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.