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Jon Talton

Analysis and commentary on economic news, trends and issues, with an emphasis on Seattle and the Northwest.

September 5, 2013 at 10:27 AM

Pot as a tax windfall? What are you smoking?

When news came that the U.S. Justice Department wouldn’t challenge legalization of marijuana in Washington and Colorado, some wonk tweeted that this could be a “game changer” for state and local tax revenues. For years, NORML, the pro-legalization group, has been arguing that legal pot could produce tax benefits. Let me inhale some skepticism. Good stuff, dude.

There’s no question that U.S. drug laws are insane and have been enforced unfairly. The “war on drugs” was lost long ago — ask any police officer. Washington’s I-502 is probably a sensible path out, although it won’t be without problems. One small unintended consequence already: I pass through clouds of pot smoke downtown (some of it smells like dog urine; obviously the stuff has changed since I was in college; does it smell better to the smoker?). Legalization will cut costs for enforcement. As to tax revenues, the state says estimates range from zero to $2 billion. I’m betting on the lower range. So is a consultant for the state.

Here’s why: For decades, an underground economy infrastructure has been built up to supply marijuana cheaply and easily to customers. Yes, it’s illegal, but it’s there and both efficient and resilient. The more that the states attach regulations and licensing fees to stores, much less tax pot, the less likely people will be to leave their dependable pusher and pay higher costs.

But what about Prohibition? Didn’t its repeal undercut the bootleggers and their crime? Yes and no, but Prohibition is not a good analogy. Consumption of liquor was widespread (it’s one way the West was won) through the entire life of the country up until the Volstead Act became law in 1919. Prohibition lasted nationally until 1933. So this was hardly enough time to change customs. Marijuana, never a widely used product, has been illegal for more than 70 years.

Not only that, but repealing Prohibition didn’t end the battle between legal liquor and bootleggers. Each state — and even individual counties — took different approaches to re-legalizing alcohol. Revenooers — state liquor tax agents — battled illegal liquor for decades. Hundreds of “dry” counties still exist, mostly in the South, where the sale of hooch is prohibited. This doesn’t prevent residents from driving to the nearest “wet” county or buying from an illegal manufacturer back in the woods.

Oklahoma still has tough liquor laws (when I worked there, I never knew so many alcoholics and I made sure to drink at restaurants where the district attorney and staff also imbibed). When I lived in Cincinnati, most people bought their liquor just across the river in Kentucky, where prices were lower than at the Ohio state stores. This caused years of entertaining friction as the Buckeye State lost tax revenues. Ohio agents would tail people with Ohio tags across the bridges, then stop them when they came back. Kentucky instructed its cops to arrest the Ohio revenooers. I have a friend who would buy a trunk-load of cheap liquor on visits back home in Arizona and drive it to Washington, where he was attending college. So even the transition from short-lived Prohibition was difficult.

I’m not trying to be a downer. But Washington faces an uncharted course on legalization with many stumbles to come. It may be years, or never, before pot becomes a significant source of taxes. It will be a long time before somebody like Costco fights to get the state out of the marijuana business and could really disrupt the low-cost underground suppliers.

And Don’t Miss: States with highly educated workforces have higher wages and stronger economies | Economic Policy Institute

Today’s Econ Haiku:

At the G-20,

More than twenty arguments

While the planet burns

 

 

 

Comments | More in | Topics: legalization, Marijuana, Washington state

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