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The Half-Baked Plan for Pot Legalization

The Half-Baked Plan for Pot Legalization
Image credit: Tumblr: thenameisbigpoppa

Pols are into pot, and that isn't as good for the legalization crowd as it might seem.

New York City Comptroller John Liu, trying to gain traction for his campaign for mayor, has come out as the latest advocate for the legalization of marijuana. But, in the weeds, his plan is really just about taxation, not toking.

Liu claims legalizing medical-marijuana usage and allowing adults to possess an ounce of pot for recreational would give the city $400 million in new revenue. Liu estimates the Big Apple has a marijuana market of $1.65 billion – though any estimate of illicit markets, given that there is no standardization of pricing and a lack of reliable figures of supply and demand, are always very rough guesses.

The legalization crowd is predictably supportive. Likely, the entrepreneurial world will embrace such moves, too, since there is a feeling that there big business in pot. What's more, the most successful entrepreneurs, we are learning, have probably smoked a bowl or two along the way.

But there's some sour in Liu's proposal, and most other political plans to legalize weed. The taxes are too damn high, and that runs the risk of running customers right out of the market. Do the math. Liu's proposal is based around charging a 20 percent excise tax on top of the standard 8.875 percent city sales tax. Using Liu's own figures, a $450 ounce of Guava Chem would then be priced at $579.94.

And that's just the beginning. Legalization nationwide is in its infancy, and yet taxes have already gone up. The City of Denver recently voted to slap a new 5 percent tax on marijuana, on top of its own 15 percent excise tax and 10 percent sales tax. And it could raise its own city tax to as high as 15 percent.

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Proponents say a vice tax like this is acceptable, akin to the excessive taxation on cigarettes. But they are forgetting about the Laffer curve. That economic theory holds that there is a relationship between taxes and economic activity. Lowering taxes boosts spending and consumption. When you tax something too high, you reduce consumption. (Historical note: Art Laffer himself [http://www.heritage.org/research/reports/2004/06/the-laffer-curve-past-present-and-future] claims to not remember forming the curve, and credits 14th Century Muslim philosopher Ibn Kahldun with the idea. It is unclear whether Laffer was stoned when they met.)

Applying the Laffer curve, there is no way Liu or anyone can reap the kind of revenue from excessive pot taxation that political plans call for. One need only look at the relationship between cigarette sales and tax rates. The higher the tax, the less people buy cigarettes. As a result, if you have revenue goals in mind, you end up raising taxes even more on the product, which decreases consumption even further.

Some proponents might cite that as a positive, saying that a decrease in use of a drug – even one considered to be as benign as cannabis – is a good thing and causes a social good. Trouble is, human nature finds that people simply don't give up a drug, they transfer to another one. And price is a big determining factor.

Look at the rise in heroin use. Heroin was on the decline, as more users switched to prescription drugs for their fix. Those were cleaner, easier to obtain and easier to ingest. But a crackdown on pharmacies led to an increase in street costs for pills like Vicodin and Dilaudid. It became cheaper to buy heroin, so addicts made an economic decision to switch drugs. As a result, the number of people who say they have used heroin in the past year jumped by more than 50 percent between 2002 to 2011, according the Substance Abuse and Mental Health Services Administration. Marijuana doesn't have the same addictive effects as other drugs, but the possibility remains that, as its cost rises, users will find their thrill (or chill) elsewhere.

Then there is one last problem with legalization: The argument that it will save money with less law enforcement is flawed and simplistic.

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Liu posits that $31 million a year can be saved in New York City since police are no longer enforcing zero-tolerance drug laws. But, legalization of marijuana is less about decriminalization than re-criminalization. On a small scale, lighting a joint in Washington Square Park would still be against the law, not because of the marijuana but because smoking is illegal in New York parks. It is a ticket, rather than an arrest, but it still bears an enforcement cost.

On a larger scale, marijuana will still face law enforcement scrutiny because not all pot will be created equal. It will be, after all, a consumer product subject to tax, so state revenue enforcers will be involved. A transaction where someone who sells a small bag of weed to a friend will no longer lead to breaking of a drug law, but rather will make both parties tax evaders. Those who grow their own will be subject to scrutiny, as well. Ask anyone with a home alcohol still whether law enforcement turns a blind eye to such things.

None of this is to say that marijuana won't be a good business for enterprising entrepreneurs. But there are regulatory and tax issues that make the sale of cannabis less attractive from a profit-and-loss standpoint. Half-baked ideas like Liu's don't help the conversation.


 

Ray Hennessey is Editorial Director of Entrepreneur.com.

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