No pot bonanza

High pot taxes would fall prey to Tiebout competition, aka the race to the bottom.

The city of Oakland proposes to tax “medical” marijuana sales at 5%, and frankly recreational sales at 10%. (This raises the question of who would pay the extra 5% tax rather than getting a “recommendation” from any of the doctors who cheerfully sell them to all comers.)

But Oakland’s pot entrepreneurs, suddenly sounding like the U.S. Chamber of Commerce, warn that if pot is taxed in Oakland buyers will move to places that don’t tax it, or don’t tax it as much.

They’re right, of course. It’s called “Tiebout competition.” Under the insane local-option plan in Proposition 19, no jurisdiction could successfully impose high cannabis taxes as long as some other jurisdiction had lower taxes. What you’d have is a race to the bottom, with very little revenue coming in.

The moral of the story: stoned logic is great for play-time, but less useful for making budget projections.

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:

20 thoughts on “No pot bonanza”

  1. You and the pot entrepreneurs are not "right, of course."

    Yes, if the taxes are imposed, some people will go elsewhere to purchase. But you have to factor in the convenience of buying from your neighborhood pot dealer and paying the tax, or driving somewhere else to avoid the tax. How much is the gas you burn and the time you spend worth?

    For people on the edge of the tax zone, it will be justifiable to exit the zone to purchase, but most people will pay the tax for the same reason you are willing to pay more for groceries at your neighborhood market rather than driving to a supermarket – convenience is an economic good.

  2. Bollocks. There will be pot shops in SF, LA (or at least Venice), that aren't going anywhere no matter the tax level. You think the hippies are going to drive to Rancho Cucamonga?

  3. I am not supporting the 'local option' idea — not sure how I think of it — but your argument reminds me of some standard economic arguments that equate 'value' and 'price.' (I should state I have no idea of the situation in California, my argument is based on my knowledge of the New York marijuana market — and briefly, years ago, the Philadelphia market — over the 40 years I have been smoking. I should, as well, mention something I've never stated directly to you. That at least one of your regular responders, someone who you have chosen to even give a guest post to in the past, has been a 'wake and bake' type for all of that time. I consume a little over an ounce of marijuana a month, and since I am a pipe smoker rather than a joint smoker, I have about 2 dozen pipes a day or more.)

    Before I deal with the specifics of the post, I should also state that, in NYC, at least, the marijuana business has never been 'organized.' I have said that it, like the growing of 'backyard tomatoes,' is the last example of where Smithian economics works — a market with many sellers, and many buyers, where the 'entrance cost' is small and 'brand loyalty' relatively unimportant. (And while I have never been involved in the 'upper levels'– and only twice, briefly, in 78 and 82, was a very low-level seller — I have had enough conversations to say the same there. There are fewer importers or growers than lower down, but at each level there is little 'loyalty' and at any level a seller freequently does choose between various suppliers. Very rarely there will be a small amouth of 'crossing levels' withh a group of street sellers working for one low-level 'wholesaler' but this is hardly 'enforced.' (I knew of one case where members of a family all of whom dealt were split between two 'wholesalers,' the father and older son with one, the two younger sons with another — and better –supplier, and yes, if they ran out they'd swap between themselves.)

    The fact is that price is a factor if you have various sellers, but so are other factors such as convenience, reliability, and even personality of the seller. If — don't know how the counties work in California, so if I goof, excuse it — Oakland sets a $10 an ounce tax and SF sets a $15 tax, this is not going to put the sellers out of business in SF, because the time and difficulty of traveling will make up for the difference in cost. Furthermore, at least at present, marijuana is a high-markup commodity — which should change as it becomes more legal — my economic argument for legalizing it, not the tax one — and there is enough 'give' in the price for the SF sellers to 'eat the tax difference' to retain 'market share.'

    Let me give three examples — admittedly from an 'illegal market,' de facto or de jure legalization would make some changes:

    Some years back, I knew a dealer named Lou. His price was generally higher than I could buy two blocks from him, his quality was uneven, yet he stayed in business because of one thing. He was reliably available, every day, rain or shine, at the same corner, from 8:00 AM to 1:00PM — except for one month of the year when he vacationed back in Puerto Rico — for at least thirteen years.

    During my second 'dealing period' all i did — and I told every one of my customers, all who lived in the same large building I did — the Sloane House YMCA — was walk three blocks, see one of the 'family members' I mentioned above, buy a nickle bag (those were the days), take some out for myself and resell it. Anyone could have gone to the same place I did, but instead they came to me because I was always there, because I was inside, and because I didn't mibnd being disturbed late at night. I wasn't wildly profitable, though sometimes I did more than pay for my own, but I was so regular that when I left the Sloane, I had to turn over my business to a friend.

    And, bringing it up to presnt day, I am currently relatively immobile, bad legs and a disabled wife, so I have my choice of two people to bring it to me, both around my age, neither of whom smoke themsleves — both used to but stopped — both of whom take a small fee for getting it for me. (I had a third who had a regular job but dealt on the side, but he went out of business.) One of the sources has better stuff (deisel at commercial prices), and probably gives me more than the other at only a slightly higher price. But he's somewhat eccentric, my contact can't always reach him, he takes off at odd times, seems to have problems with his suppliers. The other guy gives me regularity — he's got a few people he gets stuff from — at a slight loss of 'price-value.' I call the first guy first, but if I hear there's any problem, I don't wait more than a day for his contact to reappear or re-up before I call my second contact.

    Let's just say we had the same disparity of taxing among the various boroughs of NYC — not legally possible, but it makes my point. Manhattan charges $25 an ounce, Brooklyn and Queens charge $15, The Bronx, the poorest boro, charges $10, and Staten Island, the mnost Republican of boros, charges $5. How many people are going to travel even from lower Manhattan to Staten Island to save that difference? Some, but most people will just go down to their corner smoke shop and pay the difference to avoid the hassle, maybe occasionally 'loading up' if they have some other reaons to take the ferry or the Verrazano. (FerKroo'ssake, I'll sometimes pay $.70 a can for the same cat food I could get at a larger place for $.40 — and I spend more on cat food than marijuana per month — to save the trouble of traveling down to the larger place, and that's only five subway stops away.)

    (Btw, 40 years of 'wake and bake' may not lead to total incoherence or paranoia — but longwindedness, maybe, though i was as verbose before I started smoking.)

  4. Prup's is sort of a nice, nuanced discussion, and supports your view that policy changes leading to money saved in the prison system would help on supporting UCLA and Berkeley. People who've already found it acceptable to pay current California taxes will likely stand for them in future, as the tax stream gets diverted from prisons to paying for the UC Berkeley athletic program (or maybe even some academics!) but raising them even higher might send people to Oregon or North Carolina.

  5. Two more (quick — cat feeding time) things. First, this is the "Vermont/NewHampshire" situation, and shows the Tiebout position — when applied just to taxes — works fine in Republican propaganda, but not in the real world. In fact, according to the article you link to, Tiebout stresses not 'tax cost' but makes this just one factor in 'maximizing personal utility.' So, in Vermont and New hampshire, you have the choice between a (relatively) 'high tax state' that provides exceptional services, or a 'no tax state' with much poorer services. In choosing between them, the tax rate may be a factor, but I've hardly seen a major migration from Vermont to new Hampshire, and would expect to find the 'equillibrium point' between the two somewhat in Vermont's favor, more people move from NH to VT than the reverse.

    Second, i wish you'd look at the impact of legalization, or 'quasi-legalization' on the price itself. (And on the 'disposable income' of those who choose to smoke.) This will be a much more important factor, and the downward price competition will far surpass any country inequality of taxation.

  6. No Mark that makes no sense. Oakland sellers will charge a fairly similar price (likely slightly more expensive to cover for transportation costs). What will happen is that sellers will lose a bit of profit as the tax cuts into their sales. This won't drive it away.

  7. I've seen this argument every time a jurisdiction bans smoking in restaurants. Owners cry "But everybody will go and eat in New Jersey/Bethesda/Oakland!" There is never a measurable effect.

    Even in Taxachusetts, not everyone buys his liquor in New Hampshire.

  8. Well, Theophylact, as Tiebout said, folks look at the whole package. If you are in Methuen, buying one bottle, and it would be $3 more if you drove five miles to NH, you go ahead and buy it at Vinny's, or A&B. But if you are provisioning for your daughter's reception, or getting two or three cases, you go. If you wanted to measure the effect, probably your most fruitful way to do it would be to look at the ratio of one-bottle purchases to cases in Methuen and in Weymouth.

  9. "[W]ho would pay the extra 5% tax rather than getting a “recommendation” from any of the doctors who cheerfully sell them to all comers"

    I would. I have no desire to participate in a sham medical recommendation process. But if I could buy legally and openly (which is not certain even if Prop 19 passes – Mark's point is taken there), I'd consider a once-a-month trip at a cost of travel + 10% tax. Or I would on those (all-too-frequent) occasions when my dealer(s) are out.

    I guess what I really need is a consistent, uncomplicated, hassle-free supply, for which I would gladly pay an extra 5 or 10%.

  10. Of course a 5% tax won't drive all of the business out of Oakland. The point is that cross-jurisdiction competition limits the potential revenue take. The more pot someone buys, the more worthwhile it is to drive across the boundary to a lower-tax jurisdiction. Key facgt: the heaviest users use most of the total volume (for alchol, the top 20% of users consume 80% of the booze). Those are precisely the people who will have the strongest motivation to drive to cheaper supplies.

    Even in Los Angeles, the enclave cities such as Inglewood are likely put low-tax pot within an easy drive of most buyers.

  11. Dave: I said precisely that in my MYC Boro comparison. There will be some shift towards low tax counties, but nowheres enough to trigger the 'race to the bottom' that Mark predicts. I'm tempted to put together my prediction for how a legalized market would work, in my usual substantial detail. But, to slightly shift the focus, one market model that I can, with relative certainty, predict won't happen is the one Mark fears, the advertising driven oligopoly that would parallel the cigarette market.

    Two arguments against it, one logical and one practical. The logical one is simple. The 'marijuana sold by tobacco companies' idea has been around as an expectation since I started smoking. It is almost certain that some of the tobacco companies ran simulations, studies, etc., on the possibility and profitability of such a move. It is also a high probability that they would have a lower threshold for potential profitability, given the incredible losses they have suffered from the anti-tobacco movement.

    But if we assume that such a move would 'test out favorably,' what would a corporation — again, one desperately seeking a new revenue stream — do? It would take action, political action, to make such a result possibility. It would fund a 'legalization movement,' would have some of its 'home state' congressmen sponsor, or at least co-sponsor pro-marijuana legislation. It would send a stream of support to existing organizations like NORML, the NYState Marijuana Legalizatiobn party, even HIGH TIMES.

    But there is no evidence of any of these happening. Which leaves only three conclusions: a) that the study never happend (so unlikely as to be eliminated); b) that the study showed favorable, but the tobacco companies grew tender consciences that kept them from acting on it (more absurd than a) or that c) the study showed the idea just wasn't that potentially profitable.

    And — but in a separate post — I think I can show pretty solidly that such a result was correct, that the market will not tend towards an oligopolistic situation. The tobacco companies may have small parts of it, but not enough to create the situation Mark fears.

  12. Well if you just wanted to attack that particular straw-man-hippie, I think you succeeded.

    And the people who are in the stage of life where you are doing lots of chemicals ('college') usually aren't the ones who plan weeks ahead. Plus, 5% of some Popov's isn't as much as Glenfiddich, which makes the tax effects look different than just the volume drunk, or smoked in this case.

  13. Mark: the funny thing is that I agree with you that the bonanza is vastly overrated, but not for your reasons. If the tax is a 'sales tax' based on price, the rather incredible price drop that will begin to occur almost at once will shrink the bonanza. And I wonder how people are going to handle 'roadside stand' sales and 'farmer's market' sales, which I see as being a higher portion of the market than you seem to foresee.

    But your scenario leaves out so many factors. First is that there is a difference between heavy pot users and heavy alcohol users. A drunk, to put it simply, will simply drink anything with suitable alcoholic content. He may have preferences, but they aren't that important. But — speaking for myself and other heavy users (and I'm probably in the top 2%), we are still discriminating in our likes and dislikes. There are really differences between the varieties of marijuana — even among 'commercial' varieties — that mean different types are better for particular uses. I could, in an entirely legal environment, imagine having an ounce of deisel, but still going down to the corner to buy a small amount of something lighter and better for music like 'old-fashioned Hawaiian.'

    And even I would limit my ourchases to limit my use, and I think this would be much more likely for less heavy users. I wouldn't, probably, buy a quarter pound instead of buying four individual ounces over a period of time — especially since the 'quantity discount' will be the first thing to shrink. That way I can keep myself from going overboard even by my own elastic limits. One thing you don't realize is that the alcohol comparison fails because of the quantity difference, as well as the 'need for more' that occurs with alcohol. For example, thirty years ago I was involved with a young lady who would drink a quart of liquor a day — as Churchill claimed he did. That mounts up fast. But as I've said, I am a very heavy user — a friend once said she'd only seen one person who smoked more than i did — and my total usage in a year might be as much as 26 oz. Let's assume I am sufficiently hedonistic to indulge in a premium variety or blend — and that's something you are going to see a lot of, stores like tobacco stores that provide on-order blends — that, even after the price drop, goes for $100 an ounce, and that, unlike what i said above, I buy 4 weeks supply — two ounces — at a time. A 10% difference in tax rates between counties would mean an extra $20, hardly worth the time and transportation. And few people are going to load up on a year's supply at once, and someone like that might be rich enough he wouldn't care about the $260 saved — preferring to buy his at a suitably fashionable local store.

    No, Mark, the bonanza in tax revenue might not appear, but that's because of the price drop, not the tax differential. But you — of all people — should know that the real revenue to the state — which will remain even if marijuana is totally untaxed — is the saving and better utilization of police, court, jail, public defender, etc. time and expenses, and other state expenses devoted to marijuana prohibition. (I also would argue that there will be a small bonus in that at least a certain number of people will choose pot over alcohol, and thus lessen the number of alcohol-related offenses.

  14. Well, Dave, I don't ever go out of my general neighborhood in order to buy gas when my fuel tank is low. If I'm going to be heading someplace where I know the price is 40 cents a gallon less, I may well postpone filling up the tank until then. In Michelin terms, vaut le détour but not vaut le voyage. But even if I'm making a trip to Costco to buy 30 pounds of ground chuck, I'll probably fill up across the street at a gas station that charges three cents a gallon more than Costco, because the lines are too damn long at Costco. And I may well buy two cases of Jip Jip Rocks Shiraz at Calvert Woodley rather than at (say) Total Beverage, because CW's knowledge is worth something to me.

  15. I see you have deleted my post. I was trying to point out that the passage of Proposition 19 will create a natural experiment in which I believe your arguments will be not only proven wrong, but inane. I also am making the point that I think the reason you are arguing so foolishly (a word I am using deliberately) is because emotionally, you cannot allow yourself to side with the "hippies".

  16. anon, even if I had not corresponded with Mark and read him over five years and known how wrong you were, I'd still ask what you were trying to accomplish by 'analyzing him.' His arguments are strong ones, and, though obviously I disagree with them, I've never known him to make them without substantial backing that needs to be disputed, not disparaged as the result of some mythical emotional background. He's wrong, certainly, and I agree that his arguments will be proven wrong if Prop 19 passes and is let run without federal interference — but he is right that this is unlikely. But there is a different between being wrong, even stubbornly wrong, and being foolish, and I've never known Mark to be so.

  17. Prup, First he argues that Prop 19 is flawed because federal law preempts its effect yet time and time on this blog he has argued that political aspects of the policy making process cannot and should not be ignored. Since I understand Prop 19 to be mainly a political effort and not a policy making one (and despite the flaw of having to infer motive in making that statement, I believe it to be true).

    Second he disputes the economics of a law that he claims will not allow legal sale anyway. I think he has the economics all wrong (link to wikipedia article notwithstanding). There are many reasonable arguments that the direct revenue effect to the state and counties will be less than expected. It is reasonable to criticize supporters of Prop. 19 as being disingenuous for inflating their arguments but to suggest that supporters are flat out wrong that Prop. 19 will generate revenue is foolish (and is an argument that can only be made if one's judgement is clouded by emotion).

    Finally, as many people point out (and I think that includes you and even Mark in other circumstances) the true benefit of marijuana legalization will be realized in a reform of the enforcement process. Prop. 19 invariably moves the State of California in the right direction on that issue.

    So Mark argues that Prop. 19 will not be allowed to take effect unimpaired AND that its supporters are not to be trusted because they are misrepresenting revenue projections. From these arguments he concludes and has stated, a plague on both their houses. I just don't see how he gets to be anti-prop 19 from these arguments. From a practical point of view even if both are true (and I think they ARE both true although the economic conclusion is true even though his arguments are foolish in my opinion applying incorrect assumptions and the wrong model) neither are germane to the question of whether Prop. 19 is a good idea or not. Yet he argues vehemently that we should be weary of prop. 19 based on two irrelevant conclusions.

  18. So why is Mark proceeding from arguments in an area that he doesn't really present a solid argument, economics, and another one everyone agrees with him on, federal preemption, to conclude that an effort that would move the ball forward politically in a direction he favors, prop 19, is not worthy. He needs to tell me what is wrong with Prop. 18 relative to the status quo or some other politically feasible policy instead of making a pretty poor case. Since I know from reading him that his logic is generally not this scattered, I am mystified. I was wrong (you're right and I apologize to Prof. Kleiman) to analyze him as a result of my mystification, but I'm certainly allowed to call his train of logic foolish.

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