Washington's Legal Marijuana Mess

Can pot regulators beat the law of supply and demand?


Seattle Hempfest, a three-day gathering of cannabis activists, entrepreneurs, and consumers, bills itself as the world's largest pot "protestival." But last year's Hempfest, which attracted about 200,000 people to three waterfront parks on the third weekend in August, was also a victory party. The previous November, 56 percent of Washington voters had approved I-502, an initiative that made it legal for adults 21 and older to possess up to an ounce of marijuana, which if all went as planned they would eventually be able to buy at state-licensed stores.

Seattle police officers marked the occasion by handing out 1,000 one-ounce bags of Doritos to which they had affixed stickers explaining the new legal regime. Among other things, the stickers pointed out that it was still illegal to smoke pot in public. Not many Hempfest attendees heeded the warning. Despite the self-consciously political nature of the event, the vast majority of people there seemed less interested in public policy than in getting high, eating, listening to music, and checking out the wide array of cannabis-related merchandise, including tiny portable vaporizers, huge, multicolored glass bongs, and paraphernalia for consuming marijuana concentrates.

As usual, the scores of speakers who ascended Hempfest's various stages to give their five-minute spiels about pot policy generally attracted little attention, let alone applause. One exception was Alison Holcomb, the lawyer who took a leave of absence from her job at the American Civil Liberties Union of Washington to run the I-502 campaign. "Today is a new day," Holcomb told a cheering crowd under sunny skies. "All of you who are here who voted yes on Initiative 502 last year, thank you so much. You truly have changed the world."

That much was hard to deny. Together with Colorado, where a legalization initiative was approved on the same day, Washington had shown it was possible to opt out of the war on pot. No other jurisdiction had ever legalized the marijuana business once it was prohibited, and now Uruguay was on the verge of becoming the first country to do so. "The world is watching," Holcomb declared as her 5-year-old son stood beside her on the main Hempfest stage. "By the end of this year, we may see the wall of prohibition coming down." That sentence coincided with a dramatic burst of feedback noise from the band setting up on stage behind Holcomb. "It's very exciting," she said with a laugh.

Not everyone at Hempfest was quite so pleased with I-502, which had created bitter divisions within the marijuana reform movement. "It's not legal yet," warned Douglas Hiatt, a Seattle criminal defense attorney and longtime cannabis activist, in a profane and angry speech. "We've got to be able to grow it. We've got to be able to sell it freely. We've got to keep it in the hands of patients with no taxes…We've got to really legalize it for everyone, every way they need it…Tell the politicians to stop fuckin' around and get it done!"


Steve Sarich, executive director of the Cannabis Action Coalition, sang a similar tune. "They're gunning for us," he told an audience of medical marijuana activists. "We need to stop the liquor control board from taking over control of medical cannabis. We are not going to give up our rights."

Medical use of marijuana, which has been allowed since 1998 in Washington and since 2000 in Colorado, helped pave the way for broader legalization in both states. But Washington, unlike Colorado, never got around to licensing and regulating medical marijuana suppliers, who operate in a legal gray area. So while Colorado's medical marijuana industry evolved into that state's recreational marijuana industry, legalization in Washington seems destined to sweep away most of the existing cannabusinesses. That prospect has aroused resistance from the current players and anxiety among their customers, who worry that the new stores, which will be regulated by the Washington State Liquor Control Board (LCB), may not be able to serve their needs at an affordable price—a concern heightened by the likelihood that the state legislature will sharply reduce the amount of marijuana patients are allowed to grow for their own use.

The fact that Colorado's marijuana industry was better developed and legally more secure helps explain why recreational consumers there were able to buy pot from state-licensed stores at the beginning of 2014, while consumers in Washington are still waiting. "Colorado already had the industry built up," Holcomb says. "It was simply a matter of changing the status of operations." The LCB's latest projection is that pot stores will begin opening in July, but that may prove overly optimistic. Even if some retailers do open for business this summer, there may not be enough marijuana to supply them. Despite its advantages, Colorado experienced initial shortages that sent prices soaring. In Washington, which is moving more slowly partly so that growers can be licensed and operating before retailers are, the problem may be even worse.

In fact, Washington's regulators are deliberately engineering a shortage. Keen to prevent diversion of newly legal marijuana to other states, which might trigger a federal crackdown, the LCB is imposing a cap on production and strictly limiting the number of retailers. The amount of marijuana cultivation allowed by the state is calculated to supply just 25 percent of the market, while the number of retail licenses will be much smaller than the number of existing medical marijuana suppliers. Seattle, which has about 200 dispensaries (including delivery services), has been allotted just 21 state-licensed pot stores. Legalization in Washington seems to be replacing something resembling a free market—the largely unregulated medical marijuana business—with something closer to Soviet-style central planning.

'A Lot of Innovative Interpretation'

A couple of weeks after last year's Hempfest, the U.S. Justice Department announced that it would not try to block marijuana legalization in Washington and Colorado as long as those states adopted sufficiently strict regulations. In a memo to U.S. attorneys, Deputy Attorney General James Cole listed eight "federal enforcement priorities" that he said should guide decisions about whether to prosecute state-licensed marijuana businesses. The priorities included interstate trafficking, distribution to minors, sales of other drugs, and the involvement of organized crime. As long as marijuana growers and sellers complied with state law and did not implicate any of the eight priorities, Cole suggested, targeting them probably would not be a good use of federal resources.

The day that the Cole memo came out, Jenny Durkan, the U.S. attorney for the Western District of Washington, issued a statement of her own. Durkan, whose district includes Seattle, wanted to clarify that the businesses currently supplying patients in that state with cannabis had no place in the Justice Department's vision of a properly regulated marijuana market. "The Department guidance is premised on the expectation that the state will implement strong and effective regulatory and enforcement systems," she warned. "The continued operation and proliferation of unregulated, for-profit entities outside of the state's regulatory and licensing scheme is not tenable and violates both state and federal law."

Durkan herself is largely responsible for creating the situation she now views as "not tenable." In 1998 Washington voters approved an initiative that created an affirmative defense against possession and cultivation charges for patients who use marijuana to treat "terminal or debilitating conditions" based on a medical recommendation. The law gave the same defense to "any designated primary caregiver who assists a qualifying patient in the medical use of marijuana." But there was no explicitly approved commercial source of marijuana for patients who were not up to growing their own medicine and could not find someone willing to do it for them. Until 2011 dispensaries operated based on a model in which a given seller became the temporary "designated provider" (as the role was renamed in 2007) for each patient who bought cannabis from him. That year the legislature finally approved a bill aimed at regulating the medical marijuana business. But Gov. Christine Gregoire vetoed most of the bill, citing advice from Durkan and Michael Ormsby, the U.S. attorney for the Eastern District of Washington.

"The Washington legislative proposals will create a licensing scheme that permits large-scale marijuana cultivation and distribution," Durkan and Ormsby wrote in a letter to Gregoire. "This would authorize conduct contrary to federal law….Accordingly, the Department could consider civil and criminal legal remedies regarding those who set up marijuana growing facilities and dispensaries…Others who knowingly facilitate the actions of the licensees, including property owners, landlords, and financiers, should also know that their conduct violates federal law. In addition, state employees who conducted activities mandated by the Washington legislative proposals would not be immune from liability under the CSA [Controlled Substances Act]."

Gregoire, who had solicited the U.S. attorneys' guidance and may have been looking for an excuse to veto the bill, interpreted that last sentence as a threat to prosecute state employees involved in licensing and regulating medical marijuana suppliers. She therefore vetoed all the provisions of the bill that would have put them in that position. At the same time, the governor signed into law two provisions that inadvertently created the current dispensary system.

One provision closed the "designated provider" loophole, saying providers had to wait 15 days before switching from one patient to another. The other provision let patients grow cannabis in "collective gardens" rather than buy it from the state-licensed outlets that were supposed to be the main source of medical marijuana. That provision, which allowed up to 10 patients and 45 plants per garden, became the new legal rationale for dispensaries. Today medical marijuana suppliers in Washington typically operate as collective gardens (or collections of collective gardens) with rotating memberships: When a patient enters a dispensary, he becomes a member for the length of the transaction.

State Sen. Jeanne Kohl-Welles (D-Seattle), the chief sponsor of the 2011 bill, says that system is "very different" from what she had in mind. "There's nothing in statute expressly allowing dispensaries or prohibiting them," she says. "There's been a lot of innovative interpretation." Martin Martinez, who in 1999 founded Life Vine, Washington's first medical marijuana collective, thinks "all of these dispensaries basically are abusing the law." But John Schochet, deputy chief of staff in the Seattle City Attorney's Office, says state appeals courts have approved the idea of collective gardens with rotating memberships. "I couldn't give you a clear answer as to whether it's illegal under criminal law," he says, but "no one's been convicted for selling marijuana illegally using a collective garden in King County," where Seattle is located.

At the end of March, however, a state appeals court upheld a ban on collective gardens in Kent, a city about 20 miles south of Seattle. The court ruled that the legality of collective gardens depended on a patient registry created by a provision of the 2011 law that Gregoire nixed. "As the plain language of the statute and the governor's veto message indicate," the court said, "collective gardens are not legal." The decision nevertheless seemed to leave patients who grow marijuana collectively with an affirmative defense.

The LCB wants the legislature to eliminate dispensaries, which otherwise will compete with state-licensed pot stores, by repealing the collective garden provision. "There's nothing in the state law that allows for a dispensary to exist," says LCB spokesman Brian Smith. He concedes that the dispensaries serve "legitimate, ill users" but suggests that many of their customers are recreational consumers in disguise, since "medical marijuana cards are easy to get in Washington." The "terminal or debilitating conditions" covered by Washington's medical marijuana law include "intractable pain" as well as harder-to-fake illnesses such as glaucoma, cancer, epilepsy, AIDS, and hepatitis C. The health professionals authorized to recommend marijuana include naturopaths as well as physicians, physician's assistants, and nurse practitioners.

While no medical marijuana supplier admits to abusing the law, some think their competitors do. Martinez says Life Vine, whose motto is "Patients Helping Patients," "is trying to serve severely ill patients who are generally fairly indigent." He objects to "dispensaries that have given Life Vine and small patient groups a bad name, because they're truly money-making operations run by nonpatients." John Davis, CEO of Northwest Patient Resource Center, which operates two dispensaries in Seattle, does not object to making money. But he concedes "there are a lot of places out here that sling weed."

Sean Green, who has dispensaries in Spokane and in Shoreline, just north of Seattle, dismisses the idea that many medical marijuana consumers are fakers as "speculation based on conjecture." He says "each and every patient" he serves at his dispensaries "has an official, valid doctor's authorization on file," although the recommendations do not describe the patients' conditions. "They're not required to disclose that to us, and we don't ask," he says. "In 80 percent of the cases, we don't know, and they look perfectly healthy." But Green says he learned years ago, after meeting a "21-year-old skater kid who looked like a pothead" and was using marijuana to treat epilepsy, that people who seem healthy may have serious medical conditions that are not superficially obvious.

'You Realized There Was a Risk'

Green's dispensary near Seattle is a single collective garden with rotating members, while his operation in Spokane consists of "multiple collective gardens under the same roof." Similarly, Davis describes his business as "a management company that manages the assets of many collective gardens." Even if the appeals court decision upholding Kent's ban on collective gardens was wrong, these arrangements seem to be pushing the envelope. Their success hinges largely on the attitudes of city officials and county prosecutors.

Douglas Hiatt, the lawyer and activist, says King County Prosecuting Attorney Daniel Satterberg "essentially bought off on [collective gardens]. He hasn't brought any cases. What Satterberg knows is that they can't beat us in a jury trial in Seattle on medical marijuana. It's just not going to happen. So he's not interested in charging this stuff." Given the contrast between what collective gardens were meant to be and what they have become, Davis says, "I wouldn't want to be in a courtroom. So my job as a policy wonk is to never be in a courtroom. It's not the law that's solid out here. It's the policy."

For years Seattle's policy has been to tolerate dispensaries. But that changed after I-502 passed. Last year the Seattle City Council approved an ordinance that limits dispensaries to 45 plants and 72 ounces per location unless they obtain state licenses by January 1, 2015. Washington does not currently license medical marijuana outlets, and the state legislature ended its 2014 session without agreeing on a bill to incorporate them into the new system. So unless the city council extends its deadline, dispensaries will be operating in violation of local zoning law. Even if medical marijuana suppliers get a reprieve, state legislators may end up banning them in 2015, as several of the bills considered this year would have done. Those bills also would have sharply reduced possession and home cultivation limits for patients (currently 24 ounces and 15 plants, respectively), on the assumption that their needs could for the most part be met by state-licensed stores that did not yet exist.

During the legislative debate patients worried that the stores would not open on schedule; that there would be too few of them due to state limits and local bans; that their prices, boosted by shortages and the state's hefty new marijuana taxes, would be too high; and that they would not carry medical strains, catering instead to recreational consumers. Some patients, for example, prefer varieties that are low in THC, marijuana's main psychoactive ingredient, and high in cannabidiol, which does not make you high but shows promise as a treatment for a wide range of disorders, including epilepsy and multiple sclerosis. Activists worried that the new suppliers would not even be allowed to advise patients about which strains might work best for their symptoms, since state regulations bar retailers from advertising "curative or therapeutic effects."

After medical marijuana legislation was blocked in March by a dispute over sharing cannabis taxes with local governments, Steve Sarich issued a triumphant statement. "We beat back the attack on medical today and defeated the big money lobbyists hired by the 502 businesses that wanted to force patients to shop at their recreational stores and turn us into criminals," he said. "We won't have to pay pirate prices for mediocre schwag after all."

Hiatt complains that legislators are so eager to maximize tax revenue and discourage federal intervention that they are willing to compromise the interests of patients. "They're saying, 'We'll throw medical marijuana under the bus if you'll let us get away with 502,'" he says. "People in the community here are furious. They feel like they've been betrayed."

Were they? That depends on how you interpret the assurances that I-502's supporters gave in 2012. The campaign's website, for instance, told wary patients the initiative "does not change the Washington State Medical Use of Cannabis Act." That was literally true, since I-502 did not address medical use one way or the other. But once the initiative passed, creating a new system for distributing marijuana, it was inevitable that the question would come up. A year after the election, Alison Holcomb herself was arguing that "it makes little sense" to have a parallel distribution system. She said the new state-licensed stores should be the main source of medical marijuana, although she argued that patients should keep the right to grow their own medicine.

Holcomb rejects the notion that she or her allies misled patients or their suppliers about the consequences of I-502. "What the campaign said in its literature is absolutely accurate," she says. "Initiative 502 does not change anything about the medical marijuana law. But when I spoke to people in the medical marijuana business and they asked me if anything's going to happen, I said, 'Look, it completely depends on how local prosecutors feel about letting dispensaries operate the way they are once the new system is in place.' Realistically, we are going to be looking at a transition period. Seattle certainly isn't going to shut down 200 dispensaries before the end of 2014."

After Gregoire vetoed most of Kohl-Welles' bill in 2011, Holcomb notes, there were proposals to amend the collective garden provision so that rotating memberships would not be allowed. "Then the legislature essentially put medical marijuana on hold during the vote on Initiative 502 and development of rules by the LCB this year," she says. "People who decided to open medical marijuana businesses even after the governor vetoed dispensaries should be a little embarrassed to claim they thought they were going to be able to continue doing what they're doing indefinitely. You did decide to open a medical marijuana business even though the governor vetoed legislation that would've made that legal. You went into this with your eyes open and realized there was a risk."

A Five-Year Plan

Not all medical marijuana suppliers will be shut out of the new market. In fact, Washington's very first cultivation license, issued by the LCB in March, went to Sean Green, a former real estate appraiser who got into the medical marijuana business in 2011. Green is using his license for a grow operation in a Spokane office building that may also house Washington's first state-licensed pot shop. Scott O'Neil, a friend of Green's who manages his medical marijuana business in Spokane, placed eighth in the lottery for the eight licenses the LCB has allotted to that city. O'Neil, who signed agreements with Green to buy marijuana from his first harvest and to use his Kouchlock Productions brand, says the store should be ready to open as soon as a license is issued.

Green's Tier 3 production license allows him up to 21,000 feet of plant canopy. Originally the allowance for Tier 3, the largest grower category, was 30,000 square feet. But in February the LCB, having received more than 2,800 applications from would-be marijuana growers, unanimously voted to reduce the ceilings for each tier by 30 percent. It also cut the number of production licenses allowed per applicant from three to one. It said both changes were required to stay below the statewide cap on total production, which is 2 million square feet. That cap is supposed to allow production of enough marijuana to supply a quarter of the market, which is how much the LCB hopes the stores it licenses will initially attract.

One problem with that plan: Given the difficulty of measuring black-market sales and uncertainty about how legalization will affect consumption, the LCB does not really know what the demand for marijuana will be. It is relying on a RAND Corporation estimate of how much marijuana Washingtonians consumed in 2013. Beau Kilmer and his colleagues at RAND 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, Kilmer et al. 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 a 2012 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. 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.

Also keep in mind that the LCB is expecting state-licensed stores to capture no more than 25 percent of the market during their first year of operation. That number 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 try to arrange it from the top down.

The state is also restricting the retail end of the marijuana business. I-502 itself imposes extensive restrictions on advertising, and the LCB plans to issue just 334 retail licenses for the entire state. That number is in the same ballpark as the number of state-run liquor stores before sales of distilled spirits were privatized in 2012. But Washington residents could (and can) buy alcoholic beverages in various other places, including bars, restaurants, supermarkets, and convenience stores. Washington, like Colorado, is allowing marijuana sales only in specially designated stores, which may not sell other products (aside from marijuana paraphernalia) or allow on-site consumption. Even if 334 stores were plenty, it's not clear how many of them actually will open, since almost 100 cities and counties have enacted temporary or permanent bans on marijuana businesses. In January, responding to the LCB's request for guidance, Attorney General Bob Ferguson issued an opinion concluding that I-502 allows such bans, since it does not address the issue explicitly and there is a "strong presumption against finding that state law preempts local ordinances."

The LCB says controlling supply is crucial to preventing federal interference. The statewide cap on production, explains LCB spokesman Brian Smith, is designed to "meet the requirements of the U.S. Department of Justice to keep them from shutting down the Washington system." The aim, he says, is to find "the sweet spot" where the supply "reasonably meets market demand without creating too much where it's diverted out of state." And if the LCB guesses wrong, he says, it can always adjust the regulations. "What's built into the system," Smith says, "is the ability, the flexibility, to expand from year to year, to create more as we capture more of the market. It will continue to grow, and I think over about five years is when we're going to really capture a large part of that market."

Still, the state's initial target is surprisingly modest, especially since eliminating the black market was one of I-502's main goals. "I don't know how quickly people moved away from buying their liquor from bootleggers after Prohibition ended," says John Schochet, whose boss, Seattle City Attorney Pete Holmes, was one of the initiative's most prominent supporters. "But I think we start from the view that most people, given a reasonable, legal way to purchase a product, will take the legal way if it's not outrageously expensive and inconvenient. We would like to be more ambitious than the 25 percent figure."

Alison Holcomb argues that the comparison with the end of alcohol prohibition is misleading. "We never had an industrial, legalized cannabis market before prohibition," she says. "And repeal of alcohol prohibition happened nationwide overnight. We're talking two states, and we don't have a giant industry that's stepping in and opening up."

Weedless in Seattle?

Colorado's experience illustrates what happens when the legal supply of marijuana falls short of demand. Because retailers were required to produce most of their inventory but were not allowed to start growing plants for the recreational market until January, the entire legal supply for the recreational market in Colorado initially came from repurposed medical marijuana -whatever dispensaries had left over after serving their existing customers. When the first recreational outlets opened in January, prices shot up, lines formed, and shortages were common.

At the beginning of the year, stores in Colorado were charging as much as $70 for an eighth of an ounce, compared to $20 or $25 per eighth for medical marijuana before recreational sales became legal. As of May, the Medicine Man, a store in Denver, was charging recreational customers $45 for an eighth of Diamond OG, compared to $25 for medical customers. According to The Price of Weed, a website that collects purchase reports from around the country, the black-market price in Colorado was somewhere in between: $30 or so for high-quality marijuana. In other words, legal pot was selling for about 50 percent more than black-market pot.

That situation seemed to contradict basic economic principles. Because of the "risk premium" associated with prohibition, black-market prices should be higher than legal prices, not lower. But since marijuana is still banned by federal law, the risk premium has not been entirely eliminated in Colorado or Washington. Furthermore, legal marijuana sellers face taxes and regulatory costs that their black-market competitors avoid. Add to those factors the shortages caused by simultaneous licensing of growers and retailers, and you can start to understand the counterintuitive gap between legal and black-market marijuana prices.

Washington can expect to see something similar and probably worse, since its taxes are higher and the supply is likely to be hindered by the difficulty of obtaining local licenses and zoning approval. In an attempt to speed things up, the LCB decided to let producers register fully grown plants, as long as they are not flowering. Where are those plants coming from? "We're not asking that question," Smith says. In practice, that means the plants could come from medical operations, the black market, or even from other states. The LCB's incuriosity about their origins is a striking departure from its otherwise persnickety approach.

Even with fully grown plants, says John Davis, "it takes at least eight weeks to finish your crop, if you do everything perfectly." And that's after the grower signs a lease, obtains all the necessary local clearances, and does whatever construction work is necessary to produce his allotment of marijuana. Davis says growers will be reluctant to make those investments until they have their state licenses. As of May 6, the LCB had awarded just 29 production licenses. "The problem with the Washington market is that the local zoning issues have not been settled like they were in Colorado," Davis adds. "So what are these retail outlets going to sell? I would say it's reasonable to believe that the shortage problems will be much, much greater than in Colorado."

Davis applied for retail licenses in Seattle, but he drew fairly high numbers in an April lottery that gave applicants with the lowest numbers first crack at qualifying. Lotteries were necessary in most jurisdictions because the LCB received more than 2,100 applications for a total of 334 licenses. The LCB planned to "begin issuing retail licenses no later than the first week of July." But Washington's marijuana regulators have a history of revising their timelines. Last July they were saying stores could open by March 1. Then it was June.

The Washington State Economic and Revenue Forecast Council, an independent agency charged with projecting tax revenue, was not buying it. "Although LCB has indicated that it expects retail sales to start in June 2014," said a February 19 report from the council, "local moratoria on cannabis businesses and other production uncertainties have the potential to impact the timing and amount of cannabis produced and sold. As a result, we have assumed retail sales will start in June 2015."

Davis says regulators have repeatedly underestimated the magnitude of their task. "The LCB, if you look back, has given me quite a few pains in my side from laughter," he says. "There will be high demand and only a handful of people growing," says Scott O'Neil, the Spokane marijuana merchant. "It's going to take at least a year to sort it out, get everybody up and running."

'They're Not Worried a Bit'

Philip Dawdy, communications director at the Washington Cannabis Association, which represents medical suppliers, thinks state-licensed pot shops may start opening by July but warns that they will have trouble competing with black-market dealers. "The market, to really work and to really capture that 25 percent, will need to have consistent supply and quality supply," says Dawdy, who has applied for a production license. "If you put up enough barriers for consumers, it discourages a certain percentage of them and sends them to another market. I think we're going to see that here. I think you'll see a lot of people in the beginning go to the stores just for the novelty of it. But at a certain point they're gonna say, 'Why the heck am I paying $20 a gram when Jimmy the pot dealer's gonna sell it to me for $13 a gram?' I think we're going to continue to have a black market for several years. I know pot dealers in my neighborhood in Seattle. They've all told me they're not worried a bit."

Holcomb, by contrast, predicts that prices charged by state-licensed stores "will be just about the same as the black market," although "they might be a little bit higher than the black market in the beginning." Judging from what happened in Colorado, she says, "there's a huge demand to be able to walk into a legal store and buy your marijuana, and people are apparently willing to pay for that experience. As soon as production ramps up, we're going to see prices settle at essentially what the black market prices are in neighboring states, inclusive of tax."

Legal marijuana buyers will pay standard state and local sales taxes, which on average total nearly 9 percent in Washington, plus special taxes imposed by I-502. The initiative calls for a 25 percent tax at each of three levels: production, processing, and retail. Since the LCB is letting licensees combine production and processing in one operation, the first tax generally will be avoided, but that won't make much difference, since the price at that level is low. BOTEC, a consulting firm hired by the LCB, estimates that all the taxes together will account for about 37 percent of the final retail price. In other words, prices will be about 58 percent higher than they would be without the taxes. Assuming Holcomb's projection is correct, taxes will eat up legal pot's entire cost advantage.

Douglas Hiatt argues that Washington's marijuana regulations are based on "economic principles that have been completely proven to be a disaster" in countries where the government has tried to make supply equal demand by decree. "They've got an arbitrary limit on square footage," he says. "I don't know how they pulled it out of their ass. This is the very epitome of idiotic regulation. I've had a front-row seat for 20 years as the price of marijuana has come down for patients. It has gotten freer and freer…all sorts of good stuff going on, because of that little hint of a free market, of loosening prohibition. They're going the other way. They've got this controlled, state-run monopoly, and somehow that's going to eliminate the black market? Are you nuts? Only a free market beats a black market."