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March/ April/ May 2014 How Not to Make a Hash Out of Cannabis Legalization

Leaving it to the states is a recipe for disaster.

By Mark Kleiman

There are three main policy levers that could check cannabis abuse while making the drug legally available. The first and most obvious is price. Roughly speaking, high-potency pot on the illegal market today costs about $10 to $15 per gram. (It’s cheaper in the medical outlets in Colorado and Washington.) A joint, enough to get an occasional user stoned more than once, contains about four-tenths of a gram; that much cannabis costs about $5 at current prices. The price in Amsterdam, where retailing is tolerated but growing is still seriously illegal, is about the same, which helps explain why Dutch use hasn’t exploded under quasi-legalization. If we too want to avoid a vast increase in heavy cannabis use under legalization, we should create policies to keep the price of the drug about where it is now.

The difficulty is that marijuana is both relatively cheap compared to other drugs and also easy to grow (thus the nickname “weed”), and will just get cheaper and easier to grow under legalization. According to RAND, legal production costs would be a small fraction of the current level, making the pre-tax value of the cannabis in a legally produced joint pennies rather than dollars.

Taxes are one way to keep prices up. But those taxes would have to be ferociously high, and they’d have to be determined by the ounce of pot or (better) by the gram of THC, as alcohol taxes now are, not as a percentage of retail price like a sales tax. Both Colorado and Washington have percentage-of-price taxes, which will fall along with market prices. In states where it was legal, cannabis taxes would have to be more than $200 an ounce to keep prices at current levels; no ballot measure now under consideration has taxes nearly that high.

Collecting such taxes wouldn’t be easy in the face of interstate smuggling, as the tobacco markets illustrate. The total taxes on a pack of cigarettes in New York City run about $8 more than the taxes on the same pack in Virginia. Lo and behold, there’s a massive illicit industry smuggling cigarettes north, with more than a third of the cigarettes sold in New York escaping New York taxes. Without federal intervention, interstate smuggling of cannabis would be even worse. Whichever state had the lowest cannabis taxes would effectively set prices for the whole country, and the supposed state option to keep the drug illegal would fall victim to inflows from neighboring states.

The other way to keep legal pot prices up is to limit supply. Colorado and Washington both plan to impose production limits on growers. If those limits were kept tight enough, scarcity would lead to a run-up in price. (That’s happening right now in Colorado; prices in the limited number of commercial outlets open on January 1 were about 50 percent higher than prices in the medical outlets.) But those states are handing out production rights for modest fixed licensing fees, so any gain from scarcity pricing will go to the industry and encourage even more vigorous marketing. If, instead, production quotas were put up for auction, the gain could go to the taxpayers. Just as a cap-and-trade system for carbon emissions can be made to mimic the effects of a carbon tax, production quotas with an auction would be the equivalent of taxes.

The second policy lever government has is information: it can require or provide product labeling, point-of-sale communication, and outreach to prevent both drug abuse and impaired driving. In principle, posting information about, say, the known chemical composition of one type of cannabis versus another could help consumers use the drug more safely. How that plays out in practice depends on the details of policy design. Colorado and Washington require testing and labeling for chemical content, but techniques for helping consumers translate those numbers into safer consumption practices remain to be developed. The fact that more than 60 percent of cannabis user-days involve people with no more than a high school education creates an additional challenge, one often ignored by the advanced-degree holders who dominate the debate.

The government could also make sure consumers are able to get high-quality information and advice from cannabis vendors. In Uruguay, for example, which is now legalizing on the national level, the current proposal requires cannabis vendors to be registered pharmacists. Cannabis is, after all, a somewhat dangerous drug, and both much more complex chemically and less familiar culturally than beer or wine. In Washington and Colorado, by contrast, the person behind the counter will simply be a sales agent, with no required training about the pharmacology of cannabis and no professional obligation to promote safe use.

A more radical approach would be to enhance consumers’ capacity to manage their own drug use with a program of user-determined periodic purchase limits. (See “A Nudge Toward Temperance.”)

All of these attempts by government to use information to limit abuse, however, could be overwhelmed by the determined marketing efforts of a deep-pocketed marijuana industry. And the courts’ creation of a legal category called “commercial free speech” radically limits attempts to rein in those marketing efforts (see Haley Sweetland Edwards, “The Corporate ‘Free Speech’ Racket”). The “commercial free speech” doctrine creates an absurd situation: both state governments and the federal government can constitutionally put people in prison for growing and selling cannabis, but they’re constitutionally barred from legalizing cannabis with any sort of marketing restriction designed to prevent problem use.

Availability represents a third policy lever. Where can marijuana be sold? During what hours? In what form? There’s a reason why stores put candy in the front by the checkout counters; impulse buying is a powerful phenomenon. The more restrictive the rules on marijuana, the fewer new people will start smoking and the fewer new cases of abuse we’ll have. Colorado and Washington limit marijuana sales to government-licensed pot stores that have to abide by certain restrictions, such as not selling alcohol and not being located near schools. But they’re free to advertise. And there’s nothing to keep other states, or Colorado and Washington a few years from now, from allowing pot in any form to be sold in grocery stores or at the 7-Eleven. (Two years before legalizing cannabis, Washington’s voters approved a Costco-sponsored initiative to break the state monopoly on sales of distilled spirits.)

To avoid getting locked into bad policies, lawmakers in Washington need to act, and quickly. I know it’s hard to imagine anything good coming out of the current Congress, but there’s no real alternative.

What’s needed is federal legislation requiring states that legalize cannabis to structure their pot markets such that they won’t get captured by commercial interests. There are any number of ways to do that, so the legislation wouldn’t have to be overly prescriptive. States could, for instance, allow marijuana to be sold only through nonprofit outlets, or distributed via small consumer-owned co-ops (see Jonathan P. Caulkins, “Nonprofit Motive”). The most effective way, however, would be through a system of state-run retail stores.

Mark Kleiman is a professor of public policy at the University of California Los Angeles.

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