Readers of this blog know I’m watching the impact of regulation on a brand new industry. The industry in recreational marijuana. The natural experiment of the impact of regulation is taking place in Washington and Colorado.
This is the third in a series of posts describing the regulatory structure for sales of recreational marijuana in Washington state. My hypothesis is the regulation will weigh heavily on the industry.
The Economist has more background on the issue: The great pot experiment.
I’ll summarize some info on the regulatory regimen, then touch on couple of trend issues and overall background.
Both states allowed so-called medical use of marijuana before legalization. The reason Washington state has taken longer than Colorado is the medical use in Washington was very lightly regulated, if at all.
The regulatory rules had to start from scratch in Washington instead of building on existing structure in Colorado.
In Washington there will be separate licensing for producers, processors, and retail shops. I was confused on that before – I had guessed there would be vertical integration.
The article points out there is a risk premium in dealing in this industry (pun intended). Should there be a shift in cultural attitudes or opinions in the White House, the producers and processors would be seriously exposed to charges of dealing in huge volumes of controlled substances.
The mandatory tracking of each plant from production all the way to consumer product at the retail store would make prosecution for trafficking a slam dunk if there is a cultural change. Each producer and processor will have written documentation they moved large volumes of products banned at the federal level.
There have only been 90 licenses issued to producers.
The Liquor Control Board, who is the appointed regulator for recreational marijuana, is saying they hope that the licensed shops will capture 25% of the market within a year.
This has major implication for libertarian advocates of legalization. One of the major arguments in favor of legalization is to end the war on drugs. If legal sales only capture 25% to 50% of the market, the war on drugs will continued as before.
The LCB is required to set a ceiling for production. The original goal was two million square feet of marijuana plants. I have not the foggiest clue how many plants that would involve or the annual production capacity.
Anyone care to give any ideas in terms of what that means for output? (Please give article citations if so, lest you unintentionally reveal personal knowledge of production capacities which would not be a good idea to do yet.)
Currently, 688K ft.² has been licensed.
Article says the LCB will intentionally hold down production to reduce the chance any pot will leak out of the system into the hands of minors or move out-of-state. Smart move, even though it distorts prices. My guess is that over time the production will be increased so that sales are not limited by supply constraints.
Possible additional legalization
The article says there are more states with legalization on the horizon.
This November, Oregon and Alaska will vote on legalization. Florida will consider medical marijuana.
The article says we are likely to see a vote in 2016 about legalization here in California. Article doesn’t say whether that will be an initiative or legislative vote. I’m assuming an initiative.
Hints I’ve not seen in print
The article hints that the medical marijuana effort has essentially been an attempt to pave the way for legalization. One of the arguments made in Colorado was medical marijuana hasn’t created any problems, therefore legalization is okay.
The article also hints at the fiction of medical marijuana. It puts quotations around the idea of patients as customers, cooperatives as the retailers, and doctor’s recommendations as authorization needed for medicinal use. The vague hint is the medical approach is cover for recreational use.
I’ve seen articles stating that it is exquisitely easy to for anyone to get a medical marijuana card. Don’t have any links to support my statement and won’t bother to find some.
As I see more info on the regulatory structure, I’ll share it.
By the way, natural experiment is the idea that since our society would not allow a major project to be turned loose on society just to test an idea, when something happens that does what we would like to test, we get to see if the idea works. My hypothesis? Severely heavy regulations will strangle an industry. With the legalization of marijuana in two states, we get to see if that is the case.
The pro-legalization advocates will get a natural experiment to test their hypothesis that society won’t disintegrate with legalization, there won’t be huge increases in DUI auto collisions, and there will be minimal or no increase in substance abuse.
- first post on Washington regs: Regulation for state-legal sales of federally-illegal product
- this series:
- part 1
- part 2
- part 3 – article you are reading
What do you think the impact of regulation will be?
Any tax accountants care to comment on the tension between federal tax law not allowing deductions for illegal activities versus legalization of a controlled substance at the state level? Guest posts would be welcome.