How to tax and regulate marijuana

How to tax and regulate marijuana

Jan 11th 2014 | From the print edition

THEY came to Denver, the mile-high city, to get high. They shivered in the cold as they waited for the first legal recreational marijuana (cannabis) shops in Colorado to open on January 1st. It is too early to judge whether the experiment is working, but the early signs are good (see article). The first American state to allow toking-for-fun has not been seized by reefer madness. Its pot shops are more orderly than, say, a British pub at closing time. One report claimed that 37 Coloradans died of marijuana overdoses on the first day of legalisation, but it was in the Daily Currant, a spoof newspaper. Few readers were fooled: one reason why Americans keep voting to relax marijuana laws is that they have mostly come round to the view that dope is less hazardous than booze.Opponents of drug prohibition (a position The Economisthas held since 1993) may be tempted to celebrate. There is no doubt which way the tide is flowing. Most Americans now believe that marijuana should be legalised, taxed and regulated. Twenty states plus Washington, DC, allow the consumption of pot for medical purposes; Washington state will soon join Colorado in licensing sales to those who simply want to enjoy a spliff. If legalisation works in America (and Uruguay, which legalised pot last month), it will surely spread. But there’s the rub: if the first-movers mess up the details, public opinion may shift and the campaign against prohibition could stall.

Legalisation is just the first step. Pot must also be regulated. Because it is more dangerous than chocolate or chips, it needs to be subject to more stringent safety checks than food. As with alcohol, anybody who wants to produce it for sale, or sell it, should be licensed, as they will be in Colorado. It should carry clear labels showing its tetrahydrocannabinol (THC) content, just as cans of beer display their alcoholic strength—consumers should know what they are smoking. Colorado seems to be handling this well: labels are clear, safety rules stringent.

Deciding how to tax the stuff means asking some fundamental questions. Where governments want to raise revenue without distorting markets, the best approach is to charge businesses a flat fee, like a cab licence. Firms then have an incentive to do as much business as they can. But where governments want to discourage consumption—as with cigarettes and alcohol—they should tax each unit sold.

Although marijuana does not harm people as reliably as cigarettes do, nor—as alcohol does—incite citizens to kill each other, it is not good for you. And although too little research has been done on the extent of the harm it can do, it is thought to raise the risk of schizophrenia and undermine motivation. This argues for a consumption tax, and a fairly stiff one at that. But two arguments pull in the opposite direction. Marijuana may have a beneficial side-effect: if pot-smoking displaces liquor-drinking, it might actually be good for public health. And if taxes are set too high, the black market will flourish. That will deprive the state of revenue and push consumers towards unregulated, and therefore more dangerous, weed.

Better than booze

Colorado is setting the tax at more than 25%; state and federal levies on a six-pack of beer are only about 8%. The dope tax should probably be lower than those on booze, but alcohol taxes should be higher than they are now. What level the dope tax should be set at will become clearer as more information emerges about health effects and about the substitution of both dope for alcohol and legal marijuana for illegal stuff.

One obstacle to Colorado’s experiment is Uncle Sam. Marijuana remains illegal under federal law. Barack Obama’s Justice Department has said it probably will not prosecute pot shops that are legal under state law, but banks shun them for fear of violating federal money-laundering rules. So the business is largely cash only, which makes it harder to tax. Such murkiness serves no purpose. The feds should explicitly allow banks and credit-card firms to handle any transactions that are legal in the state where they occur.

Advocates of legal marijuana have long predicted that it will do less harm than prohibition; opponents have passionately disagreed. How Colorado regulates the trade will help determine who wins the argument.