Drug Legalization

Step by Step, Pot-Legalizing States Free Their Marijuana Markets

Officials learn the hard way that high taxes and red tape just encourage black markets to continue

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Even as they embarked on a deliberate experiment in legalizing marijuana for recreational use, the states taking the plunge unintentionally (we can only hope) initiated a second experiment. In dropping overt bans on the stuff while appeasing critics with reams of regulation, could they so bind the marijuana trade in red tape and taxes that they retained all the flaws of prohibition and gained few of the advantages of legalized status?

The answer was very quickly a big "yup." But officials may just be learning from the experience and fixing their early mistakes. A little.

Last summer I wrote that federal financial restrictions, as well as restrictive state rules and high taxes, had conspired to keep the marijuana black market alive and profitable in Alaska, Colorado, Oregon, Washington, and Washington, D.C., the four jurisdictions with nominally legal recreational marijuana. My conclusions weren't a stretch—I quoted local publications and pot vendors pointing out the advantages illegal dealers retained in terms of service and pricing. The rules hobbled legal businesses by hiking prices and preventing consumer-friendly offerings. Long-established illegal dealers were already in place to take advantage of that hobbling.

So officials ruefully revisited the issue and changed their ways, right? Well, some. They're in no apparent rush, but they are slowly loosening the screws.

Last month, Washington's Liquor and Cannabis Board reported that, one and a half years after recreational marijuana was legalized in the state, the "best estimate on the breakdown" of the marijuana market is: "$480M medical (37 percent of market), $460M state-licensed recreational stores (35 percent of market) and $390M illicit (28 percent of the market)."

That is, the rules have been so restrictive in the "legal" Washington market for marijuana that people remain willing to risk arrest and imprisonment while trading hundreds of millions of dollars of the stuff in ways that violate the law.

The market breakdown from the Liquor and Cannabis Board came at the end of the announcement of rescinded residency requirements on who can fund marijuana businesses, looser testing requirements for products, and looser restrictions on ingredients in products, among other changes. Those adjustments should make the industry more accessible to legal would-be participants and more able to respond to market pressure.

At the same time, state lawmakers and Seattle officials are pushing for legal home delivery of marijuana in an effort to counter consumer demand that's currently being satisfied by underground vendors.

Of course, City Attorney Pete Holmes couldn't admit the need for deregulation without throwing in some tough-guy posturing.

"I support our proposals to legalize and regulate marijuana delivery, but businesses that currently deliver marijuana undermine our efforts to demonstrate that there is a regulatory alternative to marijuana prohibition. All current delivery services are engaged in nothing less than the felony distribution of a controlled substance and must be closed."

Whatever, Pete. Just get out of the way.

In a similar spirit, Rep. Christopher Hurst (D-Enumclaw) proposes to lower the excise tax on marijuana sales from 37 to 25 percent in an effort to make legal weed more competitive price-wise with tax-free black market alternatives. "The criminals love the tax rate being high, because they don't pay it, and it makes it so the legal people can't compete with them," he noted, with unusual perspicacity for a lawmaker.

Unfortunately, Hurst's bill appears to have stalled in the House Finance Committee.

Oregon is having its own problems with marijuana taxes, through a process seemingly designed to confuse and discourage anybody delving into the legal market. The state just concluded a marijuana tax holiday with a temporary sales tax hike to 25 percent before the permanent 17 percent rate kicks in later this year.

According to The Oregonian: "Matt Price, who owns a chain of dispensaries called Cannabliss, said some customers have shrugged off the tax. 'And then,' he said, 'we have people that say they would rather go back to their 'guy,' so to speak, and walk out.'"

A huge tax hike drives people to illegal vendors? Who could have guessed?

Still, the permanent rate to come is set well below the extortionate take in Washington, and may well prove more consumer-friendly in the long run.

But Oregon has other restrictive rules in place. Edible cannabis products, which have proven very popular among medical marijuana patients, aren't yet available to recreational customers while the Liquor Control Commission, which has no authority over the medical market, puzzles over its preferred grab-bag of regulations.

Medical marijuana also remains untaxed, meaning that recreational buyers often see a wider range of cheaper products to which they have no access in the same establishments in which they're expected to make legal purchases. As a result, reports The Oregonian, "recreational shoppers at [one] store spend, on average, $38 to $45 per transaction, compared with $100 to $110 among medical marijuana patients."

Black market vendors, it should be noted, continue to sell a full line of untaxed goods. As in Washington, lowered taxes—already in the works—and loosened rules may allow Oregon's legal marijuana businesses to better compete in the future.

Colorado is experiencing "a wave of illicit marijuana cultivation in violation of federal law and operating outside Colorado's marijuana regulatory structure," according to the U.S. Attorney's Office for the District of Colorado. Strictly speaking, even if true that's not the state's fault, since it's spurred by the opportunity to satisfy demand in neighboring states suffering under federal prohibition and restrictive local laws of their own creation.

The state has arguably been a bit more proactive than Oregon and Washington in responding to people's desire for competitive prices and services. When the state's black market remained healthy after legalization, state officials reduced one of the taxes on the stuff from 10 percent to 8 percent (though this small measure of relief doesn't kick in until 2017).

The state also allows sales of edible marijuana products to recreational users. Munchies that give you the munchies have proven popular enough to gobble up close to half the market (attention Oregon regulators). Perhaps inevitably, that popularity led to new regulations—but it's also evidence of a huge trade that would have been left to illicit vendors if the state had been more restrictive.

Even so, Colorado Drug Investigators Association Vice President Jim Gerhardt approvingly tells people that marijuana is the "most highly regulated industry in the entire state."

Which, inevitably, leaves an opening for people to meet demand that can't be fulfilled within the law.

Alaska and Washington, D.C., are still hashing out what "legal" means in the context of marijuana—and the nation's capital needs federal permission to do pretty much anything beyond looking the other way. Whether the results succeed in replacing vast underground markets with legal businesses that can function in the open depends on the lessons they draw from the experiences of Colorado, Oregon, and Washington. That lawmakers and regulators in those state appear willing to adjust to reality, even a little, may be a positive sign for the future.

Should lawmakers in states with legal-ish marijuana markets be doing more to reduce taxes and restrictions? Of course. But the repeal of prohibition in those states was the first step in recognizing that black markets are the inevitable result of bans on popular goods and services. Incremental reductions in taxes and steps toward deregulation since then—however grudging–are further evidence that officials aren't completely immune to messages sent to them by the world in which they live. It's not just bans, they're learning, but unreasonable restrictions that have to be done away with if you want to eliminate underground markets.

If they keep it up, we might just embark on a new experiment to see what a legal and free market in marijuana looks like.

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  1. Geez, who ever edited this must have been smoking something.

  2. But how will the progs control individuals if the reefer isn’t taxed and regulated by central committee?

    1. Shhh! Don’t spoil the libertarian moment.

  3. Yesterday afternoon I was listening to NPR, an interview with the author of a book called Narconomics about how the drug cartels operate. It was interesting simply because of the banality of the book itself. Among other things – the government programs to destroy coca fields has little impact on the price of cocaine because the raw material is such a tiny part of the cost, the value of drug seizures are over-hyped because the feds use “street-value” instead of wholesale price, the drug cartels will attempt to work out conflicts if the conflicts become too costly, there’s a corporate structure to the cartels’ business with middle management types and everything, the cartels start branching out into other businesses once they start making enough money because of this thing called “diminishing returns” which means it’s more profitable to go into a new market rather than try to expand a saturated market, the cartels hand out t-shirts and baseball caps with their logo on it, the bribes paid to the corrupt local government officials are just a cost of doing business (A TAX YOU IDIOT!!! If they pay the government officials under the table it’s a bribe, over the table it’s a tax – what’s the difference!). Just seemed very odd to me that the author seemed so surprised that the business of selling illegal drugs operates just like every other business. If there’s money to be made, somebody’s gonna make it – what’s so surprising about that?

    1. Exactly. The black market is rarely so different from the “legal” market. It’s just underground. The big cartels likely have lawyers and even MBAs working for them. Maybe some have a few industrial engineers, too. This should come as no surprise.

    2. Oh, and one of the NPR angles on this (naturally) was how evil the cartels were because their profits are made on the backs of the poor drug farmers. They use their monopsony powers to make as much money as possible while paying out as little as possible – just like with Walmart and apples (?) – apparently apple farmers have nobody but Walmart to sell their apples to so Walmart just pays whatever they feel like for apples and apple farmers have no choice but to sell at that price or go out of business.

      1. I have posited that we would have done so much better in Afghanistan if we had simply had our military leave and replaced them with a Dept. of Agriculture office that would buy as much poppy as the Afghani farmers could produce.

        I really don’t care if they synthesized some drugs from the poppies or simply burned them. It would have been a great way for the local farmers to make honest money and it would also have deprived the Taliban of a revenue source.

        Oh, and it would have meant way less people getting shot (on both sides) and been cheaper to boot.

        1. Or allow free trade and let people who actually want or need to buy poppy, buy it. Everybody wins.

        2. As I understand it, all the legal opiates come from India (to make legal morphine, etc). No other countries are recognized as being suppliers. Allowing Afghanistan to produce it legally would take this income from the Taliban, and give it to the farmers. Too simple, I suppose…..

      2. It’s always interesting that leftists claim to think endearingly of the poor and their plight, yet they hate Wal-mart even though Wal-Mart makes it possible for the poor to buy more with their subsidized dollar. Wal-mart also creates low end jobs for the poor that would ordinarily require more skill and expertise. But, somehow, the fact that they make jobs available to the poor and poorly prepared means that Wal-mart is preying on the poor.

        Stupid leftists don’t know what they want.

        1. “Stupid leftists don’t know what they want.”

          They want control. Everything else is just window dressing.

        2. My marxist Aunt is a good example of this. She always goes on about helping the poor. But every policy decision she has ever supported has fucked the poor. Deep down she is just an elitist that feels a need to throw the poor a few crumbs while engineering a system that creates lots of exclusivity for her, and her friends. She favors municipal decisions that make parking downtown difficult and expensive for most people, knowing that she can afford valet parking services. She was against WA rolling back the cost of auto registration that charged $200 per year for car tabs on a ten year old car (and that price was from 1999). She favors environmental regulations that would price many convenience goods out of the range of the average person.

          Of course none of the policies ever effect her the same manner it will the poor. Which is always the socialist way.

      3. learn something of economics before you go pontificating. Price is that which determines the distribution of items of limited supply that have alternate uses. If the Wenatchee apple orchardists don’t get enough from WalMart, there’s always Costco, Winco, Safeway, Japan, Tree Top just down the road,, MIke’s CIder, and who’s the pie lady, Sara something or other…… and WalMart know this. Mu bet is that all of these pay pretty close to the same price for the equivalent product. Yet the difference in quality, selection, freshness at the various markeis is signficant. WalMart certainlly have no monopoly powers… didja read last week that they are closing well over a hundred stores in the US before sumer? Monopoly? Indeed….

  4. In Washington state, it was about service as much as tax avoision. Instead of going to a store, getting ID’d and probably having your license plate photographed by the DEA, you check a website of a courier service, see what they have in stock, test your order and it comes about as fast as a delivery pizza. You loose out on having a wide range of products to choose from, but nothing keeps you from visiting a store if you are that interested.

    Here’s the enlightened socialists at The Seattle Times missing the whole point.

    1. The Q
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      1. They have a ‘Bernie Sanders’ notion of wide range. You got your cheap rotgut rum, and your overpriced top-shelf rum, your cheap rotgut vodka and your overpriced top-shelf vodka. your…

  5. If only they could apply that thinking to other taxes and regulations.

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  9. “The criminals love the tax rate being high, because they don’t pay it, and it makes it so the legal people can’t compete with them,” he noted, with unusual perspicacity for a lawmaker.

    Now, if only they’d extend this line of thinking to other things…

  10. That they don’t already know “that high taxes and red tape just encourage black markets to continue” proves that they’re just stupid.

    As if we needed more proof.

  11. just before I saw the bank draft that said $7985 , I have faith …that…my friend woz trully making money in there spare time at there computar. . there uncle haz done this 4 only twenty months and just now repaid the mortgage on there mini mansion and bought a brand new Dodge . learn the facts here now……

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  13. “Alaska, Colorado, Oregon, Washington, and Washington, D.C., the four jurisdictions”

    Either J.D. or his editor got left behind in arithmetic, I see.

    1. Probably wrote that article at 4:20 AM.

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  15. here’s the difference. one morning I went to cvs to fill my adderall prescription. the doctor had fucked it up apparently, so after spending half an hour on the phone trying to figure out what was wrong I had to go about an hour each way to her office and back again (it has to be a like watermarked physical copy for some reason. oh, the kids. right). So it took around three and a half hours to fill a legal prescription, which you can only refill a day ahead of time so if youve got an inconveniently timed business trip or something you’re out of luck. that same morning I also wanted to buy some weed, so I texted my “guy”. he met me a block from my apt in under an hour. ive understood the benefits of free markets for a while, at least intellectually, but seeing how the government fucks things up in practice never really stops surprising me.

    1. I lived in Canada some years back, my doc told me to stop by the pharmacy superstore and pick up a box of some allergy med I’d not tried before. Over the counter stuff. Tjhirty gel caps for just under five bucks. The stupid things WORKED like magic, allergy suddenly and cheaply controlled.. without feeling like I was drugged or stoned. Hooray. Moved back to the states, brought my supply along with, in a couple years they’d run out,. went to a SavOn or such to get more…. prescription only!!!! Now I had to pay $80 to have a doc look down my throat and scribble on a piece of paper to go get those wonder pills. They cost… NOT five bucks, but THIRTY FIVE….. for only twenty of them!!!! From

  16. Anyone who supports marijuana is a bozo.

  17. Using WA as an example of deregulation is laughable. Medical dispensaries go away in July, and allowing outside money? That just makes it easier for big outside money to come in and push everyone else out. Which is really just a step towards progressive cronyism.

    This article is a joke. WA residents are far better off supporting the black market and giving the finger to the state.

    1. calling the newly hatched marijuana indistruy in Washington “deregulated” is a sick joke. That liquor control board are the worst form of government tyrants on the planet, almost. We tried for thirty years to get them OUT of the retail booze business. Finally the second attempt at a citizen’s initiative turned the tide…. but they put in such an insanely high tax structure few actually buy inside this state anymore. Example” 1.75 litre Kirkland Vodka costs $16 out the door at any Costco in California. That identical bottle, same UPC, is not allowed to escape any Costco in Washington for under $38. The difference? THREE tiers of tax. Costocl led the way with their “truth in pricing” displays at their Washington stores, They list the cost of the item at retail ($2 less than in California, as they have SOME small tax making it the $16 out the door). Then there is the “litre tax”, then the :”liquor tax” then, on top of all of that, the state “sales tax”. Thus the $14 item walks out the door after the poor sap customer is fleeced for another $24. Nearly twice the price of the item. I wonder how many folks stock up whenever they travel into other states, to avoid such robbery… I know quite a few who do…… and are quite happy to pick up for friends on order, too.

  18. As soon as we learned that the just-rejected liquor control board in Washington STate was to work out the rules, regs, taxes, distribution for marijuana we all know they’d make such a hash of it all they’d sustain a thriving black market for years to come. The LCB in Washington is the ugly and mean barstid child of the prohibition era “operations” that thrived in the Puget’s Sound area, primarily, and in the interior northern parts near to Canada. The distribution system they concocted was quite the inside buddy good old boy network of rewarding the major well-connected players during run running. Until we tossed the State LCB out of business by a citizen’s initiative they were invincible. Their tax structure on all alcohol is almost as bad as prohibition was, and I refuse to buy any booze in this state, waiting till I am in California or Nevada and stocking up.

    We all knew they’d do the same thing with marijuana, and they have.

    They ought to learn about a little phonomenon known as the “Laffer’s Curve”… when taxes are raised to the point of being overbearing, sales drop off so steeply total revenue falls to less than it was before the tax increase. We KNEW this stupid state gummint would mung it up hopelessly. They’ve not disappointed.

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  20. In WA, legal = $320-$400/oz, black market=$200/oz delivered. Basically, half of the consumers never had steady dealers and buy it at pot shops, the other half have bypassed the 35% premium and continue to get it from it their dealer. Onerous taxes and pointless regulation continue to stifle free market dynamics.

  21. Seems to me that if the courts search your car, home, medical records, financial records and everything else who is a cell phone any different.

    I mean with a warrant they can go through your house, with you not there, take your things and in some cases keep them.

    Seems to me a precedent has been set and it is not some new precedent but one that has been around FOREVER.

    It is clear that the OWNER of the phone in question has no problem with it being searched, since it was a State owned or paid for phone and there is no privacy here…

    I heard cook a bit on TV last night and his reasons seemed weak… Then again maybe he has never lost anyone to a enemy of our country,,, you know some innocent just going about their day and was murdered…

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