Cannabis taxes will wind up too low, not too high

Legal cannabis will naturally be much, much cheaper than illegal cannabis. A joint is the same sort of item as a teabag: the dried flowers of a plant in a wrapper. A fancy teabag costs a dime at the supermarket; the marijuana in an average joint costs about $4 (0.4 gram of sinsemilla flowers @ $10/gram) on the current illicit and quasi-medical markets. The combination of not having to worry about law enforcement and the economies of mass production will inevitably drive the joint price down close to the teabag price. (Generic tobacco cigarettes can be manufactured for about two cents each; the remainder of the price is marketing expense, quasi-rent on brand names, and taxes.)

Now that the federal government has made it clear that state-licensed production in Washington and Colorado will mostly get a pass from federal law enforcement, and now that Washington has decided to allow outdoor growing, avoiding the production bottleneck that might have resulted from the lags in local land-use approval for growing facilities, I’d expect to see much lower-than-current prices in Washington State’s commercial stores no later than next fall. (If I had been running things, I would have started with lower tax rates to speed the transition to the legal market, and then raised taxes to offset the fall in market prices, but the tax rates were in the legislation the voters passed.)

Even at current prices, cannabis is a remarkably cheap intoxicant. A  drinker who hasn’t built up a tolerance might need about $5 worth of mass-market beer to get sloshed; a similarly fresh cannabis smoker could float away on half a normal joint: call it $2 worth. Colorado medical dispensaries already offer their “weekly special” strains of sinsemilla at $5/gm., with volume discounts, and vaporization seems likely to lower the effective cost substantially.  Anyone who’s worried about the price of cannabis is spending far too much time stoned.

Taxation, even if it is very heavy on ad valorem (percentage-of-price) basis, won’t change that picture much; Washington state will collect something like 40% of total retail prices in tax, but 40% of “damned near free” isn’t very much. Colorado’s taxes will be even lower.

The illicit markets may start out with a price advantage over taxed and regulated commercial markets for a year or two. Even then, the quality/reliability/ legality advantages enjoyed by the legal stores would be expected to quickly push the illicit business to the margins, as legal alcohol has done with moonshining. That will be especially true if the states that legalize make a vigorous law-enforcement push against purely illicit activity.

The untaxed and (in Washington State) unregulated quasi-medical markets may also enjoy a price advantage; if people with medical recommendations can buy their cannabis tax-free, we should expect a certain amount of arbitrage. How best to rein in the out-of-control medical-recommendation systems is a challenge that Washington and Colorado (and California, which hasn’t legalized for non-medical use but which has more “medical marijuana” outlets than it has Starbucks) will confront over the coming months and years.

So the biggest worry about legalize cannabis would be a big upsurge in heavy use, and that worry would be exacerbated to the extent that the growth in heavy use is among juveniles. (Provision to minors is by definition illegal, but, as with alcohol, it seems unlikely to generate a distinct illicit market; younger smokers who can’t buy in the stores will be supplied by older siblings, older friends, their parents’ supplies at home, and straw purchasers.

How big that problem turns out to be depends in part on unknowns and in part on policy choices. If cannabis prices are allowed to fall to something like their free-market levels, a very large increase in heavy use would be the likely result. Preventing that will require heavy specific-excise taxation (perhaps on a per-milligram-of-THC basis) and enough enforcement to prevent the evasion of that tax.

The other approach to limiting the increase in heavy use and use by minors would be on the information side: limits on marketing, required vendor training, aggressive consumer information both at point of sale and in the community.

Naturally, true-believing libertarians insist that cannabis legalization be done in the way likely to generate bad outcomes. Taxes BAD! Regulations BAD! “Commercial speech” is SACRED! The free market FOREVER! And of course drug abuse is a merely imaginary problem, so cannabis is just an ordinary commodity that the market will handle perfectly.

It’s possible that they’ll get their way, and that as a consequence the results of cannabis legalization will be just about as bad as the drug warriors keep predicting: the reproduction of our very bad, no good, awful alcohol markets. It’s barely possible – this is what my drug-warrior friends hope – that the results will be so awful that the voters shy away from legalization altogether.

Jacob Sullum has elevated the temporary risk that relatively high taxes starting will slow down the migration from the illicit to the licit market into an existential threat to the legalization project, and is more or less encouraging Colorado pot fans to double-cross the rest of the voters by rejecting the taxes that were the premise of last year’s legalization push. “From a consumer’s perspective, something has gone terribly wrong if legal marijuana prices do not end up being substantially lower than black-market prices.” That’s true, if by “consumer” you mean someone who smokes multiple joints per day. For anyone else, the cost of weed is way down in the rounding error of a personal budget; a weekly smoker might now be paying something like $100 per year for cannabis, even at current prices.

Andrew Sullivan seems to take this seriously. Talk about solving the wrong problem!

Why Illegality Makes Drugs More Expensive Than Taxes Ever Could

One of the central rationales for making certain drugs illegal is to elevate their price and thereby reduce consumption. It’s astoundingly effective: illegality makes lightly processed plant matter (e.g., cocaine) more valuable by weight than gold.

It has long been understood that part of this price inflation occurs because individuals in the drug trade demand higher wages to compensate them for the risk of arrest. In the current issue of National Affairs, Jonathan Caulkins and Michael Lee note that an additional, less commonly appreciated mechanism is also at work:

…inefficiency stems from having to operate covertly. The precautions required to evade detection make the production of drugs very labor intensive. Grocery-store cashiers, for instance, are more than 100 times as productive as retail drug sellers in terms of items sold per labor hour. Similarly, hired hands working for crack dealers can fill about 100 vials per hour, whereas even older-model sugar-packing machines can fill between 500 and 1,000 sugar packets per minute. This labor intensity of drug production, combined with the high wages demanded for that labor, are what drive up the costs of drugs; by comparison, materials and supplies — glassine bags, gram balances, and even guns — are relatively cheap.

Caulkins and Lee provide a useful comparison point to appreciate the impact of illegality on price: If cigarettes suffered the same legal disadvantage as cocaine and heroin, they would cost about $2,000 a pack. This is a stark illustration of how taxes on a legal drug could never even remotely raise prices as high as does illegality. Even cigarettes taxes that attempt to raise the price per pack of cigarettes to one half of one percent of what their price would be under illegality are widely evaded and create huge black markets.

State Budgets’ Long Slow Climb Towards Fiscal Health

The Rockefeller Institute has reported some largely encouraging data on states’ fiscal health. Average tax receipts have risen for the tenth straight quarter following the bloodshed of The Great Recession. The picture would have been much brighter if not for the outsized influence of California, which saw 2012 quarter 2 estimated tax receipts fall by 4.9% year on year.

Voting and inequality

In an election year where one presidential candidate wants to raise taxes on the rich and the other wants to cut them, and immediately after near-party-line votes on whether to extend the Bush tax cuts for income above $250,000 a year, you’d think that Tom Edsall’s review of Joseph Stiglitz’s tract against inequality would acknowledge that the voters have a choice to make about the issue. But no:

Prospects for programs boosting public investment are virtually nil. Republicans stand a good chance of taking control of both branches of Congress after the next election. Their presumptive presidential nominee, Mitt Romney, may capture the White House. If so, his tax and regulatory proposals will most likely embody all that Stiglitz finds repugnant. Even if Romney loses, the American political system does not appear ready to respond to Stiglitz’s call to arms.

Yes, it’s true: due in part to the new system of campaign finance put in place by the Republican Supreme Court, even Democrats find their ability to legislate against plutocracy limited by their need to raise campaign funds from plutocrats. Simply re-electing Obama and keeping the Senate in Democratic hands won’t change that. But if Republicans manage to take both the Presidency and the Senate on a frankly plutocratic platform – which would enable them to lock in their partisan control of the judiciary for another couple of decades – that will tend to exacerbate the trend toward more inequality, while a Democratic victory would exert pressure in the opposite direction.

This is more or less the same argument I had with Glenn Loury in a bloggingheads diavlog that unfortunately got eaten by technical problems and will have to be redone. The plutocrats don’t have any doubt about what’s on the table this fall: that’s why they’re going to spend a billion dollars or so to elect their homeboy. Nobody on the right is urging people to sit this one out because it doesn’t really matter. Only our side is burdened by this sort of thumb-sucking electoral nihilism, earlier instantiations of which elected Richard Nixon in 1968 and George W. Bush in 1980 2000.

Update And of course there’s the $200 billion in downward income redistribution embodied in Obamacare, which will survive or not largely based on the results of this election.