How to destroy a newly legalized illegal industry: Tax it to death

How could you shut down the newly legal recreational marijuana market in states that have legalized the federally illegal drug?

Well, you could pour on the taxes and regulations so heavy the legal stuff is twice or three times the price of illegal stuff.

First, a disclaimer. I don’t have experiential knowledge of the pot market, legal or illegal. My knowledge comes from the computer screen.

Why talk about this?

Three reasons. First, it helps me learn about change taking place around us in new worlds I’ll never personally explore. Second, this specific issue will allow us to see in real-time the damage caused by taxes and government regulation by watching what happens to a new ‘industry’. Third, I expect the state lawmakers and regulators are going to get an unpleasant lesson in unintended consequences. This post will be a marker for testing the idea that regulators can damage a new industry.

Having said that, check out an article in Daily Beast by Nick Gillespie:  Pot’s Black Market Backlash – How prohibitionists and nanny staters are trying to keep marijuana illegal – or at least inconvenient.

I previously talked about the severe regulatory requirements being developed in Washington state:  Regulation for state-legal sales of federally-illegal product.

In addition to heavy taxes, rules that prohibit economies of scale, and limits to size of each sale, the rules require ‘tracing’ the contents from plant to product. That will add a huge cost to operating a ‘drug store.’

Mr. Gillespie cites an article at Forbes by Jacob Sullum, High Marijuana Taxes Could Derail Legalization Plans, which cites various sources to provide some estimates of retail costs.

According to that article, Washington state will have a 25% excise tax plus 8.75% sales tax.

In Colorado, there will be a 15% excise tax, existing sales tax (8% in Denver), an extra state sales tax up to 15%, plus cities can add on an extra local sales tax up to 15%. That is a minimum of 23% (15 + 8). Maximum potential taxes are 53% (15 + 8 +15 + 15), depending on what the state legislature and each city chooses to do.

Do you suppose that might affect sales?

(That’s a rhetorical question.)

Here are some prices from Mr. Sullum. His sources estimate the price at retail could be in the range of $482 per ounce to $723 per ounce.

He cites surveys of street prices of about $239 per ounce. Prices paid at sort-of-legal medical dispensaries are reported at about $250 per ounce.

That’s all new info to me, so it is quite helpful. I now have an actual data point for pot prices.

Let’s look at those numbers again.  They show the likely impact of those huge taxes and regulatory requirements. Since I have nothing to lean on other than his info, that would put legal-illegal pot at somewhere between 93% and 189% higher (sorry!) than a sort-of-legal dispensary.

Mr. Sullum quotes two activists with opposite opinions whether the taxes will discourage sales.

His closing comment, which I just have to quote:

[Legislators] may be tempted to keep taxes high in the hope of generating more revenue, even when reducing rates might actually boost revenue by allowing licensed sellers to attract more business. The backers of hefty marijuana taxes are putting a lot of trust in legislators’ ability to anticipate unintended consequences and learn from experience—skills that do not come naturally to politicians.

Back to Mr. Gillespie’s article.

Colorado politicians are planning on $70M in new taxes. Washington state is expecting $1.9 billion. Umm, that means that at 36.75% (25 excise + 8.75 sales), they expect about $5.2 billion of pre-tax retail sales.

He cites a drop in collected cigarette taxes in Massachusetts after a $1.00 per pack increase in taxes. That was a huge surprise to the state regulators, but not to me. His comment:

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.

So, there’s my observation on how things are shaping up to crush the newly legal sales if illegal drugs.

I’ll try to keep an eye out for stories about the crushing effect of high taxes & regulations. I’ll also wait patiently for the full expected unintended consequences.

And if you happen to be a prohibitionist that still wants to restrain now-legal pot sales, may I suggest more regulations (for the public safety of course) and higher taxes (to fund the regulatory oversight, obviously). Try strict zoning rules (maybe limited to the red light district) and an industry-specific living wage (say $15 or $20 an hour).  You might yet be able to stop this.

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