Will High Marijuana Taxes Encourage Black Markets?

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Elaine Thompson / AP

Correction appended on February 23rd at 11:40 a.m.

Opponents of marijuana prohibition had one heck of a year in 2012, as voters in both Washington and Colorado passed ballot initiatives legalizing recreational use of the drug. One of the central arguments these folks used in their anti-prohibition campaign was to point out what an excellent revenue source a well-regulated and heavily taxed marijuana industry could be for states. And in a time when the federal and state governments are so hard up for revenue, the tax receipts legal marijuana could bring in, plus reduced strain on law enforcement, could be significant. A 2010 Cato Institute study of the issue estimated that if marijuana prohibition were ended nationwide, it would save state, local, and federal governments $8.7 billion annually in reduced law enforcement costs, and bring in another $8.7 billion in tax revenues.

But as it turns out, actually figuring out an appropriate marijuana tax policy is more complicated than it sounds. The cannabis industry is an easy target for legislatures to saddle with heavy taxes. In Washington State for instance, there is a 25% tax at three different stages of cannabis production: from the grower to the processor, from the processor to the retailer, and the retailer to the customer. These taxes are in addition to any other state or local sales taxes that might apply.

(MORE: From Mexico to Moscow, the World Turns On to U.S. Marijuana Legalization)

But that’s not all. The ultimate goal for opponents of marijuana prohibition is federal legalization. But any serious reform of federal marijuana policy will most certainly include a hefty federal excise tax as well in order to 1) help fund regulatory mechanisms; and 2) garner support from lawmakers who would not otherwise be disposed to reform. Oregon Representative Earl Blumenauer, for instance, has introduced marijuana reform legislation that would enact a 50% excise tax on production.

Proponents of legalization understand that healthy sales taxes are a great tool for furthering their cause. At a certain point, however, high taxes will encourage an illicit market. Where is the line? It’s difficult to know for sure, but if a 50% tax were enacted on the federal level, the marijuana industry in a state like Washington would face at least $1.92 in tax for every $1 of product sold produced. Whether this level of taxation is enough to encourage a black market is difficult to say.

The black market generally imposes its own costs — purveyors can charge a premium because of the risks they incur. But the regulatory burden for legal marijuana cultivation is high as well. In Colorado, for instance, where medical marijuana has been legal for more than a decade, growers are required to keep their operations under 24-7 video surveillance, procure criminal background checks for workers, and keep regulators alerted each and every time they move product. These are just a few of the regulations that can help to drive up the price of legal cannabis cultivation and encourage illicit markets to develop.

Another vexing tax problem facing Washington state lawmakers particularly is whether or not medical marijuana should be taxed at the same rates as pot consumed recreationally. As it stands, medical marijuana is subject to sales tax, but not yet subject to the three levels of 25% sales tax enacted on recreational sales. But lawmakers are concerned that having the same product be taxed at different levels will create a black market whereby medical marijuana is sold illicitly to recreational consumers. One possible way to avoid this problem would be to tax all marijuana products the same, and then allow patients with a prescription to file for a refund.

(MORE: U.S. Marijuana Laws Ricochet Through Latin America)

For opponents of prohibition, taxes are the one of the best tools to convince citizens and governments of the benefits of a well-regulated marijuana industry. But the marijuana industry in America — in all its various stages of legality — is large and well-developed. Some even estimate it to be the single largest cash crop in the country. Given that fact, one can’t expect the black market to dissapear overnight if taxes and regulations make legal marijuana prohibitively expensive. And as legislators continue the process of setting up a tax and regulatory structure for this budding industry, it’s a reality they had better take into account.

This original version of this article incorrectly stated that medical marijuana is not subject to sales tax in Washington State. Medical marijuana is subject to sales tax, but not yet subject to new taxes imposed after recreational marijuana was legalized. 

100 comments
WilliamDwyer
WilliamDwyer

As far as I'm concerned, allowing a government that has ruined countless lives in its brutal and violent war on drugs to collect taxes on legal marijuana sales once we force them to repeal prohibition is somewhat like rewarding a puppy for chewing up your favorite pair of loafers.  Do we really want to trust the same government that has waged war against its own marijuana using citizens for over 80 years to regulate and tax marijuana once it's legal?  As far as I'm concerned, I'll die in jail before I pay one red cent in taxes for marijuana.  Any amount of tax will encourage a black market among those of us who refuse to accept the government's terms of surrender in this drug war.

ShawnDeNae
ShawnDeNae

I am blurry eyed from reviewing the WA Liquor Control Boards draft of rules.  Not only is there the 3 levels of 25% (1 level can be eliminated for an inhouse duel producer/processor license) but the multiple additional fees will only cause the the costs to go higher.

They are seeking feedback by 6/6/13.  I encourage every person to get their comments into the board and help draft sensible rules.

http://www.liq.wa.gov/marijuana/initial-draft-rules

KennethWilliams
KennethWilliams

You can be sure that when they do finally get around to legalizing it, they will load the law down with onerous regulations and unrealistic taxes that will keep people in the black market. It is inevitable that the regulations will favor the already established big players, and those rich enough to buy their way through the regulations and into the market. For me, I am going to continue to grow my own, and trade with others who do. I will not buy from government sanctioned outlets or dispensaries.

ChristopherMorton
ChristopherMorton

No.   What will keep the black market in business are the arbitrary restrictions, regulation and bureaucracy.   I wouldn't mind paying a tax on Cannabis, if produced in mass the tax could be offset by lowered general prices, and the product offered at the current market rate with tax included in the total.    What will keep me needing a medical card, is the fact that I cannot grow plants, and the fact that I am arbitrarily limited to buying an ounce.   It's just insane that I can buy 20 lbs of coffee if I want, but I am limited to an ounce of Cannabis.  I can fill up an entire shopping cart with liquor bottles, and the only question I might face would be - where is the party?   

Want to kill the black market?   Remove the stupid limitations.   Treat Cannabis less like a controlled substance, and more like alcohol.  Idiotic restrictions protect no one and stifle any potential for a successful business.    Imagine a world where I could buy an ounce of coffee, but if I had more than that, I could be fined, ticketed, or arrested.     Anyone who wanted to stock up and SAVE MONEY, would have to be driven to the black market.    My dad buys coffee in bulk, he would be screwed and forced to pay far more over time.   What about those who want to buy more cannabis at a time, because it SAVES MONEY?    I think people imagine that all cannabis lovers should be irresponsible low income paycheck to paycheck stoners who cannot actually afford to make decisions that are financially more responsible.   The drug propaganda has everyone believing that owning a pound means you have intent to deal.   But you would only have incentive to deal if people had no where else to go buy a pound.    Idiots.

WilliamRoberson
WilliamRoberson

I used to grow my own indoors but had to stop when my sister got picked for a DUI and started some trouble.  I would really like to get back at it. At $11.06 an ounce I was saving nearly $4000.00 a year and keeping that money out of the hand of street gangs.  I basically saw it as keeping guns off the street.  For every 50 bucks spent 1 gun hits the street.  Needless to say, I haven't been smoking very much.  Last time was New Years when I was in Yellowstone National Park.

One thing is certain.  The government should be tackling legal marijuana rather than gay marriage.

NedHoey
NedHoey

First of all, “marijuana” should not be taxed at all. It’s just a plant consisting mostly of common plant substances. Any tax should be on the THC CONTENT of the product. It is how alcohol is taxed, on the products alcohol content. That’s certainly how they’re going to have to tax the edible products. A simple tax by gross weight of dried flower is totally ridiculous. I would convert all my flower to concentrates to increase the THC to bulk ratio. There should be an excise tax on content in the production chain, from producer to distributor/retailer. NO mandated three tier system, (a lesson learned from alcohol) and sales tax for general use (not medical).

Second, cannabis is an extremely prolific plant. Legal cultivation is going to produce vast quantities. We are so accustomed to decades of black market pricing, most people including most in the trade are unable to conceive of the $10-20 oz. yet that’s what commercial grade cannabis could and should cost. Remember, indoor growing was always more about hiding production, so the high cost of doing it will soon no longer be worthwhile. seen any indoor vineyards lately? That a good thing too because the carbon footprint of indoor growing is horrendous. 

There is no longer an alcohol black market because the scale of production required to produce profitable quantities is large. Alcohol beverages are cheap, to make money you need large production. Large production is easier for the government to oversee and tax. A tax which by the way, MUST not exceed in TOTAL, about 20% of the retail price. Also, if the legal marketplace is established such that the oz price for dried flower remains above $50-70 an oz, at least here in CA, black market activity WILL continue. Street prices for commercial grades are at that price NOW. If it’s worth it now, it will still be worth doing it when legal.

Paulpot
Paulpot

Well the 1937 Marijuana Tax Act was a fairly high tax and it resulted in some black market trading.

ganjadite
ganjadite

I think this is a valid concern, but the silver lining is you can grow your own with no tax at all. I think we need smart minded people in the groups making the laws and write them to make sense and not just try to get what money you can from the consumer. If you are looking for some dank recipes check us out at ganjalicious.com

Peace and Love

mrbomb13
mrbomb13

Second, regarding the possibility of a potenially high tax on marijuana creating a "black market," all one has to do review Economics 101.

Since a high tax will raise the price of legal marijuana, it will incentivize buyers to compare price points between legal and illegal sources.  If the price of illegal marijuana (on the black market) is higher, than demand for legal sources will remain stable (so long as supply is sufficient).  The black market would prove to be a non-lucrative venture.

However, if the price of taxed legal marijuana is higher than the black market offerings, demand for legal marijuana will fall, and supply will rise.  To incentivize buyers to purchase legal marijuana under such circumstances, prices will have to fall to boost demand.  In that case, the substitute to legal marijuana will be a more desirable g/s, and the black market will prove to be lucrative (and flourish for the near-term).

However, if the price of the taxed legal marijuana equals the black market offerings, than demand for either will be determined by differences at the micro-level (i.e. comparative potency of the substance, ease of purchase, available quantities, etc.).

davidswift87
davidswift87

@SanhoTree yep, but as with cigarettes, legal highs and music downloads, most ppl will go for the legal option, even if it means paying more

mrbomb13
mrbomb13

Not so fast, TIME Magazine!  Presumably, the "Marijuana Prohibition" you mention is meant to echo the 1920s "Prohibition on Alcohol." 

However, the two are in no way the same.  1920s Prohibition banned the sale and distribution of alcohol - which was previously legal in the vast majority of the country.  It took a constitutional amendment to repeal Prohibition.

The alleged "Marijuana Prohibition" is a blatant misnomer, because marijuana has been illegal across the U.S..  In fact, cracking down on marijuana has been the focus of the U.S. Government's 'War on Drugs.'  It has only been very recent that 2/50 of the States have legalized the substance.

Therefore, it's totally inaccurate to write about "Opponents of Marijuana Prohibition," because such prohibition has never existed. 

Seriously, TIME, you need to expand your editorial staff, because this article should have never been published in its current form.

babyboo5150
babyboo5150

Why is alcohol legal when it reeks havoc on the body as well as how it can totally change a persons way of thinking? Ever go where liquor is...always a fight. There is power in numbers..andif we want change then being passive is NOT the answer. Get involved!

cannabisstrains
cannabisstrains

.....and prohibition is better than taxed marijuana? We're already encouraging Black Markets....

SashaDowding
SashaDowding

Enough is enough! Repeal federal prohibition of the cannabis plant. Use the plant to generate much needed tax revenue. Allow the authorities to refocus their resources on serious crime. Make a name for America as the most cannabis friendly nation on the globe!

MuzzyLu
MuzzyLu

Try growing your own marijuana so you know that there are no insecticides or mold on your buds, and NO TAXES! There is an ebook showing how to grow, harvest and make great little edible treats of marijuana! This book has great recipes for edible marijuana that are easy, small and cheap to make: MARIJUANA - Guide to Buying, Growing, Harvesting, and Making Medical Marijuana Oil and Delicious Candies to Treat Pain and Ailments by Mary Bendis, Second Edition. Only 2.99. Learn to make marijuana oil, delicious Cannabis Chocolates, and tasty Dragon Teeth Mints. 

tomsquawk
tomsquawk

um, isn't that what moonshiners do? wonder how you would prove a purchase or that you grew your own.

GustavoPicciuto
GustavoPicciuto

I t won't. Piece of mind, at least for myself, is worth more than a 50$ per ounce tax. No responsible, working, family man is going to want to keep going to the black market to enjoy a substance less harmful than alcohol. I would pay that and more if it would mean knowing I wouldn't be harassed into buying something other than marijuana or that I wouldn't have to meet someone I don't know in a shady alley somewhere, we're grown ups with families to take care of we can't be doing all that; why can't we enjoy something that's less toxic and safer than alcohol without having to engage in criminal activity, it's not fair and it doesn't make sense. 

lilmiss2000
lilmiss2000

@TIME @timebusiness Is the pope white??

revraygreen
revraygreen

The rent-A-Christians acting as agents of Lucifer have left distribution to the black market since 1937...

Nixie
Nixie

“@TIME: Will high marijuana taxes encourage black markets? http://t.co/lI9FFXFqr8" like this is worse than drug dealers?

jlittle14850
jlittle14850

@TIME @timebusiness isn't it already illegally traded on the black market? Come on journalists. Do some journaling for a change

earthtocameron
earthtocameron

@TIME @TIMEBusiness Doesn't the government ALREADY do that? Can we try #freedom?

Hzygone
Hzygone

@TIME @timebusiness duhhhhhhhhh

Msizakirai
Msizakirai

@TIME legalize it! Bob Marley was right!

plumbum821
plumbum821

@TIME @TIMEBusiness I don't know for sure but let's give it a shot! #legalize #cannabis

bboysolid
bboysolid

@TIME @timebusiness ofcourse

LaurenLockliear
LaurenLockliear

@TIME @TIMEBusiness will making it illegal encourage a black market? it's been illegal for decades, do you think that will change? #duh

RadianceNewYork
RadianceNewYork

@TIME @TIMEBusiness .....that's what we already have......

VicIanni10
VicIanni10

@TIME @TIMEBusiness yes, if the tax is too much. Weed is only as expensive as it is bc of illegality. Really a cheap crop..risk drives price

HurricaneMe
HurricaneMe

@TIME @TIMEBusiness really? dont you realize all there is right now is a black market???

JosefEugene
JosefEugene

@TIME @TIMEBusiness There will always be a black market but legality will serve convenience, which true enthusiast desire.

EuoeaoK
EuoeaoK

@TIME @TIMEBusiness Umm, yeah. Big effin duh.

jeanbrianhanle
jeanbrianhanle

@TIME @TIMEBusiness Does high tobacco taxes encourage black markets?

cmoref
cmoref

@TIME @TIMEBusiness yes? isn't there already a black market for anything and everything that is legal?

elmaxx
elmaxx

@TIME @TIMEBusiness if they are prohibitive.... i guess you have decades of proof to show for it

BobWilliamKnight
BobWilliamKnight

@mrbomb13 they couldnt both be the same price you gotta go lower than street prices to get customers.you failed economics

SanhoTree
SanhoTree

@davidswift87 Just as one would pay more for a car stereo from a proper store vs one that "fell off a truck." Not worth the gamble.

KennethWilliams
KennethWilliams

@mrbomb13 You could not be more wrong. Cannabis prohibition began in the 1930s. Up until then it was a legal and was used for all kinds of things....In fact, during WWII hemp was re-legalized to help in the war effort. Read some history, and you'd know that the criminalization of cannabis had absolutely NOTHING to do with public safety, and everything to do with fascist style economics and politics.

george03636486
george03636486

cannabis has been grown in the US legaly for very many years, george washington even grew and endorsed it

it was not till 1930 that they started banning it and that was because of a mix of racial steriotypes(that all mexacins smoke it), propoganda from the wood industry, and confusion with jimson weed( which is not cannabis)

billgriggs4
billgriggs4

Alcohol and marijuna prohibition aren't so different.  In both cases these are products that are too popular to effectively ban. Marijuana wasn't so popular when it was first banned, but use took off in the late Sixties and according to federal data we hit the point a few years ago that over half of all American adults under the age of 65 had smoked pot. Both prohibitions did more harm than good.  Neither stopped much.  Alcohol prohibition cut drinking at first but by the end of that 13 year experiment a huge black market had developed and almost as many were drinking as before.  We have the same thing going on with pot today, a massive black market with billions and billions of dollars worth of transaction every year, and huge criminal organizations getting rich. The two prohibitions are a lot more similar than different.

As for the constitutional amendment, it took that to ban alcohol because back then the feds still had some respect for states rights.  It took another amendment, the 21st Amendment, to repeal the 18th Amendment that banned alcohol. No amendment would be required to legalize marijuana as our Constitution does not ban it.

nicole1121
nicole1121

@mrbomb13 Um...you're saying that marijuana has always been illegal in the US?

george03636486
george03636486

thanks for the link

realy informetive for  anyone wanting to understand the taxing situation

po@newrevenue.org
po@newrevenue.org

@george03636486 

Thank you.  And thanks to Christopher Matthews for correcting the text -- changing "sold" to "produced."  He boosts my faith in journalism.

Pat Oglesby