The Perils of Central Pot Planning in Washington


Jacob Sullum

Yesterday the Washington State Liquor Control Board (WSLCB), having received almost 3,000 applications from would-be marijuana growers, unanimously voted to reduce the number of licenses per applicant and the maximum size of farms. Initially the board said it would license up to three grow operations per applicant; now each must make do with one (at most). The board also cut the square footage allowed for each level of cultivation license by 30 percent: from 2,000 to 1,400 square feet of plant canopy for Tier 1, from 10,000 to 7,000 for Tier 2, and from 30,000 to 21,000 for Tier 3. The reductions were necessary, the WSLCB explains, because otherwise the combined square footage of qualified applicants would far exceed the board's cap on total production, which it has set at 2 million square feet. But that cap is based on the amount of marijuana needed to supply just 25 percent of the anticipated market, which means the board is deliberately engineering a shortage.

How come? "In its enforcement guidelines issued August 29, 2013," the WSLCB notes, "the Department of Justice required states to ensure a tightly regulated and controlled market to prevent diversion of product to other states, sales to minors and other concerns." Regulators worry that if they let legal growers produce enough pot to meet demand, the total supply will be excessive once you take into account the black market and the quasi-legal "collective gardens" that supply medical marijuana to patients (although it seems likely that the legislature will phase out the latter by the middle of next year). That extra pot could end up in the hands of "minors" (a group that in this case includes 18-to-20-year-old adults) or consumers in other states, thereby implicating two of the "enforcement priorities" that the Justice Department has said could trigger federal intervention.

But all this central planning is fraught with uncertainty. The demand estimate on which the board is relying, for instance, is based on calculations by RAND Corporation researchers who used state-level data from the National Survey on Drug Use and Health (NSDUH) combined with their own online survey of cannabis consumers, which aimed to figure out how much marijuana each consumer buys over the course of a year. Adjusting the NSDUH data to account for under-reporting, RAND's Beau Kilmer and his colleagues put total consumption in 2013 at 135 to 225 metric tons, with a median estimate of 175. That number was more than twice as big as an estimate by the Washington Office of Financial Management, which said total marijuana consumption would be about 85 metric tons in 2013. Kilmer et al. say the difference "is largely driven by our use of more recent data."

While the RAND study seems considerably more rigorous than the state's earlier projection, it still relies on a bunch of debatable assumptions, and its estimate covers a wide range. Furthermore, the estimate is for consumption in 2013, so it does not take into account the likely increase in consumption after state-licensed pot shops start opening later this year. That increase is apt to include more-frequent use by current consumers as well as purchases by new consumers and by visitors from other states. To get a sense of how wildly off government projections of demand can be, witness the delight of Colorado officials upon finding that their haul from marijuana taxes in the next fiscal year will be around $100 million, more than twice as high as projected before voters approved legalization in 2012.

And recall that the WSLCB is expecting state-licensed stores to capture no more than 25 percent of the market during their first year of operation, a number that could turn out to be far from the mark in either direction, depending on variables such as the after-tax price of legal pot and the fate of medical marijuana dispensaries. Additional uncertainty comes from estimating how much square footage is needed to produce a given amount of pot. As Soviet officials discovered on a much larger scale, this coordination of supply and demand is a pretty complicated problem when you insist upon arranging it through government diktat.

In short, the only thing we know for sure about the 2-million-square-foot ceiling is that it will have to be changed at some point. But for now, the WSLCB is sticking to it, which means cannabis cultivators must conform to tighter limits than they were expecting.