Tax Revenue Arguments Won’t Legalize $50 Pounds of Marijuana


Recently, the Washington Post published an article by Keith Humphreys entitled, “Falling prices mean trouble for states that have legalized marijuana“. It rests on the fact that as more states legalize, cannabis production rises and the price of marijuana declines. Therefore, states that have been banking on marijuana tax revenue derived as a percentage of the price stand to lose money.

New data from one legalization state illustrate the point. Colorado’s Department of Revenue assesses the going price for marijuana every six months and uses this information to calculate the value of the state’s 15 percent tax on pot production. The progression of marijuana prices over time in Colorado perfectly parallels the pattern in Washington after that state legalized: Prices briefly spiked due to initial supply shortages, but then began dropping as the marijuana industry matured and expanded. Wholesale prices in Colorado tumbled 24.5 percent over the past year to $1,471 per pound.

My grower friends out here on the West Coast would love to get near $1,500 per pound wholesale. Out here, the days of the three-figure pound are upon us. Everybody who has fashioned an economy around pounds costing thousands will have to adapt to an entirely new reality. If a marijuana Trumpocalypse does not occur and we continue growing the cannabis industry, within a generation, the concept of marijuana costing thousands-a-pound will seem as ridiculous as luxury aluminum jewelry.

Legalized marijuana costs as much to produce per pound as you’re currently being charged per ounce. (Image: Congressional Research Service, pg 10)

We have most of the legal marijuana states taxing marijuana at between a low of 6 percent (Massachusetts) and a high of 37 percent (Washington) of the price, as excise, sales, and local taxes. These states face declining tax revenues from legalized marijuana unless consumption increases to keep pace.

Call me skeptical, but I don’t anticipate any state public service ads encouraging more pot smoking to help the economy. To one degree or another, the state legalization laws are written to impede and discourage increased marijuana consumption.

The states, then, may decide they need to raise the marijuana taxes to keep the revenue flowing. That, of course, subsidizes the underground market, whose couriers and producers are protected from law enforcement, aside from Washington’s lack of home-grow rights.

The same effect would be felt in two legal marijuana states that don’t rely solely on marijuana’s price for tax revenue. Alaska taxes marijuana by weight at $50 per ounce, while California has both a 15 percent sales tax and a $9.25 per-ounce tax.

Tax Price vs Weight
The lower marijuana’s price falls, the more a per-ounce tax benefits the underground dealer.

However, in those two states the underground market benefits far more from falling prices. The further the wholesale price of marijuana drops, the more disproportionate the gains for the untaxed seller. If marijuana’s wholesale price dropped to $25 per ounce, California and Alaska would have the most expensive legal marijuana.

Consider that we sold marijuana legalization to a skeptical public with the promise that it would raise tax revenue for schools and cover the cost of its own regulation. We promised that a taxed-and-regulated market would decimate the underground market.

So, what happens when California’s legal production comes online and the price of marijuana crashes? What happens when states start raising the taxes to maintain the revenue needed to regulate the market, further stalling legal sales and depressing revenue as consumers return to the underground market?

If you sell marijuana legalization as a revenue source, you lose as it becomes just legal enough to crash the price. If you sell marijuana legalization only for medical need, you lose as it becomes just legal enough to become pharmaceuticalized. If you sell marijuana legalization as a remedy to racist law enforcement, you lose as it becomes just legal enough to reveal that racist law enforcement still prevails. If you sell marijuana legalization as a cure for mass incarceration, you lose as it becomes just legal enough to force you into a court-monitored rehab instead. If you sell marijuana legalization as logically being safer than alcohol, you lose as it becomes just legal enough to be studied and proven that “safer” doesn’t mean “safe”.

Just as blacksmiths, buggy-whip manufacturers, and powdered wig designers had to adjust to a changing historical context, so, too, must we marijuana reformers. All the arguments we’ve used to legalize marijuana have worked so far, but there is only one argument for marijuana legalization that holds true no matter what it costs and why we use it:

No entity holds the authority to tell me what I can do with my body so long as it harms no other.

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