Cannabis taxes will wind up too low, not too high

The big threat to cannabis legalization isnt high taxes; it’s low taxes and loose regulation.

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!

Policing the Illicit Cannabis Market After Legalization

Colorado and Washington law enforcement are in for a challenge post-marijuana legalization

Law enforcement officials in Colorado and Washington will soon be grappling with the question of how to police illicit sales and production of cannabis after the legal cannabis market is in place. The logical approach would be to prioritize illicit market enforcement immediately after legalization takes effect. The enforcement and resultant busts would be coupled with press releases full of head-shaking quotes along the lines of “I can’t understand why people keep engaging in crime now that recreational marijuana is legally available”. Such tactics would help undermine the black market by driving people into the legal cannabis market.

However, once there is a legal market in a drug, enforcement against illegal markets becomes much more challenging. When a drug is illegal, mere possession is prima facie evidence of crime. But when the substance can be legally possessed, law enforcement must catch someone in the act of illegally selling, buying or producing the substance to make an arrest, which is much more difficult.

Further, smart criminals will seek legal cover, making law enforcement’s task even more challenging. If you operate a regional marijuana distribution ring for example, you’d be well advised to buy a license to operate legally in Colorado or Washington. Your subsequent possession of marijuana and associated equipment will thus appear legal sans some careful investigative spadework, which police may not have the resources to undertake.

Barring some unusual foresight by and targeted resources for law enforcement in Washington and Colorado, risk of arrest will probably drop rather than rise in the illegal cannabis market post-legalization. Reduced risk of arrest will make the black market less unappealing to customers than it was in prior years. This drop in legal risk will help the black market survive, particularly as its prices will be likely be dropping at the same time.