Pot's Black Market Backlash

How prohibitionists, nanny staters, and taxpayers who voted for legalization (!) are trying to keep marijuana illegal - or at least inconvenient.
In 2012, voters in Colorado and Washington passed full-on, no-hemming-or-hawing pot legalization by large majorities. Lawmakers in each state have spent the better part of the past year figuring out how to tax and regulate their nascent commercial pot industries, which will open for business in 2014 (until then, recreational pot is only supposed to be cultivated for personal use). The spirit behind the legalization efforts in both states was that marijuana should be treated in a “manner similar to alcohol.”

Unfortunately, it’s starting to look like both states are going to treat pot in a manner similar to alcohol during Prohibition. Not only are pot taxes likely to be sky high, various sorts of restrictions on pot shops may well make it easier to buy, sell, and use black-market marijuana rather than the legal variety. That’s a bummer all around: States and municipalities will collect less revenue than expected, law-abiding residents will effectively be denied access to pot, and the crime, corruption, and violence that inevitably surrounds black markets will continue apace.

Washington’s legalization initiative, I-502, mandated a 25 percent excise tax at each of three levels of transactions: sales between producers and processors; sales between processors and retailers; and sales between retailers and customers. That’s all on top of a state sales tax of 8.75 percent. As Jacob Sullum argued at Forbes, the upshot of such a system is that weed could end up costing end users somewhere between $482 an ounce and $723 an ounce. The average price of high-quality pot at Seattle’s medical marijuana dispensaries is currently about $250 an ounce (under I-502, medicinal pot won’t be subject to taxes).

“The legal market is going to have a hard time competing with the illegal market, but a particularly hard time competing with untaxed, unregulated sort-of-legal market,” Mark Kleiman, a UCLA professor and one of the main policy consultants for the Washington’s government, told Sullum.

A similar situation is shaping up in Colorado, where voters just passed Proposition AA, which creates a 15 percent excise tax and a sales tax as high as 15 percent on pot sold in stores licensed by the state. On top of that, local municipalities can slap still more taxes on weed sales. Cities such as Boulder and Denver will start out with levies in the 3.5 percent range but can jack the rates as high as 10 percent and 15 percent.