Now that marijuana has become legal in Washington and Colorado, reformers are drawing battle lines over its taxation. Anti-tax libertarians and medical marijuana industry opponents of Washington's I-502 are now raising fears about $17 to $25 gram after-tax prices and the destruction of the medical marijuana industry. Sadly, they are using the same sort of scaremongering tactics opponents of marijuana legalization use to maintain prohibition in other states.
Jacob Sullum, a writer for the libertarian Reason.com published an article this week in Forbes entitled "High Marijuana Taxes Could Derail Legalization Plans". In it he describes an analysis by BOTEC, the consulting firm handling Washington's legalization rollout, which explains, "based on a production cost of $2 per gram... the after-tax retail price will be $17 per gram, or $482 per ounce. Another projection, based on a production cost of $3 per gram, puts the retail price at $25.50 per gram, or $723 per ounce."
In addition to the $2/gram production cost and 25% excise tax at the producer, processor, and retailer level, BOTEC assumed a 100% double-your-money markup at each level, too. Sullum's mistake, and those who've latched on to the $17/gram figure to frighten consumers, is failing to read the report's explanation of that 100% markup figure.
"A review of retail markups across 53 sectors find an enormous range of average markups, from 14% for gas stations with convenience stores to 139% for optical goods (e.g., glasses)," writes BOTEC. "[I]f we replace the arbitrary assumptions of 100% markups with the processor markups typical of a dairy (34%) and retail markup typical of beer, wine and liquor stores (31%), then the numbers would look very different. The projected retail price would then be less than half as high ($7.46 vs. $16.99)..."
And what's this $2/gram production cost, anyway? Really, it costs over $900 to produce a pound of marijuana? We consulted this RAND analysis from 2010 that analyzed figures from illegal grows. They found "a well-run 5' x 5' hydroponic grow producing 4 harvests per year might yield 10.5 pounds per year with tangible costs of $225 per pound." Jorge Cervantes' Dutch case study revealed a long-term cost of $238 per pound.
So it appears the cost of growing marijuana - even under the restrictions of prohibition, unable to grow at large, industrial scale and required to take precautions to hide the activity - turns out to be somewhere around 52¢ per gram. Plug that 52¢ into BOTEC's inflated 100% markup scheme and you get weed at $4.42 / gram. Bring your markups into the 33% real-world range and you get weed down to $1.95 / gram. (Do it yourself - online spreadsheet available at http://rad-r.us/botec.)
Now, we don't think (in the short term) we're going to see retail $2 grams. Legal growers will face regulatory, security, licensing, and employee costs a typical 5' x 5' grow doesn't incur. But even if weed costs $1.32 per gram to grow (Colorado State University's estimate for Amendment 64), at 100% markups the post-tax cost is still just $11.21/gram. Since the market will bear people paying $7-$15 a gram, that's where it will be priced. No tokers in the Pacific Northwest are going to spend over $300 on an ounce of cannabis. Growers, processors, and retailers who want their business will be forced to reduce production costs and markups.
But the $17/gram exaggeration won't die because it fans the flames of hatred some in the medical marijuana industry had for I-502 all along. Sullum explains that the untaxed, unregulated medical marijuana dispensaries in Seattle charge $250 per ounce. Already the Seattle City Council has called for merging the recreational and medical markets. This is the "I told you so" moment for the No on I-502 crowd who claimed all along that legalization would harm medical marijuana patients, blaming the regulation of recreational marijuana rather than the lack of regulation for medical marijuana.
The real fear for medical marijuana dispensaries in Seattle is that taxed recreational marijuana may come in at a reasonable price. Then many patients decide the annual medical permission slip they buy so they can shop for untaxed medical marijuana isn't worth it. Then there are fewer registered patients, meaning fewer people to fill in those untaxed 10-patient 45-plant collective grows that feed the unregulated medical dispensaries.
Sullum's title warns high taxes would "derail legalization plans". In another article, he worries that Colorado's marijuana taxation would "preserve the black market". Yet nothing about taxing of marijuana is going to repeal Initiative 502 or Amendment 64. If the taxes are too high, those states may not realize the tax revenue they hoped for and the black market might continue unabated. So then states will be forced to lower those high taxes to capture more market share, just as the cannabis market will have to adjust if their markups are too high. These tax rates aren't commandments; they can be changed. If they are as odious as predicted, the support for lowering the taxes will be substantial. The black market isn't the boogeyman; it's the leverage that forces legal marijuana prices lower.
It's strange that the people who usually preach about the corrective power of free markets are making an exception for legalized marijuana.