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!

420 Shades of Grey: Kilmer on Marijuana Legalization

RAND drug policy expert Dr. Beau Kilmer thinks that the Department of Justice’s decision not to challenge marijuana legalization in Colorado and Washington could

encourage other states and other countries to consider the radical shift from marijuana prohibition to allowing the development of a commercial marijuana industry. But it’s critical to note those are not the only choices. Marijuana policy isn’t a black or white issue. Indeed, it’s more like 420 shades of grey.

The non-commercial policy options he mentions include home growing, state monopolies, and allowing marijuana production only by “for benefit” organizations.

He also has some advice for states that might legalize in the near future:

Policy options become even greyer when you realize that decisions about marijuana don’t have to be permanent. But once for-profit companies and their lobbyists get entrenched, it could be harder to make changes. Thus, pioneering jurisdictions may want to consider incremental approaches that begin with non-profit regimes.

It’s a good read by an important thinker in this area; you can catch it now on CNN’s website.

Understanding the U.N. Treaties, Federalism and Marijuana Legalization

I got private pushback from some major players on both the left and the right of drug policy for my argument that U.N. drug control treaties are not relevant to the legalization of recreational marijuana in Washington and Colorado. The view I expressed in my editorial was that for nations with federalist government like the U.S., U.N. treaties traditionally apply only to federal policy. The U.S. federal government is thus bound by the U.N. drug control treaties it signed but its individual states did not.

A policymaker sympathetic to marijuana legalization directed my attention to Article 3 the 1988 United Nations Convention Against Illicit Traffic in Narcotic Drugs and Psychotropic Substances. The article includes an agreement to make a huge range of drug-related activities illegal, including manufacture, sales and transport. The article goes on to say: Subject to its constitutional principles and the basic concepts of its legal system [Emphasis mine], each Party shall adopt such measures as may be necessary to establish as a criminal offence under its domestic law, when committed intentionally, the possession, purchase or cultivation of narcotic drugs or psychotropic substances for personal consumption contrary to the provisions of the 1961 Convention, the 1961 Convention as amended or the 1971 Convention.

The “subject to its constitutional principles” phrase is the escape clause for federalist countries like the U.S. Continue reading “Understanding the U.N. Treaties, Federalism and Marijuana Legalization”

Federalism and cannabis policy: the terms of a bargain

Policy waivers and Sec. 873 contractual agreements: how to use the states as laboratories for cannabis policy.

The Journal of Drug Policy Analysis has just published a new paper (behind a paywall) in which I offer two alternatives to the options currently in public discussion as to how the federal government can deal with state-level cannabis legalization.

This fall, Washington and Colorado intend to start licensing businesses to produce and sell cannabis under voter-passed initiatives, even though the stuff remains illegal under federal law. The federal government has not yet said what it plans to do about it, and its three obvious options – acquiescing, cracking down, and muddling through – all have fairly serious drawbacks.

A number of what Keith calls Formerly Important Persons have demanded that the feds crush the state-legal Colorado and Washington markets. Since every participant in those markets needs a license, that wouldn’t be hard to do: any federal judge would cheerfully enjoin someone applying for license to commit a federal felony from doing so.

But the state-legal commercial markets represent only one of three systems that can deliver cannabis to customers. The loosely-regulated “medical marijuana” markets would be a far tougher nut for the feds to crack. And the purely illicit system, which handles the vast bulk of transactions today, is way too big for 4000 DEA agents to suppress without help. More than 90% of arrests for growing and dealing marijuana are made by state and local cops. So the feds need state and local authorities in Washington and Colorado to maintain pressure on illegal growing.

Constitutionally, the states have no mandate to even have drug laws, let alone enforce them. In this case, federalism is more than a legal doctrine: it’s a brute fact.

So: Washington and Colorado would like the feds to let their new commercial systems operate. And the feds would like Washington and Colorado to suppress production for out-of-state sale. When each of two parties has something the other wants, that’s the basis for a bargain.

And the Controlled Substances Act (Sec. 873, if you’re keeping score at home) orders the Attorney General to cooperate with state and local officials in enforcing the law, and authorizes him, “notwithstanding any other provision of law,” to enter into “contractual arrangements” with states and localities. The paper proposes that he use that authority to make formal deals with Colorado and Washington in which the Justice Department would agree to keep hands off state-licensed businesses in return for the states’ active help in suppressing interstate trade. That wouldn’t make the state-authorized activity legal, but it could formalize a program of targeted, selective enforcement that would give state licensees an effective safe harbor.

That seems to me a clear second-best to my preferred option, which would be a Congressionally-authorized program of policy waivers. As with the waivers that allowed state-level experiments with alternatives to AFDC, cannabis policy waivers could allow the states, in good Brandeisian fashion, to act as the “laboratories of democracy” in a policy area where there is currently much more passion than knowledge.

Here’s the abstract of the paper:

Passage of marijuana-legalization initiatives in Colorado and Washington poses a problem for the federal government: marijuana remains illegal under federal law, but the federal government lacks the capacity to fully enforce that law without state and local cooperation. Complete deference to state legalization would put each state’s cannabis policy at the mercy of its neighbors’. A system of legislatively-authorized policy waivers would allow controlled exploration of alternative systems of control. In the absence of such authorization, the executive branch could use existing authority to craft cooperative agreements with the states intended to confine the effects of each state’s new policies within its own borders.

More detail in this UCLA press release.

Bob Young at the Seattle Times and Jordan Schrader at the News-Tribune have stories.

Logic and the marijuana war

Pot is safer than beer. Denying that fact isn’t “anti-drug;” it’s just anti-truth.

A pro-pot group rented video-billboard space outside the Indianapolis Speedway for the weekend of a NASCAR event to run a video with the following voicetrack:

If you’re an adult who enjoys a good beer, there’s a similar product you might want to know about – one without all the calories and serious health problems, less toxic so it doesn’t cause hangovers or overdose deaths, and it’s not linked to violence or reckless behavior.

Marijuana: less harmful than alcohol and time to treat it that way.

A group that calls itself “anti-drug” objected.

This campaign falsely claims marijuana is safer than alcohol and promotes illicit drug use in a state where marijuana is illegal.

The billboard company chickened out, either out of cowardice or because it didn’t want to offend its beer-company advertisers.

The New York Daily News repeats as fact the claim that the objecting organization is “anti-drug.” “Anti-truth” would be closer to the mark.

The logical negation of “Marijuana is safer than alcohol” would be “Alcohol is no more dangerous than marijuana.” How could anyone concerned about drug abuse make such a recklessly false claim promoting use of the intoxicant that kills, injures, and addicts more people than all the illicit drugs combined? “Less harmful than alcohol” is a low bar, but cannabis clears it easily.

Two Strategies for Avoiding a Marijuana Mega-Corp

There are multiple policies that could stop the legal marijuana industry from becoming dominated by a mega-corporation that corrupts regulators.

In many industries, including tobacco, a small number of companies control most of the business and in doing so attain sufficient economic power to shape regulatory decisions in their favor. A similar situation could easily arise if marijuana is fully legalized.

Regulatory capture by a legal Marijuana Mega-Corp is not considered problematic by most modern libertarians given their hostility to government and their worship of corporate power. But it profoundly troubles at least three political camps (a) Good-government advocates who fear corruption of regulatory agencies, (b) Public health professionals, and, (c) The noble minority of libertarians wise enough to appreciate that large, weakly-regulated corporations can and frequently do violate the freedom of the citizenry. These public-minded groups can pursue at least two different policy strategies to keep any future legal marijuana industry from becoming a clone of Big Tobacco.

The Washington State Legalization Ballot Initiative 502 offers a strategy based on control of producer size. The Liquor Control Board has the power to issue a large number of licenses to legally produce marijuana while limiting how much each licensee can produce. The resultant cottage industry would be highly competitive and have a hard time coordinating regulatory capture efforts relative to an industry with only one or two mega-producers. On the downside, such an approach would raise the costs of inspecting all production sites and make monitoring compliance with any future regulations a more significant bureaucratic challenge.

Pat Oglesby has offered an intriguing alternative policy approach: Using tax rates to help small marijuana production firms compete with large ones, who economies of scale could otherwise allow them to undersell small producers. Federal alcohol taxation has this intent:

Small wine businesses, producing no more than 150,000 gallons a year, pay just 17 cents a gallon – instead of the standard Federal rate of $1.07 — on the first 100,000 gallons. Small and medium sized brewers, on the first 60,000 barrels, pay $7 a barrel instead of the standard $18.

As Pat notes himself, a sized-based tax rate requires the up-front work of creating clear standards and monitoring protocols to ensure that “small” producers are in fact small (versus for example being a mega-corp disguised as a series of small producers operating under different names). Still, as a public policy, it has the elegance of simplicity, which is often a facilitator of implementation within overstretched state bureaucracies.

Cannabis and schizophrenia: Scare stories are not policy arguments.

“Some” isn’t much of an argument. You need “How many?”

The Wall Street Journal has an op-ed by a Yale psychiatry resident warning that the legalization of cannabis will lead to increased disability due to schizophrenia. That’s based on a couple of studies showing that cannabis use, especially early heavy use, is a statistical risk factor for a subsequent schizophrenia diagnosis.

If I had a young friend with a family history of schizophrenia or who had experienced schizophrenic symptoms, I’d advise that person to stay away from cannabis. Why take unnecessary chances? But the evidence of an actual causal link is fairly underwhelming; it’s very hard to tell whether early cannabis use might reflect attempts at self-medication for pre-clinical symptoms rather than being an actual precipitating cause.

At the population level, we have what seems to me like strong negative evidence on the question whether increasing the availability of cannabis will lead to a measurable increase in the number of people with disabling levels of schizophrenia. Those in pre-Boomer and early Boomer birth cohorts in the U.S. – anyone born before about 1952 – had essentially zero experience with cannabis before the age of 18. But that changed rapidly. More than 10% of the high-school seniors of 1979 – roughly speaking, the birth cohort of 1961 – were daily or near-daily pot-smokers. Then the prevalence of heavy adolescent use fell sharply for a little more than a decade, reaching its trough around 1992, and has rebounded since.

Yet the rate of schizophrenia diagnosis shows no corresponding cohort-to-cohort swings. (Nor, for that matter, between high- and low-cannabis-prevalence areas within the U.S. or cross-nationally.) That doesn’t mean there aren’t individual cases in which cannabis precipitates a first psychotic break, or that there aren’t some people with schizophrenia whose disease course is worsened by pot-smoking. (It’s also possible, of course, that cannabis provides valuable symptomatic relief for others, but no doubt our vigilant Institutional Review Boards will protect us from ever learning about that phenomenon, if it exists.)

But those results do help put an upper bound on the number of additional schizophrenia diagnoses we need to fear as the result of the increase in cannabis use that would result from legalization and the resulting changes in availability, price, and attitudes. And that upper bound is fairly low: low enough to keep it off the list of the top ten reasons for or against legalization. Note, for example, that people put in jail or prison are at risk of severe damage, especially if while inside they become victims of physical or sexual assault. Some commit suicide. So the mental-health costs of arresting 650,000 people a year, and holding 30,000 or more prisoners at any one time, for cannabis offenses – costs that would be largely, though not entirely, abolished by legalization – might easily match or exceed the mental-health costs of increased exposure to cannabis.

The author of the WSJ piece solemnly announces, “The claim that marijuana is medically harmless is false.” No sh*t, Sherlock! Nothing is harmless. It’s always a question of counting harms, weighing them against one another, and comparing them to benefits. And we should do that not only when embarking on “social experiments” (i.e., making changes) but also when continuing a high-cost and potentially unsustainable status quo policy.

The costs of cannabis prohibition are large (including $35 billion a year in criminal income), and its capacity to keep consumption in check appears to be breaking down. That’s not a reason to plunge wildly into legalization on the libertarian model, but it is reason enough consider, soberly, the options around legal availability. Mere unquantified viewing-with-alarm (about schizophrenia, or workplace impairment, or intoxicated driving, or increased use by adolescents, or increased substance abuse disorder) no longer counts as a valuable contribution to the debate, any more than mindless sloganeering about “The failure of the War on Drugs.”

Some people will get hurt as a result of legalization; some people are getting hurt now by prohibition. The question before us is, “What policy would minimize total damage, net of the benefits of responsible use?” Continued prohibition in some form – at least the prohibition of commerce – might turn out to be the answer to that question; at least, Jonathan Caulkins and Keith Humphreys both think so, and they’re two of the most thoughtful and knowledgeable people around on this issue.

But being “against legalization” does not by itself name a policy position. No one I know has a serious proposal to put the genie back in the bottle, reversing the trend toward more cannabis use, and heavier use, that started around 2003 and seems to be accelerating. So it’s time to try some innovation. Who knows? We might be able to construct a licit market, and norms of responsile use, that would stop the progression toward more potent and less CBD-buffered, and thus probably riskier, cannabis. And then we should evaluate the results of those innovations with as much cool detachment as we can summon up: not to “prove” that one team of culture warriors or the other was right, but to consider what to try next. That’s the way grown-ups make policy.

Persistent Racial Differences Under Softening Marijuana Enforcement

It was an enjoyable experience to work with Ian Urbina and Ezekiel Edwards in examining ACLU data on the difference between the Black and White arrest rate for marijuana possession. We had somewhat different takes on the data, but certainly all want there to be equality under the law, which is currently not the case in much of the U.S..

Why has the softening of marijuana enforcement in the past few years apparently not reduced the African-American arrest rate? The answer may lie in political economy. Until recently, support for legalizing/decriminalizing marijuana has been much higher among Whites than among Blacks, which may help account for why enforcement softening spread where it did in the U.S..

As context, the most recent U.S. census reports that 13.1% of the US population is Black. The states that have decriminalized marijuana or significantly expanded an existing decriminalization statute in the past few years are below, with their Black population percentage:

California 6.6%
Massachusetts 7.8%
Connecticut 11.1%
Rhode Island 7.2%
Maine 1.3%

The two states that have legalized recreational marijuana, with their Black population percentage:

Washington State 3.8%
Colorado 4.3%

It’s a marked pattern that has thus far meant that White marijuana users are being affected by softening enforcement more than are Black marijuana users. However, some cities with predominantly Black populations (e.g., St. Louis) have recently moved in the decriminalization direction, which may reduce the arrest rate among African-Americans in the coming years,

“How to Legalize Pot”

Bill Keller on mj legalization: Can we get to “orderly market” without passing through “way too stoned”?

Remind me to talk to Bill Keller more often. Not many reporters will expend the effort to understand the nuances of a complex issue and make them understandable to non-specialist readers. Key quote: “Can we get to ‘orderly market’ without passing through ‘way too stoned’?”