By Dave Anderson:
In Pennsylvania, I can get pleasantly drinkable wine for $8 a bottle, and good wine (90+ on Wine Spectator assessments) for $13 a bottle if I buy the bottles on sale. Wine is a highly segmented market ranging from capital intensive high quantity operations that produce 2 Buck Chuck, Beringers, Little Penguin, and Yellow Tail to applications of massive semi-skilled labor topped by some high end skill labor that produces world-class bottles from numerous regions.
Pennsylvania makes decent money from taxing wine sales and running the wine and spirits store, but it is not a savior of the state budget. The state is constrained from raising prices too much by a combination of the public's demand curve (even if you accept the state store system is not a profit optimizing system, it tries to act mostly like one) and competition from other states and their respective tax systems.
Many marijuana legalization advocates are making claims that marijuana legalization would produce massive state and local tax windfalls as what was formerly a black market crop or at least a gray market crop is brought into the overt and taxable markets. This is a faulty analysis as it fails to consider the costs inherent in being a black-market operation.
The price of any black-market product that faces any significant legal restrictions that the state actually tries to enforce is a multi-item function. The first is the basic cost function of land, water, irrigation pipes and fertilizer. In the marijuana supply market, land and irrigation is most likely inefficiently allocated because most/all marijuana growers can not assemble large plots that are amazingly visible unlike the large and visible vineyards used for wine production.
Secondly, since marijuana is not in the overt-market, there is a "Go to jail" risk premium. People want to get paid more to do the same job on the black market than on the white market because there is a chance that they could go to jail. There is also a "Dispute resolution via 9mm" risk premium instead of dispute resolution through lawyers. Finally, there is the distribution premium as smuggling goods, intra-state, inter-state and internationally is expensive.
Wine has the first basic cost function, and then it has the cost of overhead that is legitimate and open for competition as basically any trucking firm is willing to take seven hundred cases from Sonoma to Pittsburgh for a reasonable fee because the greatest risk a trucker faces is diesel price volatility and the Ohio Highway Patrol pulling him over. The same is not true for marijuana at this time.
In a legalization environment, the costs of producing and distributing marijuana should fall dramatically as the various risk premiums collapse. Additionally, marijuana production can probably be brought up to a more efficient scale where capital intensive instead of labor intensive methods of production are viable. There is some money for the state in a legalization environment as taxes can be levied, but it is not a deficit busting windfall.
Oakland, California is moving in the direction of experimenting with large scale production, and the small growers who benefit from the current regulatory and risk premium mess are opposed to large scale production because they know prices will collapse:
The most influential critic was Steve DeAngelo, owner of Oakland's Harborside Health Center, the largest medical marijuana dispensary in the nation.
His dispensary buys from some 500 different growers, meaning Harborside offers about 100 varieties at any time. Permitting only industrial operations would reduce variety, he said.
"Some people might prefer mass production, assembly-line cannabis that costs less. Others might prefer cannabis grown by a master gardener in a smaller plot...The regulations will award permits to four indoor marijuana farms. There will be no size limit, but there have been proposals for farms as large as 100,000 square feet - about the size of two football fields....
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Legalized marijuana would allow for capital intensive, "assembly line" weed to be produced. That product would occupy the same niche as 2 Buck Chuck and other low-price but drinkable wines. There is some money to be made for the state via taxation but it will not be a windfall as the cost curves for producing low end but decent weed will collapse as the various risk premiums implode. At that point, the marijuana industry probably looks a lot like the wine industry after ten years of sorting itself out. No single state in the US can balance its budget on the back of either wine production or wine sales today, and in a legalization universe, no state would be able to count on weed production or sales to fill in a massive budgetary hole.
The Pennsylvania State Store system is a notably poor platform on which to build arguments about tax windfall from decriminalized marijuana sales.
ReplyDeleteThe system is anti-competitive, the product overpriced with limited selection, and the employees members of arguably the most powerful state workers union in the U.S. with no motivation to provide adequate service.
The entirety of this argument is true. The problem is that it leaves some things out.
ReplyDeleteThe Two Buck Chuck segment of the marijuana market already exists: it's the stuff imported from Mexico. So there would be gains by transferring that to domestic production.
Let's turn to a beer metaphor. Plenty of people buy 30-packs of Natural Light, but there are a lot of people who spend $10 or more per six pack for quality microbrews. So i'm not sure that we can argue that large production will push small (but high margin) production out completely. It's impossible to predict how or when marijuana supply would meet demand. As it stands, all the illicit homegrowers and the Mexican cartels can't meet it.
The problem, as i see it, is that legalization via medical marijuana referendums is inefficient. States only gain revenue from some property, sales and income taxation. In a legalized atmosphere, smart states would establish a control regime similar to alcohol. Assigning licenses to retail distributors (in states that don't operate like PA) can be a boon to local economies as the licenses are limited and sold by auction. It also allows counties to have some control over the number of retail outlets.
You're right, marijuana legalization will not solve state budget issues by itself. But, we must also consider the savings in not enforcing current laws. Further, the biggest gain would probably be in putting the large amounts of cash flowing through the black market to work in the white market. Bringing the revenue (even if it declines) into the open...taxed, capable of being invested openly, etc...has unpredictable benefits.
The entirety of this argument is true. The problem is that it leaves some things out.
ReplyDeleteThe Two Buck Chuck segment of the marijuana market already exists: it's the stuff imported from Mexico. So there would be gains by transferring that to domestic production.
Let's turn to a beer metaphor. Plenty of people buy 30-packs of Natural Light, but there are a lot of people who spend $10 or more per six pack for quality microbrews. So i'm not sure that we can argue that large production will push small (but high margin) production out completely. It's impossible to predict how or when marijuana supply would meet demand. As it stands, all the illicit homegrowers and the Mexican cartels can't meet it.
The problem, as i see it, is that legalization via medical marijuana referendums is inefficient. States only gain revenue from some property, sales and income taxation. In a legalized atmosphere, smart states would establish a control regime similar to alcohol. Assigning licenses to retail distributors (in states that don't operate like PA) can be a boon to local economies as the licenses are limited and sold by auction. It also allows counties to have some control over the number of retail outlets.
You're right, marijuana legalization will not solve state budget issues by itself. But, we must also consider the savings in not enforcing current laws. Further, the biggest gain would probably be in putting the large amounts of cash flowing through the black market to work in the white market. Bringing the revenue (even if it declines) into the open...taxed, capable of being invested openly, etc...has unpredictable benefits.
One important aspect to legalization that must be included is the right of people to home-grow their pot the same way people home-brew their beer.
ReplyDeleteno money sales. sharing with friends and perhaps informal barter arrangements.
and NOT have the state produce it. Look to Canada for the risks and dissapointments of State Weed.
also, it should not be taxed up the wazu. maybe a bit higher than beer..