Update on marijuana regulation – #17

As a reminder, I’m watching the legalization of recreational marijuana to see what effect heavy-handed regulation has on a newly legal industry. My hypothesis? Overbearing regulation will restrict, if not strangle, an emerging industry.

4/9 – New York Times – Marijuana Taxes Won’t Save State Budgets – The governor’s office has dropped their estimate of taxes from recreational marijuana sales for the year ending June 30, 2015 from $118M back in February 2014 to $69M now.

That is a mere 0.2% of the state budget, less than a quarter of one percent. The trivial amount massively undercuts the concept that pot taxes will be a big help for state budgets, which is one of the secondary reasons touted to legalize marijuana.

The volume of sales just isn’t there. A state report estimated that in 2014 there were 130 metric tons consumed in Colorado, of which 77 metric tons was sold through medicinal and recreation marijuana stores.

I’m an accountant so cannot stop myself from on the obvious tangent. … Metric ton is 2,205 pounds. That means the estimate is for 2,716,560 ounces sold legally (77 metric tons x 2,205 pounds x 16 ounces) out of 4,586,400 ounces total (130 metric tons x 2,205 pounds x 16 ounces).

In other words 41% of the marijuana consumed was obtained on the illegal market. That presents a serious challenge to the argument that legalization will wipe out the black market.


Article says retail prices were around $10 a gram last fall. One person says since November, retail prices in the Denver area have dropped between 16% and 30%.

A better focus

A researcher from UCLA suggests that the tax money should not be a focus of this issue. In the best quote I’ve seen yet, he says

“The stakes in reducing criminal activity and incarceration and protecting public health are way higher than the stakes in generating revenue.”

Perhaps that idea ought to be the focus of those advocating legalization of recreational marijuana, whether coming from the progressive perspective or libertarian perspective. Arguing for legalization based on generating tons of tax revenue is going to risks public disappointment when the data starts rolling in.

4/14 – McClatchy DC – Tax Day is source of unhappiness for marijuana industry – Focus on article is inability of a state-legal marijuana store to deduct operating costs for purposes of calculating federal income tax. One owner of a recreational marijuana store says 77% of revenue goes to paying taxes of some sort, whether state sales, state excise, or federal income tax.

Article suggests there might be a bit more interest in Congress of changing this. However, there are vocal opponents resisting giving any more leeway to marijuana legalization. Seems to me that those advocates know the federal tax issues are creating a serious cost issue in the industry and don’t want to remove the pressure.

3/28 – American Interest – A Drug Bust in Pot-Friendly Colorado – Large drug operation was busted. They were operating to export illegally into neighboring states while pretending to be a grower for the medical marijuana industry.

This is a perfect illustration of the idea that regulation and taxation of marijuana while partially legalizing the stuff will still require extensive law enforcement efforts.

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