—via marking the cigarette packages with stamps—that state cigarette taxes have been paid.” (Cites for quotes and assertions here are at http://newtax.files.wordpress.com/2011/01/20-may-2011-taxing-marijuana4.pdf.) The tobacco-friendly state of North Carolina requires no stamps, though, because smugglers (even some with terrorist ties) boost the state’s revenue. In Canada, monitoring of tear tape, “the pressure-sensitive plastic ribbon that is wrapped around a package of cigarettes to facilitate the opening of the cellophane wrapping that encloses the package,” also aims to prevent evasion and resists counterfeiting. Meanwhile, the U.S. Treasury has proposed a “track and trace” system, using bar codes or the like, for cigarettes.

    Knowing of technology used to enforce the California cigarette tax, staff of the state’s Board of Equalization investigated stamps for identification of tax-paid marijuana in case Proposition 19 passed. Colorado officials are “considering mandating that medical pot include radio-frequency identification devices, somewhat like coded tags on library books, to keep track of who’s getting what.”

    Seals or stamps could mark not only a pack of cigarettes but also a pouch like those in which pipe tobacco is now sold. A seal or stamp could also mark packages of infused brownies, sodas, olive oil, chewing gum, or whatever policy-makers allow sold.

    An open container, even empty, could give a rebuttable presumption of legality for the quantity it can contain. To be sure, such a presumption would allow evaders to re-fill an open container with contraband, in the style of my friend who pours cheap Scotch into single malt bottles to impress his guests. As a corollary, there could be a rebuttable presumption of evasion for any unpackaged amount that would not fit into the largest legally sold package. In that scenario, users would need to finish one package before opening the next one.

  17. Mark,

    The memo is really great. The only missing piece (IMHO) is a discussion of the applicable tax rate (or the price of the tax stamp, which is pretty much the same thing). The 100% rate used in the example (and yes, I know it is just an example) would seem too high: that would imply, using the Kilmer et al estimate on the potential post-legalization retail price (and I know you have some qualms with their estimates), a tax of about US$ 38 per ounce: that is more or less US$1300 per kilo, which is about 1.5 to 3 times more than what the cartels are making for smuggling the stuff into the US. My guess is not many people would pay that tax and a very significant black market would remain. I know it’s early in the game for thinking about the specifics, but maybe that could be a follow-up assignment for your students?

    Best regards.

    1. Taxes based on weight are not a good solution. I gave a fairly extensive discussion of this on the DPFCA mailing list about a year ago. If the tax is X dollars per ounce, then it obviously makes more sense for everyone to buy hashish or hash oil. That is, a weight-based tax will tend to have the effect of driving people to stronger varieties to avoid the tax.

      Last year, some people had proposed initiatives that pegged the tax rate at fifty dollars per ounce. The problem with that is that tax rates fixed in initiatives are hard to change and inflation will eventually reduce that fifty dollars to comparatively nothing. Also, if you peg the price at 800 per pound, or 200 per quarter pound, then you are at tax rates high enough to encourage lots of cheating.

      The only kind of tax that really makes sense for marijuana, and stays sensible over time, is a sales tax on the retail price.

      As far as the 100% tax rate suggested, while that may not be the most desireable level, I am sure some people would still buy it at that price. The reason I am sure comes from observation of people making purchases in dispensaries. Take a nice-looking, well-formed eighth that sells for 50 dollars. If you simply crumble it between your fingers, then it is worth half as much. Same exact product, but it sells for twice as much when it looks pretty. Some parts of the market just aren’t very price-sensitive.

      1. The problem is that we don’t have good systematic evidence about the price elasticity of marijuana. What you say about quality-conscious consumers may be true for a significant portion of the market, but, then again, it might not. And price elasticy makes quite a difference, in terms of incremental use, size of the remaining black market, and potential tax revenues. It is not a minor issue.

        And yes, I agree, nominal per-weight taxes are a bad idea.

        1. There are avenues to get the evidence. Many (if not most) dispensaries are computerized now so it is easy to do analysis of what sells best. As with other products, most people take price into account, but there is a class of people who definitely don’t. Like wine connosieurs, they will pay whatever price for desired flavors.

          But I have also observed that price elasticity has changed over time. A few years ago, a friend of mine bought a few pounds of Mexican weed at a very cheap price. He figured that the price was so cheap that he could certainly make money on it. Certainly, if he had this same weed in the 1970s, he would have been able to move it quite easily.

          He couldn’t find anyone who wanted to buy it at any price. He went through a lot of work to find buyers but nobody wanted it. He eventually offered it to his friends to smoke and they didn’t even want to smoke it for free. His friends had good, tasty bud and didn’t want to smoke the marijuana version of Sneaky Pete.

  18. Just to keep the historical record straight, these ideas were the result of a conversation I had with Richard Lee, the chief promoter of Prop. 19. I had criticized Prop. 19 quite heavily on a number of points, including the fact that it didn’t offer any protection against Federal interference. Feds could have shut the system down quite easily.

    Rich got a little worked up during the conversation and said something on the order of “Well, if you are so smart, why don’t you tell us how to do it?”

    That seemed like a pretty fair challenge to me. After all, if I don’t like his plan then I ought to have a better one myself. So I set to work thinking on how it could be done. He was quite sure — as Kleiman and everyone else was quite sure — that there was no way to do it. The idea that something can’t be done strikes me as a challenge. As a result, you see these various ideas presented here.

    As it turns out, there are various ways to do it, each with its own advantages and drawbacks. All one has to do is abandon that commonly held idea that it is impossible. Start from a fresh point of view.

    And, yes, Rich later admitted that I had done it. You might say the issue is illustrative of the problems that have faced drug policy for decades – not enough thinking outside of the box.

    So where’s my MPP?

  19. Determining the tax base (weight, potency, or price) is not easy. A tax based on weight presents the inflation problem, which indexing can solve. But that base indeed drives all product into ultra-high potency.

    It seems to me that a taxed based on potency is probably theoretically ideal. That’s the Federal set-up for liquor, where 50-proof whisky is taxed at 125 percent (50/40) of the rate of 40 percent whisky. And we tax the alcohol in whisky more than that in beer (though we don’t have a strict potency base, because we treat all beer alike). We may have the infrastructure to administer a potency-based tax on marijuana. Various labs are measuring potency already.

    I would submit that alcohol taxes are too low because they aren’t indexed and because Big Alcohol’s lobbyists are powerful – not because potency is the wrong base.

    A tax based on price better seems better than one based on weight, but no authority in the US uses price to tax alcohol or tobacco (except those that add general retail sales taxes to a potency- or weight-based excise tax). A price base has a few problems.

    If we impose it at the retail level, a lot of product goes untaxed through pilferage, diversion, and even shoplifting. If we impose it higher up the supply chain, say at the sale between producer and wholesaler, then what happens if the producer and wholesaler aren’t separate? What’s the price that we base the tax on? We have to guess.

    Technology should be able to measure potency accurately enough for government work by the time legalization happens. In the meantime, yes, price seems like the best option.

    1. The easiest place to apply it would be at the retail level. There may be diversion and loss of tax income as a result but that is going to be the result of any tax system. Every tax is avoided to some event. I think this one will probably be as good as any in the collection department.

      If the tax is imposed at the higher levels, then it is like a Value Added Tax which, I hear, is enforced in Europe to their satisfaction. If producer and wholesaler are the same (as would be the case in the Central Valley) then the tax is levied on the value at the transfer to the retail dealer. Another issue is that in the Central Valley, the producer, wholesaler, and retailer would be the same person, because of things like roadside fruit stands.

      But, bottom line, whatever the tax scheme and rates might be, any such system would be a massive improvement over sending the revenue to organized crime. So . . . comparatively speaking . . .

      I am not a fan of tax rates based on potency. In alcohol it makes some sense because there are clearly two classes of beverages – brewed and distilled – and the differences in potency between them are quite dramatic. With marijuana, one would have to pick an arbitrary potency as the dividing line. Either that, or base the tax proportionately. Such as, one percent mj gets a tax of one dollar, ten percent mj gets a tax of ten dollars, and so forth.

      The first method seems unnecessarily arbitrary to me, and the second seems like it would be hard to manage. We don’t use the second method on anything else right now.

      It should be noted that one proposed initiative would regulate marijuana like wine and put it under the control of the ABC, like alcohol. Another initiative would put it under the Dept. of Public Health, similar to tobacco. (Why did they choose the Dept. of Public Health, rather than the ABC? Because some people get offended if mj is grouped with alcohol, even if only for regulatory purposes. It is a kind of holy belief. Thou shalt not disparage mj, even by remote implication.)

      In both cases, the respective departments are supposed to come up with rules. (One of the initiatives previously called for a special commission to make the rules. I pointed out that 1) no Tea Party person is going to vote for any new government agency and 2) it could never be done in the six month time frame they allowed.)

      In either case, the regulatory department will probably make the rules along the lines of what they are used to doing. If it goes to the ABC, it will probably be taxed like booze. If it goes to the Dept. of Public Health, it will probably be taxed like tobacco, by the cigarette.

      In a perfect world, I would go with the retail sales tax as the option most likely to produce the best results.

      1. And another issue with taxing by potency — it makes it easy for the industry to avoid higher taxes. I agree with you that the taxes on alcohol are probably too low. But changing the amount of tax per gallon of alcohol to keep pace with inflation is going to require fighting the alcohol lobbyists — which explains why alcohol tax rates are low. Every penny of increase means a new political war.

        If the tax is pegged to the retail price then the tax revenue naturally follows inflation without any adjustments. We can do it once and pretty much forget it.

    2. I should add one reason I like the retail sales tax idea — because people are willing to pay it. It is like people buying thousand dollar bottles of wine. If someone buys a thousand dollar bottle of wine then an extra hundred in taxes really doesn’t mean anything to that person. You can get a lot more tax revenue from a single sale without any complaint from the taxpayer. The tax in some cases might be several times what you could get from any other system.

    3. I just remembered another issue with taxing marijuana by potency. The most potent forms of marijuana are usually sold in units that are measured in grams. Therefore, in a typical sale, the amount of the tax, if based on potency and the amount purchased, would be quite small.

      On the other hand, cannabis concentrates are often quite expensive per gram, so a tax based on retail price would produce more revenue.

      1. Thanks for all these thoughtful comments and for the background of studying these issues in depth. This kind of open discussion needs to happen. So Bravo.

        Yes, most alcohol bears tax based on flat rates or cliffs. At the Federal level:

        All beer is taxed the same, by volume.

        For wine, there are cliffs. At 14 percent alcohol (the threshold for “fortified” wine), the federal tax per bottle jumps from 21 cents to 31 cents, rounded; at 21 percent alcohol, there’s another huge jump to 62 cents.

        But there is one case where alcohol is taxed on a strictly potency basis: That’s liquor, the most potent form of alcohol — and because of its potency, most socially disfavored – before the Feds decided to set rules for everyone, many jurisdictions used to allow beer consumption at age 18, but no hard liquor until 21. For liquor, “The tax is adjusted, depending on the percentage of alcohol of the product.” http://ttb.gov/tax_audit/atftaxes.shtml

        The retail level presents another problem: there are many locations where collections have to be monitored. Higher up the supply chain, there are fewer. Creating choke points for collection makes tax administration easier, and less costly. (The choke point is where stamps – for tobacco and alcohol today — go on.)

        Think of the rogue retailer. Or the careless one. Each retailer would have to be monitored to see if he was selling tax-free product on the side. With a choke point higher up the supply chain, there are no worries about retailers selling on the side.

        Now a question: Why would one tax base rather than another would produce more revenue (assuming perfect or equal enforcement) or tolerance for a higher total tax?

  20. I’m a tech volunteer for Committee for a Safer Michigan (RepealToday.org). I found this via DrugWarRant. We are actually doing this: we’ve got the petitions out. We’ve been approved and we have until July 9th to get our goal of 500,000 signatures (need roughly 350,000):

    Constitutional Amendment To End Marihuana Prohibition In Michigan

    A Petition to amend the Michigan Constitution, Article 1, to add:
    Article 1 Section 28. Repeal of Marihuana Prohibition.

    For persons who are at least 21 years of age who are not incarcerated, marihuana acquisition, cultivation, manufacture, sale, delivery, transfer, transportation, possession, ingestion, presence in or on the body, religious, medical, industrial, agricultural, commercial or personal use, or possession or use of paraphernalia shall not be prohibited, abridged or penalized in any manner, nor subject to civil forfeiture; provided that no person shall be permitted to operate an aircraft, motor vehicle, motorboat, ORV, snowmobile, train, or other heavy or dangerous equipment or machinery while impaired by marihuana.

  21. Just a suggestion here, Mark, but I would bet that you would have gotten a lot more answers from students if the question you asked was simply rephrased. Try something like:

    Devise a system that allows sale of a product, with controls on the sellers, that does not involve issuance of a license.

    That is, we want to create an incentive for sellers to cooperate with the law and follow certain rules. What are the rules we want them to follow? There are really only about four that we want with alcohol.

    First, we want to make sure that licensed people are of good character. Law-abiding citizens create fewer enforcement problems.

    Second, we want to make sure that they don’t sell to kids.

    Third, we want to make sure that they pay their taxes.

    Fourth, we want to make sure that they don’t sell to people who are too intoxicated.

    If they do any of those things, we want to have appropriate penalties in place to deter them.

    So how can we create a system that does all of those things, without actually issuing a license? Once you break it down to exactly what you want, the whole thing becomes much easier — and numbers of solutions miraculously appear. It isn’t nearly as hard as you imagined once the question is framed properly.

  22. Yes, most alcohol bears tax based on flat rates or cliffs. But not all.

    At the Federal level:

    All beer is taxed the same, by volume.

    For wine, there are cliffs. At 14 percent alcohol (the threshold for “fortified” wine), the federal tax per bottle jumps from 21 cents to 31 cents, rounded; at 21 percent alcohol, there’s another huge jump to 62 cents.

    But there is one case where alcohol is taxed on a strictly potency basis: That’s liquor, the most potent form of alcohol — and because of its potency, most socially disfavored – before the Feds decided to set rules for everyone, many jurisdictions used to allow beer consumption at age 18, but no hard liquor until 21. For liquor, “The tax is adjusted, depending on the percentage of alcohol of the product.” http://ttb.gov/tax_audit/atftaxes.shtml

    The retail level presents another problem: there are many locations where collections have to be monitored. Higher up the supply chain, there are fewer. Creating choke points for collection makes tax administration easier, and less costly. (The choke point is where stamps – for tobacco and alcohol today — go on.)

    Think of the rogue retailer. Or the careless one. Each retailer would have to be monitored to see if he was selling tax-free product on the side. With a choke point higher up the supply chain, there are no worries about retailers selling on the side.

    Now a question: Why would one tax base (price) rather than another (potency, that is, THC content) produce more revenue (assuming perfect or equal enforcement) or tolerance for a higher total tax? Isn’t the issue the tax burden, which could be set high or low with any tax base?

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