Pot’s Black Market Backlash
In 2012, voters in Colorado and Washington passed full-on, no-hemming-or-hawing pot legalization by large majorities. Lawmakers in each state have spent the better part of the past year figuring out how to tax and regulate their nascent commercial pot industries, which will open for business in 2014 (until then, recreational pot is only supposed to be cultivated for personal use). The spirit behind the legalization efforts in both states was that marijuana should be treated in a “manner similar to alcohol.”
Unfortunately, it’s starting to look like both states are going to treat pot in a manner similar to alcohol during Prohibition. Not only are pot taxes likely to be sky high, various sorts of restrictions on pot shops may well make it easier to buy, sell, and use black-market marijuana rather than the legal variety. That’s a bummer all around: States and municipalities will collect less revenue than expected, law-abiding residents will effectively be denied access to pot, and the crime, corruption, and violence that inevitably surrounds black markets will continue apace.
Washington’s legalization initiative, I-502, mandated a 25 percent excise tax at each of three levels of transactions: sales between producers and processors; sales between processors and retailers; and sales between retailers and customers. That’s all on top of a state sales tax of 8.75 percent. As Jacob Sullum argued at Forbes, the upshot of such a system is that weed could end up costing end users somewhere between $482 an ounce and $723 an ounce. The average price of high-quality pot at Seattle’s medical marijuana dispensaries is currently about $250 an ounce (under I-502, medicinal pot won’t be subject to taxes).
“The legal market is going to have a hard time competing with the illegal market, but a particularly hard time competing with untaxed, unregulated sort-of-legal market,” Mark Kleiman, a UCLA professor and one of the main policy consultants for the Washington’s government, told Sullum.
A similar situation is shaping up in Colorado, where voters just passed Proposition AA, which creates a 15 percent excise tax and a sales tax as high as 15 percent on pot sold in stores licensed by the state. On top of that, local municipalities can slap still more taxes on weed sales. Cities such as Boulder and Denver will start out with levies in the 3.5 percent range but can jack the rates as high as 10 percent and 15 percent.
While Colorado’s legalization initiative made personal use and possession of pot legal statewide, it also let counties and municipalities to opt out of allowing pot sales. Over 100 towns and cities across Colorado have voted to ban outright or delay the opening of retail shops selling recreational pot. And it turns out that some of the counties that have banned the sale of recreational marijuana nonetheless want their share of sales taxes collected by the state. When asked whether such a position is hypocritical, a commissioner from Douglas County, which opted out of allowing pot sales, told the Denver CBS affiliate, “The answer is going to be then, why was my county not able to opt out of allowing the smoking of it at all?”
The upshot of such actions is predictable and depressing. Colorado lawmakers are banking on about $70 million a year (PDF) in taxes from pot and their Washington counterparts have projected new revenues of $1.9 billion over the first five years of legalization. There’s just no way that’s going to happen if a legal ounce of pot is double the price or more of back-alley weed. Even the most stoned pothead isn’t that easy to scam.
If the experience of state cigarette taxes teaches us anything, it’s that draconian levies allow black markets to flourish. After raising its per-pack tax by a dollar this year, Massachusetts is now grappling with somewhere between $74 million and $295 million in lost revenue. Most people are happy to pay taxes that they think are fair—and most people will avoid taxes they think are extortionary. Combine that with the widespread NIMBYism at work in Colorado and it’s a recipe for clutching defeat from the jaws of victory.
The past several decades haven’t been kind to the nation’s drug warriors, especially when it comes to marijuana, the only illegal drug that is used on a monthly basis by more than 1 percent of Americans. In 1996, California passed a medical marijuana law and was soon followed by 19 other states and the District of Columbia. Crime—whether drug-related or not—didn’t go up, kids didn’t start toking up in droves, the heavens didn’t fall.
Instead, a record number of people—58 percent, according to Gallup—have come to embrace pot legalization as a smart and proper idea and The Marijuana Policy Project identifies no fewer than 10 states it expects to legalize weed in the next couple of years.
It’ll be an ironic buzzkill if it ends up that folks in places such as Maine, California, and Hawaii have an easier time firing up a state-sanctioned joint and enjoying the economic and social benefits of legalization long before the trailblazing residents of Colorado and Washington.