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Free Minds & Free Markets

Taxes and Red Tape Keep Colorado’s Marijuana Black Market Profitable

Meddling state officials have managed to make the legal pot market uncompetitive.

You have to give it to Colorado. The state's voters legalized recreational marijuana in 2012, transforming the popular stuff from a prohibited vice to a substance that could be produced, bought and sold without the hassle of hiding dealings from the authorities and the fear of arrest for voluntary transactions. Yet the marijuana black market is still going strong over four years later, with many sellers and customers willing to take a chance on legal consequences rather than make a risk-free deal.

Maintaining a profitable black market for a perfectly legal product is quite an accomplishment. But never fear, Colorado lawmakers have a plan—they're moving to ban marijuana advertisements by unlicensed vendors. That should learn 'em.

Except… Given the history of illegal dealings that have prospered even in the absence of Craigslist postings, that's probably not going to do the trick. It doesn't even begin to address the driving force behind the black market, which is taxes so sky high and regulations so burdensome that they make legal pot uncompetitive.

"An ounce of pot on the black market can cost as little as 180 dollars," according to PBS correspondent Rick Karr. "At the store Andy Williams owns, you have to pay around 240 dollars for an ounce. That's partly because the price includes a 15 percent excise tax, a 10 percent marijuana tax, the state sales tax, and Denver's marijuana sales tax."

Colorado also piles on expensive regulatory requirements to get a license, and bars people with criminal records from the business. So, if you don't have the money and legal savvy to cut through the red tape, and were caught selling marijuana before it was legalized, you can't deal in the stuff—within the law.

"Regulations support those that have access to wealth," says marijuana activist Larisa Bolivar. "And middle and lower classes don't have access to wealth. I can't just go and ask my dad, 'Hey, can I have $20,000 for licensing and application fees?' You know? And then 'Can I get a million dollars to get a property?'"

High taxes and regulations encourage black markets in legal goods? But why would state officials know that? How could they ever predict that harassing a market with tax collectors and inspectors instead of cops would keep people underground?

Maybe…because their own experts told them so?

"Rational consumer behavior theory would predict that consumers would choose to buy marijuana from a licensed medical or retail center if the price is comparable to illicit source prices," an advisory report prepared by academics and business consultants for the state suggested in 2014. But "If the price of regulated marijuana remains high, as it has in early 2014, black-market production could continue if it could compete with the regulated market on price."

But even before that, there may have been a hint, here and there, that piling regulations and taxes on a "legal" market is a very effective way of driving business into the shadows. Even confining ourselves to the world of stuff you set on fire and inhale, we can see that higher taxes mean more black market cigarettes and lower taxes mean fewer. 13.5 percent of cigarettes sold in Colorado are sourced on the black market, according to 2013 figures from the Mackinac Center for Public Policy and the Tax Foundation. By comparison, New York, which piles $4.35 in taxes on every pack of smokes (with more added in New York City), in contrast to the $0.84 in Colorado, sees 58 percent of the cigarettes sold in the state smuggled from elsewhere. "One consequence of high state cigarette tax rates has been increased smuggling," the groups point out.

The traffic in booze is another legal market habitually afflicted by politicians with high taxes and burdensome red tape.

"Conservatively, illegal importation of alcohol into Michigan strips the State of at least $14 million each year," the Michigan Liquor Control Commission estimated in 2007, in an extended complaint about consumers dodging high taxes. Lower-tax neighboring states were named by officials as sources of adult beverages smuggled to avoid Michigan's excessive government take.

Illinois officials also complain about state residents evading their tax regime with black market purchases. Tellingly, they've managed to make "a six-bottle case of vodka that costs $167 in Indiana costs $226 in Illinois and is $18 more than that in Cook County," according to one press report, and they play at being shocked that they have fueled a thriving illicit trade.

Illinois and Michigan also impose rules that raise costs and reduce competition—which sounds like a trial run for Colorado's marijuana market. There's really no excuse for officials in the Centennial State to feign surprise. They're adopting policies that have been tried before, and getting exactly the same results.

So, they're learning, right?

Dream on. We're talking about politicians here. Governor John Hickenlooper wants to increase the marijuana sales tax from 10 percent from 8 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," state Sen. Pat Steadman (D-Denver) commented.

Steadman should know; he pushed for marijuana taxes in the past.

And those high taxes, along with burdensome regulations, are a big reason why Colorado's marijuana black market continues to hum along in such good health—and is likely to do so well into the future.

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  • Brandon Lyon||

    I feel like there should be mandatory continuing education requirements for legislators. Nurse and teachers have to why not the people in charge of writing the laws for everybody. Something along the lines of economics, a health course, and basic psychology, etc

  • Juice||

    Can you imagine the fight over the content of those classes?

  • R C Dean||

    Hell, worth it just for that.

    Go long popcorn futures.

  • prolefeed||

    I'm gonna guess such mandatory classes would require proficiency in SJW rhetoric and parroting socialist economics in Blue states, and a different set of nonsense in Red states, since politicians would insist on being the ones who set those rules.

    It's hard to get people with a claimed monopoly of force to voluntarily give up that power.

  • Diane Merriam||

    Continuing implies that they were educated to begin with.

  • Scarecrow Repair & Chippering||

    Politicians think of budget in terms of what can be legally spent, or possibly in terms of what can be extracted from the public without enough squealing to lose an election. The concept that budgets have to balance, or that taxes can have unintended consequences, is simply outside their ken. The idea that any of what they spend taxes on might not be necessary is completely off the reservation; you might as well spout Hittite to them. You might as well explain economics to a turtle for all the good it does.

    Eventually tax revenue from pot will taper off and cease to be the miracle medicine, and their attention will go elsewhere. Then some new legislators will take a fresh look at this unremarkable revenue source and actually listen to an economist or two who mentions the radical new idea of lowering the taxes to banish the black market, revenues will climb a little, noses will perk up at the scent, and taxes might be lowered a bit more, until revenue growth slows, and after a while, another set of new legislators will realize the black market has dwindled and they can raise taxes again, and the black market will reform and arise from slumber, and the cycle will repeat.

  • qjkxbmwvz||

    "An ounce of pot on the black market can cost as little as 180 dollars."
    Wait...what is that in real money?
    "An ounce of pot on the black market can cost as little as eleven and a half ounces of silver."
    Shit, it's that much? This explains my lack of a habit.

  • techgump||

    Supply and demand... tainted a bit still due to the aspect that the black market trade of marijuana is just that: illegal. So the element of risk still distorts true market pricing absent such.
    Anyway, an OZ of pot will last the average consumer a few weeks to a month or more, and fits into the size of a bag you could put 20+ OZ of silver. Ya, it's a tad expensive. In CA I could get an OZ of quality bud for $100. Still, I prefer the silver :)

  • Juice||

    In CA I could get an OZ of quality bud for $100.

    Must be nice. Here in DC-MD-VA it's going to cost $300-400 depending.

  • R C Dean||

    Sounds like a classic market arbitrage opportunity.

  • ||

    "Anyway, an OZ of pot will last the average consumer a few weeks to a month or more, "

    Lol.... Yeah sure.

  • brianwash||

    Whether or not I agree with Colorado's current levels of taxation and regulation, this article isn't very well thought out. A big fallacy is that arbitrage of established label-brand products across state lines (liquor, tobacco) is the same thing as buying black-market marijuana. It's not. What's being compared is a quality regulated product priced at $240/ounce, vs. greenery of dubious origin at $180/ounce. Sure, there are lots of networks of people sharing their personal harvests, and that will always slip through the cracks. But it seems to me Colorado has very effectively taken the market away from international crime syndicates smuggling inferior, adulterated and/or unsafe product.

  • Scarecrow Repair & Chippering||

    Riiiight, because a government stamp of approval means quality.

    Riiiighht.

  • Lord Rollingpin||

    No, it's a free(ish) market that means quality. Brand-names and all that.

  • Hugh Akston||

  • Diane Reynolds (Paul.)||

    But it seems to me Colorado has very effectively taken the market away from international crime syndicates smuggling inferior, adulterated and/or unsafe product.

    Did you read the article? It clearly didn't.

  • ThomasD||

    I read him as sarcasm. But apparently I'm the only one. I thought this was the tell.

    "Sure, there are lots of networks of people sharing their personal harvests, and that will always slip through the cracks."

  • IceTrey||

    People bought Mexican dirt weed for 60 years with God knows what on it. They'll have no qualms about buying a bag of dank nugs grown in the US.

  • Trigger Hippie||

    ^
    Made that transition years ago. Nowadays, I get mine from a guy who picks it from....the back door a Colorado dispensary. Fancy that.

  • Cynical Asshole||

    What's being compared is a quality regulated product priced at $240/ounce, vs. greenery of dubious origin at $180/ounce.

    Yeah, because it's not like the vast majority of pot smokers pre-legalization already "knew a guy" who they trusted to sell them quality weed.

    Sure, there are lots of networks of people sharing their personal harvests, and that will always slip through the cracks.

    As part of pot legalization in CO, individuals may grow up to 6 plants, with 3 producing bud, and share it up to an ounce at a time without remuneration. No "slipping through the cracks" required.

  • Diane Merriam||

    I'm guessing you don't know much about the drug market. I've been out of it personally for many years now, but still have friends who smoke regularly. Plenty of dealers have their specialties and their own brand names and quality control and the like. It doesn't take a government to be sure of what you're getting before you buy it, especially pot.

  • brianwash||

    Government inspection means your product did not ship bathed in pesticides, was not ruined by powdery mildew or bud rot but shipped anyway, or slathered in nitrates until the day it was harvested. It means it's not just some nasty cheap greenery sprayed with dangerous artificial cannabinoids to up the potency. Like I said, this is not about the black market of a friends-of-friends network of growers, this is about locking out big crime syndicates that smuggle poor quality, potentially harmful product.

    We can debate whether taxes are too high and the industry is over-regulated. Everyone should agree what the industry really needs is stable, predictable regulation. But don't claim that government oversight as a whole is a bad thing unless you like to eat tainted food, drink polluted water, and enjoy getting shaken down by abusive monopolies.

  • thom||

    Obviously, if it weren't for government taking care of me, I would just stupidly hand over my hard earned money to corporations who were trying to kill me. God I'm so dumb. Thank God for common sense regulation.

  • Pompey:何 Class Mothersmucker||

    I'm so happy to have the watchful eye peering down on me. Otherwise I would go back to my old ways of shitting in my cupped hands and rubbing it all over my chest, face, shoulders, and groin.

  • thom||

    It's so frustrating. There's literally nothing you can do.

  • Citizen X||

    That's called "Crusty's Night In."

  • Pompey:何 Class Mothersmucker||

    A hilarious sequel to the 1994 film Baby's Day Out. Let's greenlight this bitch.

  • Diane Reynolds (Paul.)||

    What was the quality metric of marijuana before it was legal?

  • Lord Rollingpin||

    Now that's an interesting question.

  • Diane Merriam||

    Description of the high, mainly. "Good buzz" "Killer" "Mellow" Then of course there were the location designations ... Acapulco Gold, Thai Sticks

  • ||

    Who was in charge of Flint's water, again? Cause that stuff was super high quality.

  • Diane Reynolds (Paul.)||

    Who was in charge of Flint's water, again?

    The Koch Brothers.

  • ||

    Eggggsackly

  • Pompey:何 Class Mothersmucker||

    Betsy DeVos

  • Lord Rollingpin||

    Added minerals, what's not to like.

  • Chipwooder||

    The ghost of Ayn Rand

  • Cynical Asshole||

    Wal-Mart?

  • Sumio Mondo, Jr.||

    But don't claim that government oversight as a whole is a bad thing unless you like to eat tainted food, drink polluted water, and enjoy getting shaken down by abusive monopolies

    Because the best way to get customers coming back is to poison them. Sounds legit.

  • BakedPenguin||

    It worked for Chipotle!

  • Billy Bones||

    Yes, because everyone knows the secret to running a successful business is to kill off your customers. And no, we cannot debate whether the taxes are too high. I should pay no more taxes for my weed as I do my milk. Any tax I pay above the amount I do for milk (or any other food product) is nothing more than paying the government a fee for their permission to partake in an activity. That goes for all excise taxes--cigarettes, alcohol, and weed.

  • DOOMco||

    +100000

  • Not a True MJG||

    Government inspection means your product did not ship bathed in pesticides, was not ruined by powdery mildew or bud rot but shipped anyway, or slathered in nitrates until the day it was harvested.

    Says who?

  • DOOMco||

    They for sure use pesticides here. They have an approved list!

  • Microaggressor||

    ...and enjoy getting shaken down by abusive monopolies


    Translation: I'm too dumb to understand how monopolies form. I'm also too dumb to understand how the private sector implements quality control, because all my life the government held my hand and I prefer to remain ignorant of history.

  • Cynical Asshole||

    don't claim that government oversight as a whole is a bad thing unless you like to eat tainted food, drink polluted water, and enjoy getting shaken down by abusive monopolies.

    Because selling people tainted food and polluted water is totally a legit business model. Killing your customers is totally the best way to run a successful business. And without the benevolent government, every industry would devolve into one single monopoly.

    *rolls eyes* What a fucking idiot.

  • John Titor||

    I bought a hell of a lot of weed from Hell's Angels when I was a teenager. Never had a problem. Ditto the less savory types I bought from in university. Pot dealers tend to avoid selling bad goods due to, you know, word getting around that you sell shitty weed.

  • John Titor||

    Also, in some of those cases, the potential of being beaten with a pipe for selling shitty weed.

  • ||

    2Chilly!!!!!!!!

  • ||

    The legal weed trade is great for tourists who would have no idea where to get it. If I lived there, I would probably buy from an under-the-table dealer.

  • Diane Reynolds (Paul.)||

    I'd buy from a legal dealer only if I could do it in cash and show no ID.

  • SugarFree||

    I don't know about Colorado, but in Washington state they looked at my ID, but did not record the information. Much like getting into any busy bar.

    I should have to do either for either, of course, but it wasn't any different.

    And I paid cash.

  • SugarFree||

    *I shouldn't have to* [self-eyeroll]

  • prolefeed||

    Yeah, the dispensaries I went to in Colorado checked my driver's license solely to verify my age, and took cash. They had a quarter ounce limit on tourists at the time (up to an ounce now) -- but given the lack of any way to verify purchases, that just meant I would have had to go to four businesses to get an ounce.

  • ||

    The shop I bought from last year in Frisco was cash-only. And they only looked at my ID to make sure I was old enough. I don't recall them retaining any info on me. And they were really knowledgeable about their product, even down to the thread size of the pre-filled oil vaping capsules.

  • SugarFree||

    This too. Friendliest customer experience ever.

  • IceTrey||

    Yeah the thread size is standard and everyone knows it.

  • ||

    I didn't know it. I only got the vape to bring to CO.

  • IceTrey||

    Why would you bring cannabis to CO?

  • ||

    I didn't. I brought the vape to CO. Didn't know that the threads for the capsules were pretty much universal.

  • R C Dean||

    Nah, there's two different thread sizes.

    Err, I've heard. From a friend. More of an acquaintance, really.

  • Conchfritters||

    +1 Grass Roots in Frisco.

  • ||

    Is that the one by the Safeway? Cause that's the one I went to.

  • IceTrey||

    All cannabis business is cash because they can't use banks or card services. They even pay their taxes in cash.

  • DOOMco||

    Most are cash only. I used to sell a few companies a safe a week. They are atill having a hard time making deposits to a bank.
    They check id but as far as i know, its not recorded.
    Some have a loyalty program. I do not advise you to sigb up.

  • IceTrey||

    They are all cash only.

  • Chipwooder||

    As those great political observers, the Circle Jerks, once said...

    Red tape
    Bureaucracy and bourgeoisie
    Red tape
    It's killing you and killing me
    Tax this, tax that, tax this, tax that
    No more red tape!

  • John Titor||

    2Chili, bringing the relief. Glad to have you back.

    As I touched on in the 'Libertarian-Progressive Coalition' article, this is working as intended. The goal for legalization was tax revenue moreso than an idea of bodily autonomy. We're just talking past each other until we realized this.

  • Cynical Asshole||

    The goal for legalization was tax revenue moreso than an idea of bodily autonomy. We're just talking past each other until we realized this.

    I remember a few years ago talking to my hippy far left sister about drug legalization. We were in complete agreements until she threw out the usual lefty talking point that "it should be legalized and then tax the shit out of it in order to offset the societal costs blah blah blah, something in there about how taxing the shit out of it will also hurt the big bad KKKORPORAYSHUNZ that will try to corner the whole market, etc. etc. probably something about the Kochs in there too."

    As calmly as I could I pointed out to her that the taxes won't hurt the "EVUL KKKORPORAYSHUNZ" because they'll be included in the price paid by the consumers, and that further more the more the drugs are taxed and regulated, the more likely it will be that the very thing she was worried about - that only big scary corporations will control the industry and shut out smaller players - will come to pass. Then I followed that up by pointing out that if the taxes are too high that the black market will continue to function, which will guarantee that the police violence of the drug war, and all the negatives that implies, will also continue unabated.

  • Cynical Asshole||

    She didn't have much of a response. I don't think she was prepared for me to point out how her preferred policy of legalizing drugs and "taxing and regulating the shit out of them" would end up hurting the very people that she claims to care about. She was still of the misconception that libertarians were just extremist conservatives who were OK with pot.

  • BakedPenguin||

    I remember having a discussion of legalizing pot with a friend when we were 16 or so. (At the time, we both smoked) He said he hoped it wouldn't be legalized, because taxes would make it more expensive. I told him that if people didn't have to worry about jail for providing it, the price would go down. It didn't occur to me at the time that pols could be so stupid that they could make him right.

  • ||

    I think jail is a pretty hefty tax, personally.

  • prolefeed||

    Oh, the price is plummeting since legalization. It's just the black market is staying a step ahead.

  • Hamster of Doom||

    "An ounce of pot on the black market can cost as little as 180 dollars," according to PBS correspondent Rick Karr. "At the store Andy Williams owns, you have to pay around 240 dollars for an ounce.


    Holy crap. An ounce of mid-grade medical quality used to cost $160.

    What the fuck, that was the only thing that state was doing right.

  • DOOMco||

    1/2 ounces for 100 bucks is decently cheap. But we have a 22.5% tax here.

    The best way is to know someone who works at the grow facility. Or an employee discount.
    Growing your own is the cheapest route, but you can't do that in almost any apartment here.

  • Hamster of Doom||

    Whaaaaat? When did that happen? My executive sous and my lieutenant on the line both started growing in their apartments back when they legalized it. Three plants per person. I distinctly remember it.

    What the fuck did Colorado politicians DO?

    Go down to Civic Center or Skyline 2 if you're having supply issues. UNLESS THAT HAS CHANGED TOO. FUCK.

  • DOOMco||

    They let the laws regarding rental property get owned by the 5 people who have apartments.

    We can have 3 and 3 here, but no landlord will allow it. You might get lucky outside boulder.

  • Cynical Asshole||

    I'm pretty sure that an ounce of mid-grade medical quality is probably still ~$160. Medicinal isn't subject to the "sin tax" that the recreational stuff is.

  • prolefeed||

    Actually, it's cheaper than that if you shop around a bit. THCU in Trinidad CO is showing $100 an ounce for 27% THC Pink Kush, according to their website.

    Weirdly, similarly potent stuff at the same store can cost multiples of that price.

  • AnonCowHerd||

    Wage gap! Pink is obviously for women...

  • Juice||

    Just yesterday I was bitching about how legalization isn't really putting a dent in prices. Maybe they've been prevented from rising and they're about the same as they were 10-15 years ago, but damn, legalization should cause them to plummet. I guess it's not legal in enough places yet.

  • ||

    I don't think we'll see prices go down significantly until it's legal on a national level. Then you could (hopefully) buy online or go to the next state that maybe has lower taxes. Right now, if you're in CO, it's not like you can hop down to NM or UT to get a better deal.

  • ||

    (kind of like health insurance)

  • Zeb||

    I'm pretty sure prices have gone down. They certainly have on the black market, even in places where it isn't legalized.

  • prolefeed||

    To repeat what I put upthread:


    THCU in Trinidad CO is showing $100 an ounce for 27% THC Pink Kush, according to their website.

    Weirdly, similarly potent stuff at the same store can cost multiples of that price.

    Unless that is a teaser rate where they never seem to have any in stock when you try to buy it, I'm gonna go with legalization has driven prices waaaay down in the legal market.

  • Cynical Asshole||

    They're adopting policies that have been tried before, and getting exactly the same results.

    The definition of insanity is doing the same thing you've done before and expecting different results. No one is crazier than politicians.

  • Conchfritters||

    So why do I tell my children that if first they don't succeed, then to try, try again? Dam - no wonder why they are insane.

  • Cynical Asshole||

  • ThomasD||

    What makes you think they do not know what they are doing?

    They are generating revenue, creating a new aspect of of government, while still justifying the continued existence of the drug warriors as revenue warriors.

    Win, win, win as far as they are concerned.


    Permission is not libertarian. In practice it is often anti-libertarian.

  • Robert||

    Taxes at that level ordinarily wouldn't sustain much of a black market in most otherwise-prohibited goods. However, the "enforcement premium" has probably sunk to very low levels because the risk of getting caught is probably very slim in a state with a significant legal market.

  • R C Dean||

    I usually like JD's work, but he whiffed on this one. No mention of how the refugee ban will destroy the legal market in Colorado.

  • BeBraveUSA||

    As someone who is legally licensed to cultivate and sell cannabis in Colorado, I spent a great deal of time and money getting licensed. Illegal growers and sellers hurt my business and undermine the entire legal cannabis industry. Those of us who operate legally in this business are highly sensitive to any negative press or knee jerk governmental response that would undermine this fragile legal market. Black Market grows are constantly being busted here. These busts seem to always make the Six O'clock news and the entire industry is implicated albeit through ignorance and deliberate negative propaganda on the part of the media.

  • IceTrey||

    And it's the government's fault for creating a black market with their idiotic regulation and taxation.

  • Hamster of Doom||

    Illegal growers and sellers hurt my business...


    Those fucking fucks. How dare they. After you bent over for your screwing like a pussy, as was expected and everything. You totally ought to get something special for that.

    Fuck you, asshole. Grow best or fail.

  • ThomasD||

    Frankly if you didn't see this coming you weren't thinking passed all those dollar signs. Or did you really think government was going to be the protector of your financial interests?

    Have you considered tobacco? Much less black market influence there.

  • Unemployed Armenian Tranny||

    "Governor John Hickenlooper wants to increase the marijuana sales tax from 10 percent from 8 percent."

    Um...what? How high were you when you wrote this, J.D.?

  • Tionico||

    You think Colorado's system is crazy, have a good look at Wasnington's, Used to be medical use marijuana was readily available (after certification as a patient) and reasonably priced. I knew a few who were legal growers and providers, all paperwork in place, taxes (few) in, etc. Once this state voted in "rec" use as legal, it was given to the state liquor control board to regulate, manage, tax... they were areadly furious with Washington voters for taking booze industry out from under state control,and did not hesitate to institute "payback" for the faux pas of taking their liquid baby out from uder thair control.

    The taxes they imposed on booze once it became privatised are amongst the highest in the nation. The Costco brand 1.75 litre vodka, six to the case, costs about $240. The same item number anywhere in California costs less than $100. What, you think I buy any booze in Washington? They've done the same to marijana and with the same result. Now they're brining the medical use industry under their control, same game as the rec use. The black market on weed in Washington has actually increased.. the long jail sentences for dealing or possessing are now gone.. they'll fix that soon enough. We can't have no UNINSPECTED dealers selling under OUR noses, now, can we? That's what I thought.... I was certain you'd understand......
    Since WA rehashed the liquor trade here, I've not bought one bottle inside this state. And have no intention of so doing going forward.

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