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Free Minds & Free Markets

Nevada’s Half-Hearted Marijuana Legalization Guarantees a Healthy Black Market

Legalized marijuana came to Nevada, but so have the high taxes and complex regulations that preserve illegal sales elsewhere.

Are Nevada officials actually trying to preserve the state's marijuana black market?

In the first four days that Nevada residents could legally purchase marijuana for recreational uses, state retailers made $3 million in sales—and lined the state government's coffers to the tune of a cool $500,000 in tax revenues, according to the Las Vegas Sun.

Actually, that can't be right. Allowing for rounding, that only accounts for about 15 percent of sales—which is the state excise tax on the first wholesale sale. Nevada also imposes a 10 percent retail excise tax on recreational sales, and then adds in sales tax, which varies from just under 7 percent to over 8 percent according to where you are. Let's call the total tax take about 32 percent of legal recreational marijuana sales. That's a really high tax rate to impose on any industry—especially one that was thriving (albeit illegally) and entirely untaxed less than two weeks ago.

The confusion is understandable, given that Nevadans voted to legalize pot just last November and state officials dragged their feet on complying until the last minute. The market for marijuana is currently operating under emergency regulations issued July 6 after booze distributors went to court to protect a temporary, legally guaranteed monopoly on recreational marijuana sales guaranteed them by last year's ballot measure. In June they won an injunction prevent the state from authorizing competing licensees and the whole process threatened to founder.

"State officials are clearly rushing into this hoping no one will notice how sloppy implementation is actually going," Rafael Lemaitre, a former top staffer in the Obama administration's Office of National Drug Control Policy, told the Sun.

That the state might need to make room for more retailers to hang out their shingles is evident from reports of hours-long lines for people to make legal purchases.

Undoubtedly, many people were willing to endure long lines because of the novelty of legal marijuana sales and the festive nature—fireworks!—of the holiday weekend launch. But novelty wears off. You have to assume that Nevada pot connoisseurs might soon tire of long waits when they could certainly get quick delivery from whichever underground entrepreneurs had their business before July 1—especially when calling old dealers could also bypass that high tax.

Nevada isn't exactly inventing the wheel here, either. Other states have legalized marijuana in the past, and their experiences offer lessons to anybody willing to learn.

"Colorado and Washington both initially levied tax rates of over 30 percent and struggled to reduce the size of the black market," the Tax Foundation's Lindsey Lassiter and Matthew Stadnicki recently noted. "Nevada could face similar troubles stamping out the black market."

To keep people from reverting back to their reliable and responsive black market dealers, Lassiter and Stadnicki recommend that the state focus on a lower, relatively easily implemented retail sales taxes. Reduced burden and simplicity would encourage compliance. So, they say, would reducing the tax differential between the legal recreational market and the legal medical marijuana market, so that supply doesn't get diverted from the one to the other. If Nevada lawmakers don't make some changes, well…

Nine months after Colorado legalized recreational sales, PBS reported that black market marijuana remained far cheaper than the legal stuff, and stifling red tape made it difficult and expensive to open an aboveground business. Little has changed since then, except that the state has actually tightened regulations and recently hiked the marijuana sales tax by 50 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," former state Sen. Pat Steadman (D-Denver) commented earlier this year.

Washington state also tried its luck with sort-of legalization of marijuana that bound the market in restrictions and burdened it with high vice taxes (37 percent excise tax). Lawmakers and regulators channeled their inner commissars and tried to create a centrally planned market with caps on production and sales outlets. Lower prices and easier access—including home delivery—were two big competitive edges possessed by illegal dealers that led Seattle Weekly to conclude last September that "four years after legal weed, Seattle's black market still thrives."

State lawmakers recently voted down legalization of delivery services—a change that would have eliminated one major advantage possessed by underground vendors.

So…What's Nevada's excuse? Having seen states elsewhere enter into legalization of marijuana half-heartedly, and preserve a healthy black market as a result, it's impossible for lawmakers to claim they can't predict the outcome of their efforts to nominally legalize a product while retaining some of the worst aspects of prohibition via intrusive taxes and rules.

Then again, officials in Colorado and Washington have been living with the results of their bad choices, and seem unwilling to undo the damage. If you're incapable of learning from your own experiences, it's unlikely that you'll suddenly see lessons elsewhere.

Whatever the motivations of officials in Nevada and their counterparts in other states, you can anticipate that "legalizing" marijuana while burdening it with tight rules and high taxes will have legal dealers competing with underground vendors for a long time to come.

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  • BestUsedCarSales||

    This reminds me again of the recent vote in Arizona for legalization. The law was a cronyistic piece of shit, sounds similar to the liquor retailer restriction you mentioned in the article.

    It was killed in Arizona and I wonder if it's just better to kill it until legalization is presented in a reasonable way before finally legalizing it.

  • Juice||

    The law was a cronyistic piece of shit

    Like Ohio.

  • JuanQPublic||

    It's also interesting that Ohio gov Kasich gets a lot of support from the prison industry, given his deep connections with them at Lehman Brothers.

  • Hugh Akston||

    Yep, if the government can't figure out the exact right tax/regulatory structure on the first try, it's definitely better to continue to throw people in prison and ruin their lives for possession of unauthorized plant matter.

  • Juice||

    Well, you can't go interrupting one revenue stream unless you start another one that you think will extract more loot from the masses.

  • Diane Reynolds (Paul.)||

    Nine months after Colorado legalized recreational sales, PBS reported that black market marijuana remained far cheaper than the legal stuff, and stifling red tape made it difficult and expensive to open an aboveground business. Little has changed since then, except that the state has actually tightened regulations and recently hiked the marijuana sales tax by 50 percent.

    It appears Nevada has created entire new classes of criminals and reasons to throw people in prison.

  • lovingc||

    What new class of criminals?

  • Diane Reynolds (Paul.)||

    Well, maybe not a new class of criminal, but it keeps the old class of criminal firmly in place. But I'd argue that with the onerous taxes, I could see a legally licensed seller attempting to circumvent the tax system by including under-the-counter sales at his legal shop which-- could be argued is a new class of criminal, at least in the marijuana game.

    I don't know what the laws are for home growing in Nevada, but they're illegal in Washington, creating yet more tricky rules that often the people who support the law aren't even aware of. Unless of course you're growing for medical reasons. I'm guessing the recommendation from a doctor is probably easy to get, but if it lapses or you don't have one, it's a felony.

    These easy-peasey-to-follow rules create a pretty touchy environment.

  • Zeb||

    The fact that other laws related to cannabis remain unchanged is a problem with a lot of the "legalization" laws.

    I still say it's an improvement. And it may be the price you have to pay to get any kind of legalization. But it would be nice to at least see some attempt to simply legalize and leave it at that.

  • Robert||

    "Some attempt"? What do you think all these measures are a compromise w? In effect, total legaliz'n is always being attempted, as is total prohib'n, & what emerges is whichever compromise democracy will support at the moment.

  • BestUsedCarSales||

    That's definitely the biggest concern, and why I ultimately voted for it.

  • BestUsedCarSales||

    Though, I wonder what will happen if people still just use black market weed as mentioned here. What is the legal consequence of that?

  • Zeb||

    I'm pretty sure possession remains legal, just don't get caught making the black market transaction.

  • Diane Reynolds (Paul.)||

    Pretty much this. In Washington, because possession is legal, there's really no enforcement mechanism to know where you purchased it from. Of course, legislators burning the midnight oil could fix this in a jiffy, and I'm sure the residents would lap it up.

  • flyfishnevada||

    I'm not sure but I don't think there is any mention of buying pot from any specific source in the law. It's the seller than needs to be licensed and all that. I'm not sure what crime they would charge a buyer with if they were caught.

  • BestUsedCarSales||

    Even I must admit. A 5 million dollar a year job from home is pretty impressive. Gosh, I guess I'll click.

  • hackajar||

    Liquor distributors are a lot like record companies. They get to pick winners and losers of who gets their brands to market. Like when you could not get a variety of tequila at a tequila bar in Las Vegas, because their only approved distributor simply didn't offer more than household names. Going around them is the equivalent of being a Union Scab in Nevada. So I can see this playing out well for the MJ market.

  • ThomasD||

    The NV law is asinine and nothing more than permission to purchase from a state owned monopoly.

    https://tinyurl.com/ya92m9qh

    Kinder, gentler statism.

  • Diane Reynolds (Paul.)||

    Freedom is permission-based now, didn't you get the memo?

  • Robert||

    As long as there are at least 2 people in the world close enough to do each other harm, freedom will always be permission-based. When 1 dies & there's only the other person left, then freedom will no longer be permission-based. Same when that last person dies.

  • lovingc||

    How do you figure that, are the dispensaries and labs and growers state owned?

  • Diane Reynolds (Paul.)||

    What's so hard about passing a single line law that reads:

    It shall be legal for the citizens of Nevada to sell, purchase and cultivate marijuana without restriction beyond any existing regulations which would presume to cover any other legal product.

  • Zeb||

    Mostly it's hard because of shrill ninnies screeching about The Children.

  • EscherEnigma||

    Eh, your second-half is way too open-ended and broad.

    I think I get the idea†, but whatever your intention is, it's better to make explicit then require legislators/voters to already know all about the regulatory requirements of their state to figure out what your proposal actually calls for.

    Either way though, I suspect that these legalize-MJ proposals are, these days, so complicated because they're trying to bait in people that might otherwise object.
    ________
    †Though that "think" is the problem. Are we talking about treating it like a tomato, like beer, like tobacco, like aspirin, like Plan B, like pseudoephedrine... like the weird Venn diagram of all that...

  • Diane Reynolds (Paul.)||

    The idea is that possessing marijuana should be like possessing a tennis ball. What ever regulations exist that allow me to walk down the street holding a tennis ball would or could apply.

    Cultivating marijuana is the same as cultivating tomatoes. Whatever regulations exist that allow me to buy a piece of land and cultivate tomatoes would cover my cultivation of MJ.

    Selling marijuana should be the same as selling phone chargers or perfume. If I'm opening a storefront in a commercially zoned area, I'll have to acquire the appropriate business license allowing me to open a shop and allow customers to come through the doors.

    Basically, I'm throwing the regulators a huge bone here. The idea is to stay far and away from calling Marijuana "special", because as we know, the instant the government sees a product, its use, sale or production as "special", it gets irreparably fucked up.

  • Zeb||

    Or perhaps something purely negative. Just say that the laws criminalizing possession, cultivation, sale and transportation of cannabis are repealed. We don't need a new law. Just get rid of the bad old laws.

  • Diane Reynolds (Paul.)||

    I'm all for this as well, if it can even be done. Do states and localities have a single law banning the sale and possession of marijuana, or is it threaded through hundreds of statutes, kind of requiring a single, umbrella law to nullify or render neutral all the offending lines of code that the programmer couldn't find?

  • Robert||

    Something like the latter, but far from beyond the ability to find & delete all instances. That's not that big a job for legislative staffs. In some places the mere word could be struck, while in others the resulting sentence would no longer make sense, having no object left.

    Or you could go my alter-the-definition route. There's probably a statutory definition already, so states could amend it so it no longer applies to anything in the real world.

    Or constitutional provision, superseding everything in statute.

  • Robert||

    Legisl'n doesn't work like that. Then you'd have contradictory statutes. For your single line law to work, it'd have to be a constitutional provision.

    What would work in a single line of legisl'n would be a law that defines "marijuana" as the word is used in the statutes of the state to be something nonexistent. So none of the legal provisions re marijuana would have any appl'n. For instance, "For all purposes of the consolidated laws of Nevada, `marijuana' shall mean the hair of the purple trout."

  • ThomasD||

    While there may be 'private' monies involved it's not like those privately held 'assets' have any value absent state permission.

    I'd call that government ownership.

  • Diane Reynolds (Paul.)||

    The hottest story you'll read all week.

    Oregon woman who licked, groped another woman on flight is sentenced
  • Juice||

    Nevertheless...

  • Diane Reynolds (Paul.)||

    America seems to be trapped in a kind of perpetual Brendan Fraser movie where if we fail to ask permission using the exact right magic words, we end up in some fucked up situation that's not a whole lot better than what we started with.

    The only difference is, there's no Elizabeth Hurley in the frame.

  • Ornithorhynchus||

    Sadly, there's no Dudley Moore or Peter Cook, either.

  • lovingc||

    If you are looking for approval or an atta boy you are going to have a long wait.

  • JuanQPublic||

    I'm still trying to wrap my head around the idea of "illegal plants". It's one of those things that has been around for a century, so everyone is desensitized to how insane the idea is.

  • Sevo||

    Oakland, CA 'legalized' weed, and the scramble to distribute the goodies to the cronies is a sight to behold! Right now, there is great concern in the city government that it won't be regulated enough

  • lovingc||

    Less than 17% is not egregious for an initial tax rate. It could be lower but if time shows that the black market is still a major player then start lowering taxes until they stop selling.

  • Rhywun||

    if time shows that the black market is still a major player then start lowering taxes until they stop selling

    Ask the cigarette industry regulators how that's working out for them.

  • lovingc||

    If the price is low enough the difference in product should stop the black market. But you seem to want some thing to bitch about so have fun idiot!

  • Rhywun||

    I'll excuse your rudeness for now, in the interest of enlightening you:

    My point is that, to take one example, NYC, the tax rate on a pack of cigarettes is something like 80% and various stories in the media are claiming that up to 80% of cigs sold in the city are black-market. And the government is not lowering taxes, in fact they go up quite regularly.

  • Diane Reynolds (Paul.)||

    80% is not egregious for an initial tax rate.

  • Citizen X - #6||

    Quoting facts about one policy to illustrate probable results of an almost identical policy is something an idiot would do, idiot.

  • Rhywun||

    I'm Poppy.

  • Zeb||

    Oh no, not again.

  • EscherEnigma||

    Hrm... different history, different goal, different scenario.

    In the case of cigarettes, it's a long-legal product and the goal is not to squash the black-market, it's to reduce use. There's lots of evidence that, done correctly, vice taxes on it work on that goal. It's possible to go too far (as you pointed out with NYC), but broadly the taxes meet the goal.

    In the case of marijuana, it's a long-illegal product that's newly legal, and the goal is to squash the black-market while hoping that legal customers will entice dealers to stop selling to kids. In this case, it's quite possible that lawmakers would drop taxes to try and push the black-market out. If they do succeed in that goal, it's likely that sometime down the line they'll start raising taxes again as the goal moves from "eliminate criminal enterprise" to "reduce use".

    So I can see why your point, but the goals of legalization and taxation are different, and so different strategies aren't uncalled for.

  • Diane Reynolds (Paul.)||

    There's lots of evidence that, done correctly, vice taxes on it work on that goal. It's possible to go too far (as you pointed out with NYC), but broadly the taxes meet the goal.

    I'm not convinced the taxes had as much of an impact than other rules such as making it impossible to smoke pretty much anywhere. For instance, do you believe for a moment that if we legalized and then taxed the hell out of prostitution that money-for-sex would dry up?

  • EscherEnigma||

    "I'm not convinced the taxes had as much of an impact than other rules such as making it impossible to smoke pretty much anywhere."
    The whole "banning smoking in public" thing is a more recent tactic, and started being tried when localities just-about hit the ceiling of the efficacy of vice taxes. It caught on for other places after that, but it was initially tried because vice taxes were minimizing about as much as they could already.

    That said...
    "do you believe for a moment that if we legalized and then taxed the hell out of prostitution that money-for-sex would dry up?"
    If by "dry up" you mean "eliminate"? Then no. But I didn't say "eliminate" or "dry up", I said "reduce use".

    And sure. There's no reason to think that demand for sex doesn't respond to economic demands like other goods and services. That said, marijuana is more like cigarettes and alcohol then prostitution, and the efficacy of vice taxes on reduce use of those is well documented, despite your disbelief.

  • Robert||

    I think Diane meant compared to having it illegal, not compared to tax-free.

  • EscherEnigma||

    For prohibition to be effective, supply has to be sufficiently costly and intensive that it can't be done secretly in any quantity.

    Which is why it failed so hard for alcohol, and why it continues to fail for marijuana, prostitution, cocaine and so-on. Hell, the only thing I can think of where prohibition actually worked is the sale of human organs.

    So yeah, I have seen nothing and heard no arguments to think that prohibition on cigarettes would be more effective at reducing cigarette use then a correctly implemented scheme of taxation and regulation.

  • Diane Reynolds (Paul.)||

    +1 Eric Garner.

  • Robert||

    Who was not selling cigarets at the time. Sometimes it's just about nasty & reckless cops, or some other agenda, not what the cops let out that it was about.

  • JuanQPublic||

    But then the state loses control over people's lives. They certainly can't be acceptable.

  • Ken Shultz||

    Nevada's government is dominated and paid for by the casino industry. Even the unions that represent casino workers can't stop the casinos from firing their workers at the drop of a hat.

    That domination gets a little funny with the initiative process because marijuana was legalized without the blessing of the casinos.

    I think the casinos liked marijuana just fine when it was illegal--just like prostitution in Clark county is illegal. Sure, prostitution is all over the Las Vegas Strip, you can have them called into your hotel room, and picking the hookers out of the crowd on the casino floor is as easy as anything. But as long as it's illegal, the casinos can't be blamed for it, right?

    The casinos want to go nationwide. They want internet gambling--just as soon as they get the federal regulation in place to make sure they're the only ones who can operate legally online. The casinos are afraid they won't get the political support they need to do that if they're associated with prostitution and marijuana--so you're gonna get static for making it legal from them.

    Meanwhile, tourists don't generally get busted for marijuana or prostitution in Vegas, even if it is illegal. I think that's the way the casinos want it--maybe until they can figure out how to make marijuana seem like wholesome family entertainment like they made topless circus shows and giving people free booze while they gamble seem like wholesome family entertainment.

  • Diane Reynolds (Paul.)||

    I think the casinos liked marijuana just fine when it was illegal--just like prostitution in Clark county is illegal. Sure, prostitution is all over the Las Vegas Strip, you can have them called into your hotel room, and picking the hookers out of the crowd on the casino floor is as easy as anything. But as long as it's illegal, the casinos can't be blamed for it, right?

    *furiously scribbling notes*

  • ||

    Ken is a big whale in the Vegas escort economy.

  • EscherEnigma||

    "[...] maybe until they can figure out how to make marijuana seem like wholesome family entertainment [...]"
    I thought the 70s Show already did that?

    That said, I see your point. Not being a Nevada resident, only an occasional tourist†, I can't speak to whether your assessment is correct or not, but it sure sounds reasonable.

    So I'll mark that as "weakly held idea".
    _______
    †What? I like the dancing nearly-naked men. Especially when they flip my kilt.

  • hello.||

    The casinos want to go nationwide. They want internet gambling--just as soon as they get the federal regulation in place to make sure they're the only ones who can operate legally online.

    If that's what they wanted they'd already have it. Sheldon Addelson has spent a veritable fortune buying congressional influence to shut down all forms of internet gambling with no concomitant effort to position himself in a monopoly position of a regulated market. None at all. Internet gambling is peanuts compared to the money the casino conglomerates make on every other part of the casino. They want people actually physically present in their casinos spending $500 a night plus the resort fee on a room, dancing at the clubs with the $250,000-a-night DJ and paying $175 for a $20 bottle of booze. Not a 10% rake on penny ante poker and the standard margin on virtual blackjack.

  • Uncle Jay||

    RE: Nevada's Half-Hearted Marijuana Legalization Guarantees a Healthy Black Market
    Legalized marijuana came to Nevada, but so have the high taxes and complex regulations that preserve illegal sales elsewhere.

    Is this what is called sabotage?

  • Empress Trudy||

    Sin taxes are problematic. But why not standardize the tax on the quantity of the substance that people are purchasing. Not the weight but the THC amount. Just like alcohol taxes on the AMOUNT of alcohol not the size the of the bottle. Stronger weed, more tax per unit retail weight. That way at least consumers have a way to make a cogent Malt Liquor vs. Scotch decision. Leaving it untaxed though in a state of libertarian nirvana isn't realistic.

  • Robert||

    If a total ad valorem tax rate of about 1/3 is enough to keep a black market going, then the "enforcement tax" vs. the blck market must not have been so greatwhich makes me wonder how much there is to gain by legaliz'n. Seriously, if people generally can buy illegal goods for only 1/3 more than their market price would've been, prohib'n isn't as much of a drag as it seems.

  • AD-RtR/OS!||

    Who says the mob doesn't still run NV.

  • hello.||

    Allowing for rounding, that only accounts for about 15 percent of sales—which is the state excise tax on the first wholesale sale. Nevada also imposes a 10 percent retail excise tax on recreational sales, and then adds in sales tax, which varies from just under 7 percent to over 8 percent according to where you are. Let's call the total tax take about 32 percent of legal recreational marijuana sales.

    You can't just sum the percentages at each level of taxation and reach the total tax rate you fucking moron.

  • flyfishnevada||

    I'm not totally up to speed on the initiative but the measure was considered by the legislature in 2015 but they took no action. They could have passed the measure or defeated it but choose not to. I guess you could say they all liked the bill so much they decided to let the people vote but then why not pass it? I don't think they believed it could actually pass.

    So while I agree with many of the conclusions about implementation and the potential for a black market, I'm not sure the article tells the whole story. Nevada didn't write the initiative. I'm guessing it was written by it's sponsors, however, to appease the powers that be. In this case, it was alcohol distributors, among others. The state tried to go around the law with emergency measures, and is doing so again as I write this. I'm sure it is to preserve the windfall of cash but nevertheless, they are trying to get product to the people. It's a power struggle. Everyone wants a piece of the pie.

  • Africanis||

    Libertarian pot head : Yeahhhh legalized pot, *looks at price* " wtf you taxin my pot brah? "
    Big gov: You must have known you can't have one without the other! Now, f*ck you pay me!

    There is no excuse to buy illegally now. You wanted legal pot, so now you pay for it. I think if you are found purchasing illegally the Mob, I mean the government should make you pay big time. Why complain when you knew all along they were going to screw you.

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  • Perseus||

    The "black market" in pot will always be with us regardless of regulations and taxes for the very same reason we can't seem to get rid of the "black market" in sweet corn. Anyone that wants to can grow it. It is not a complicated manufactured product that requires special skills or tools to make.

    Politicians are likely to care more about new revenue than whether or not there is a black market. That said there will also be pols who would like to be seen as punishing use with vice taxes. There will be constant wrangling over proper taxes and regs with the likely outcome being honest their rates and lower amounts of tax revenue taken by the gov than would be possible if they were smart enough to keep rates low.

    I think the most important aspect of any legalization/decriminization fight is to get personal possession and growing decriminalized. If you have that, you have a way around all taxes and regs that may come.

  • Perseus||

    I just realized that there is a whole segment of society that thinks you can only buy sweet corn in the store. Whereas I could only imagine buying it at a roadside stand or growing it myself.

  • mgseattle||

    As much as I dislike the over-regulation and over-taxation of pot here in Washington State, the net result really isn't that bad. I guess if you consume an ounce a month, it gets pretty pricey. But for the occasional consumer, a few grams goes a long way, and the product selection is pretty good.

    For example, check out Uncle Ike's, one of the top sellers in Seattle: https://central-district-menu.ikes.com/

    Advocating for a "true free market" in pot is not going to get you anywhere with the majority of the population, just as advocating for a "true free market" in liquor is a non-starter. Vice taxes are a fact of life (especially here in Washington State), and I'd MUCH rather have legalized pot than re-criminalization, however flawed our system is.

  • anuj2017||

    ji

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