Pot prices plunge in Washington State

The harvest is in, and ounces of 10%-THC cannabis are selling for $200 at commercial retail outlets in Washington. (Figure roughly 70 joints to the ounce, and at least 3 stoned hours per joint, so the cost of intoxication is roughly $1 per hour.) That price is fully competitive  with both the illicit market and the medical market.

This was utterly predictable, as I know because my RAND colleagues predicted it. So much for the argument that Washington’s taxes were too high.

What is also predictable is that prices will continue to drop, both in Washington State and in Colorado, unless the authorities start to limit production volume. $200/oz. would be a fairly reasonable price target; anything much lower than that risks a big increase in heavy use and underage use. (Of course there’s no way to keep the stuff from leaking from adults, who are allowed to purchase, to minors, who aren’t.)

Falling prices are also bad news for all the folks who thought they were going to get rich selling a newly legal product at the old, illegal prices. No such luck.

 

 

 

Washington State Court of Appeals bans medical marijuana stores

Never a dull moment.

I completely failed to see this one coming.

A brief history lesson:

Washington State has had a medical marijuana law since 1998. In 2011, the legislature passed a bill allowing the creation of “collective gardens” (aka stores) to grow cannabis for patients registered with the state, and regulating those outlets in various ways: all members of the collectives would have had to register with the state. The governor used her line-item veto to take out major provisions of that bill, including the part that would have created the patient registry.

Until now, the prevailing view has been that the permission to open stores was valid law even though the regulations designed to control them had been zapped, leaving Washington with a booming, and virtually unregulated and untaxed, medical cannabis industry; as everyone says, Seattle has more “medical outlets” than it does Starbucks locations. Some players in that industry were among the strongest opponents of the I-502 initiative that legalized non-medical sales.

Once I-502 had passed, its proponents and administrators started to worry about how a regulated and taxed commercial market could compete with a wide-open, but untaxed and unregulated, quasi-medical system. There were efforts in the legislature this year to rein in the “gardens,” but the industry (speaking, of course, in the name of “the patients”) and a partisan split in the legislature made it impossible to pass anything. Battle was expected to be joined again in January, with the threat of federal intervention lurking in the background.

In the meantime, the town of Kent had passed a local ordinance banning medical outlets. Various industry players sued, citing what was left of the 2011 law. But now the Washington State Court of Appeals (the second-tier court) has ruled that the governor’s partial veto makes all the collective gardens illegal, because a legal collective garden must serve registered patients and there is no patient registry. Therefore, Kent is at liberty to ban what was – according to the court – an illegal activity in the first place. All that’s left of the medical marijuana law is permission for individuals with medical recommendations to grow their own: if charged with a violation of state law for production or possession (but not, apparently, sale), a medical recommendation creates an affirmative defense.

Presumably most of the localities that have collective gardens, including Seattle, will continue to let them operate, especially since the commercial outlets won’t even start to open until sometime around the end of June or early July.

There may be an additional layer of complexity: the Liquor Board planned to allow newly-licensed growers to bring some of their existing cannabis plants into the legal system, since otherwise there would be nothing for the new stores to sell. If newly-licensed growers have to grow new product from seed starting late this spring, the shelves will be bare until fall at the earliest.  Whether the new ruling puts a monkey-wrench in that machinery remains to be seen, as does the effect of the ruling on the bargaining over a new law next year. (Or will the governor call the legislature into special session to give it another try this year?)

Never a dull moment.

 

Cannabis retail licenses: lotteries v. auctions

If you have more applicants than licenses and don’t want to select, why a lottery rather than an auction?

Washington State has more applicants for pot-shop licenses than it has licenses to hand out. So the plan is to cull the ineligible applications and then have a lottery.

A lottery is “fair” in some primitive sense – it avoids charges of favoritism – but it has no other virtue. It simply creates windfall winners and losers. Why not auction the licenses (on, say, a five-years-at-a-time basis) and capture the windfall for the state?

The next hard problem facing  the Liquor Board will be how to allocate the limited square footage of grow space. Again, I’d opt for an auction.

Footnote Bob Young quotes me accurately, but slightly out of context. When I said “What if we gave a pot legalization and nobody came?” I was worried about whether the retail stores would have anything to sell in the first year at prices competitive with the  illicit market and with the medical outlets. The decision to allow outdoor growing will, I think, make that problem go away quickly, and hasten the problem of prices low enough to encourage drug abuse, use by minors, and diversion from legal retail sale for out-of-state distribution.

Second footnote No, I’m not currently an active adviser to the Washington State process. BOTEC has completed all its assigned tasks.

Barriers to Marijuana Tax Revenue in Washington State

It’s harder than you think to get significant tax revenue from legal marijuana

Prior to the 2012 election in which Washington voters passed a marijuana legalization initiative, state officials estimated that legalization would generate up to $560 million in new tax revenue in its first year, with the expected state income projected to increase in later years. Subsequent work by Jon Caulkins and the BOTEC analysis group that the state retained for policy advice estimated annual state marijuana consumption at 165 million grams. Will the State of Washington really reap $3.39 in tax revenue for every gram of marijuana consumed?

It’s not likely, for at least four reasons:

1. Ad valorem tax revenue is dependent on the price of marijuana, which will fall under legalization

The initiative created a marijuana industry modeled on the alcohol industry, with a tri-part structure of growers, processors and retailers. A 25% tax was assessed at each transfer point and sales tax (statewide average 8.87%) is also applied at retail. Note that you can’t just add those numbers to get the effective rate at retail because marijuana increases in value as it moves through the production chain. When that is taken into account, tax at retail works out roughly to 45% of purchase price.

That’s a set up for enormous revenue if marijuana prices stay constant, but they will not. Illegality, by design, imposes many costs on the drug business. For example, you have to compensate employees for risk of arrest and enforce contracts privately. That’s why legalization will lower marijuana prices, perhaps by as much as 80% or even more. Unless the price drop leads to a spectacular increases in consumption, ad valorem taxes will bring in substantially less revenue than expected.

Some organizations and individuals advocating marijuana legalization propose excise taxes (e..g, $50/ounce irrespective of market price). This should generate more predictable revenue and also have the public health benefit of putting a floor under effective price.

2. The medical marijuana system is very loosely regulated and tax-free for consumers Continue reading “Barriers to Marijuana Tax Revenue in Washington State”