Price Drops, Tax Schemes, and Other Marijuana Legalization Hype

Posted: August 25th, 2010 by Militant Libertarian

by Aaron Turpen, CannaCentral

Politics is usually a shell game of right and wrong, good and evil, with the average person being the middle shell that never gets to hide the coin. The debate over marijuana legalization in California is no different.

A recent press release and report from the RAND Corporation regarding the legalization of marijuana and its effect on price and tax revenues made headlines with its assumption that marijuana prices on the street would drop by almost 900% from its current $375/ounce to $38/ounce.1

The report may well be true, but it fails on two key points: it ignores a current model that could have been used to gauge how marijuana usage might be changed by legalization; and it ignores the fact that marijuana is not a one-size-fits-all product, but instead has various forms and price tags (“grades”).

First, Some Background – California’s Two Legalization Efforts

Most people are unaware that there is more than one initiative to legalize marijuana in California.

Proposition 19, a ballot initiative, is the most often cited effort. It would legalize marijuana for people over the age of 21 and allow cultivation of up to 25 square feet (5×5) of MJ plants. A person over 21 could possess, transport, and even share up to an ounce of marijuana – thus all current marijuana clubs and seed (and bud) trading groups would instantly become legalized. In addition, this proposition would also tax commercial cultivation and sales of the herb.

The other is Assembly Bill 2254, which would likewise legalize marijuana for those over 21 years of age. Unlike the proposition, though, it leaves the taxation, regulation, and other duties up to California’s Department of Alcoholic Beverage Control. It would create a $50 sales tax (per ounce), which would be used to fund drug awareness and rehabilitation programs.

Both ideas have their up and down sides, but most of the focus is on Proposition 19, as it is more likely to pass into law.

Meanwhile, the Board of Equalization issued a report to the Assembly’s Committee on Public Safety which gave the BoE’s examination of the impact of legalized marijuana on tax revenues. Robert Ingenito, of the BoE, gave the Board’s rather conservative approach at arriving at total tax revenues from the sale and use of legalized marijuana. His total number is “up to $1.4 billion” with actual numbers likely being, they think, in the $1 billion range. The bulk of that would be in excise taxes, at the $50 assumed rate of the Assembly’s bill. The rest would be into state General Fund and various county and city coffers.2

An interesting highlight in Mr. Ingenito’s report was the citing of the United Nation’s numbers on marijuana use. They show that only 9% of users consume it daily and only 4% of those use it more than once daily. The bulk of users use it four or less times annually (45%) and 100 times or less annually (41%).

Ignoring Alaska

The report from RAND ignores the fact that marijuana has had a somewhat legalized status in Alaska for 35 years. It’s legal to own and cultivate marijuana inside a person’s personal property (enclosed, such as a house) to produce up to one ounce per adult. While this isn’t the full legalization that California might get, it is the closest thing to it geographically and legally.3

What Alaska has had to deal with is the same thing California has already had a taste of and will have to deal with even more if legalization happens: federal laws. Despite Obama’s promise that prosecution under federal law for state-legal marijuana use would cease, it continues to happen. So in this case, the issue will become a state’s rights problem with, again, the average person in California being caught in the middle.

One Size Fits All Pot

The other assumption by RAND that is wrong is that marijuana has a one-size-fits-all attribute. The RAND researchers seem to have ignored sites like CannaCentral that list a huge number of various grades and strains of cannabis that exist. RAND’s assumption of $375 per ounce shows this, as the price per ounce can fluctuate wildly depending on factors such as the quality, grade, type, freshness, and so forth.

Of course, non-savvy buyers will buy anything. It’s possible, even now, to get low-grade garbage skunk that is more stems and seeds than it is buds for less than $200 an ounce. So RAND’s assumption that it will drop down to $38/ounce is a little off putting to say the least.

Most of the taxation of marijuana under either proposition in California will likely take place for commercial growing and distribution, not for home grown plants. This is where the grey and black markets will continue and there is (and has always been) little that can be done to stop it.

Commercial growers, however, have a market incentive to deal with that RAND doesn’t seem to be taking into consideration here.

The Marijuana Market After Legalization

All businesses, whatever their product or service, must provide the highest quality at the lowest price they can. There will be Walmart pot sellers and there will be Wild Oats pot sellers. The $38 Fine China at the W might get some people by while others will demand the Chronic at the O. Most will fall in the middle.

Add to this mix the common cultivation of proprietary strains, the branding that goes into many strains and growers, and the various ways that marijuana can be consumed and it becomes a very vibrant, competitive market.

Whatever the legalization method of choice in California, it will open up a vast new business market that will suddenly go from underground to above board. Efforts will be made to curtail and stop it, of course, and a lot of effort will go into controlling it – usually in order to collect taxes. In the end, though, like any other market, marijuana will become a vast opportunity for entrepreneurs large and small.

Like wines, some areas will have specific, local blends and flavors while others will have theirs. Some will be $8/bottle off the shelf at the W and others will be $200/bottle at the O. This will be the reality: pot will drop in price, of course, but not by 900%. Average drops will depend on a lot of things, but $38 (plus tax) pot will not be common on the legal market.

1 – Legalizing Marijuana in California Would Sharply Lower the Price of the Drug press release from the RAND Corporation, July 7, 2010.

2 – Prepared Testimony of Robert Ingenito, Chief, Research and Statistics Section, Board of Equalization to the Interim Hearing of the Assembly Committee on Public Safety, October 28, 2009.

3 – NORML > State By State Laws > Alaska


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