Nevada's Half-Hearted Marijuana Legalization Guarantees a Healthy Black Market

Legalized marijuana came to Nevada, but so have the high taxes and complex regulations that preserve illegal sales elsewhere.

Are Nevada officials actually trying to preserve the state's marijuana black market?

In the first four days that Nevada residents could legally purchase marijuana for recreational uses, state retailers made $3 million in sales—and lined the state government's coffers to the tune of a cool $500,000 in tax revenues, according to the Las Vegas Sun.

Actually, that can't be right. Allowing for rounding, that only accounts for about 15 percent of sales—which is the state excise tax on the first wholesale sale. Nevada also imposes a 10 percent retail excise tax on recreational sales, and then adds in sales tax, which varies from just under 7 percent to over 8 percent according to where you are. Let's call the total tax take about 32 percent of legal recreational marijuana sales. That's a really high tax rate to impose on any industry—especially one that was thriving (albeit illegally) and entirely untaxed less than two weeks ago.

The confusion is understandable, given that Nevadans voted to legalize pot just last November and state officials dragged their feet on complying until the last minute. The market for marijuana is currently operating under emergency regulations issued July 6 after booze distributors went to court to protect a temporary, legally guaranteed monopoly on recreational marijuana sales guaranteed them by last year's ballot measure. In June they won an injunction prevent the state from authorizing competing licensees and the whole process threatened to founder.

"State officials are clearly rushing into this hoping no one will notice how sloppy implementation is actually going," Rafael Lemaitre, a former top staffer in the Obama administration's Office of National Drug Control Policy, told the Sun.

That the state might need to make room for more retailers to hang out their shingles is evident from reports of hours-long lines for people to make legal purchases.

Undoubtedly, many people were willing to endure long lines because of the novelty of legal marijuana sales and the festive nature—fireworks!—of the holiday weekend launch. But novelty wears off. You have to assume that Nevada pot connoisseurs might soon tire of long waits when they could certainly get quick delivery from whichever underground entrepreneurs had their business before July 1—especially when calling old dealers could also bypass that high tax.

Nevada isn't exactly inventing the wheel here, either. Other states have legalized marijuana in the past, and their experiences offer lessons to anybody willing to learn.

"Colorado and Washington both initially levied tax rates of over 30 percent and struggled to reduce the size of the black market," the Tax Foundation's Lindsey Lassiter and Matthew Stadnicki recently noted. "Nevada could face similar troubles stamping out the black market."

To keep people from reverting back to their reliable and responsive black market dealers, Lassiter and Stadnicki recommend that the state focus on a lower, relatively easily implemented retail sales taxes. Reduced burden and simplicity would encourage compliance. So, they say, would reducing the tax differential between the legal recreational market and the legal medical marijuana market, so that supply doesn't get diverted from the one to the other. If Nevada lawmakers don't make some changes, well…

Nine months after Colorado legalized recreational sales, PBS reported that black market marijuana remained far cheaper than the legal stuff, and stifling red tape made it difficult and expensive to open an aboveground business. Little has changed since then, except that the state has actually tightened regulations and recently hiked the marijuana sales tax by 50 percent.

"It seems kind of odd that at the same time they're trying to do something about the black and gray markets they're going to ratchet up the taxes and drive more people to the black and gray markets," former state Sen. Pat Steadman (D-Denver) commented earlier this year.

Washington state also tried its luck with sort-of legalization of marijuana that bound the market in restrictions and burdened it with high vice taxes (37 percent excise tax). Lawmakers and regulators channeled their inner commissars and tried to create a centrally planned market with caps on production and sales outlets. Lower prices and easier access—including home delivery—were two big competitive edges possessed by illegal dealers that led Seattle Weekly to conclude last September that "four years after legal weed, Seattle's black market still thrives."

State lawmakers recently voted down legalization of delivery services—a change that would have eliminated one major advantage possessed by underground vendors.

So…What's Nevada's excuse? Having seen states elsewhere enter into legalization of marijuana half-heartedly, and preserve a healthy black market as a result, it's impossible for lawmakers to claim they can't predict the outcome of their efforts to nominally legalize a product while retaining some of the worst aspects of prohibition via intrusive taxes and rules.

Then again, officials in Colorado and Washington have been living with the results of their bad choices, and seem unwilling to undo the damage. If you're incapable of learning from your own experiences, it's unlikely that you'll suddenly see lessons elsewhere.

Whatever the motivations of officials in Nevada and their counterparts in other states, you can anticipate that "legalizing" marijuana while burdening it with tight rules and high taxes will have legal dealers competing with underground vendors for a long time to come.