Rules for the marijuana market
The New York Times said the following in an editorial:
As voters and lawmakers in more states decide to legalize marijuana, policymakers will have to answer a fresh and difficult question: How should governments regulate the production and sale of the drug?
Beyond keeping marijuana out of the hands of minors, a good regulatory system has to limit the increase in drug abuse that is likely to accompany lower prices and greater availability after legalization. It should protect consumers from both dangerous and counterfeit products, reducing the physical risk from a psychoactive substance.
And a well-regulated system should undermine and eventually eliminate the black market for marijuana, which has done great damage to society.
The experiences of Colorado and Washington state, where sales of recreational marijuana started this year, will prove instructive. While there are important differences in their approaches, both states have licensed businesses to grow, process and sell marijuana while imposing strict rules and high taxes on them. Other states that legalize will probably adopt a similar model, because it resembles how the federal and state governments regulate tobacco and alcohol.
— A Better Way to Tax: Policymakers trying to regulate the drug will face challenges similar to the ones U.S. lawmakers faced at the end of Prohibition in 1933. Like alcohol during Prohibition, marijuana is widely available across the United States today. But it will become much more accessible after legalization, when businesses engaged in its production and sale no longer operate in the black market nor engage in violence. The pretax price of the drug could fall by 90 percent after legalization, according to Robert MacCoun, a law professor at Stanford, and fellow researchers. Moreover, marijuana businesses will have a financial incentive to get a broad population to use the drug regularly. A recent report prepared for the Colorado Department of Revenue concluded that nearly 90 percent of the demand for marijuana in the state this year would come from only 30 percent of users, those who use the drug 21 to 31 days a month.
Regulators will have to design policies that allow licensed businesses to undercut the illegal market but keep prices high enough so dependence on the drug does not increase a lot. One important way to curb use is to tax marijuana heavily, following the post-Prohibition template of replacing criminalization with regulation and taxes. Colorado and Washington have imposed high tax rates that are based on price, much like existing sales taxes. But Mark Kleiman, a public policy professor at the University of California, Los Angeles, rightly warns that those taxes will lose their bite when prices inevitably decline as marijuana businesses become more efficient at production. A better approach would be to tax the drug based on its potency — which can be measured in various ways, including by the amount of the component THC in a batch — and increase the rate over time to keep up with inflation.
Lawmakers should not repeat the mistakes they made on alcohol in recent years, taxing it too lightly and allowing the industry to become highly concentrated. (Just two companies control about 75 percent of the U.S. beer market today.) Federal excise taxes on alcohol are levied at fixed rates by volume; there are different rates for liquor, wine and beer. For example, the tax on a 31-gallon barrel of beer is $18, or 5 cents per 12-ounce can. But those tax rates were last increased in 1991, even though the Consumer Price Index has increased 75 percent since then.
Most states have also kept their excise taxes steady in recent years, in part because of the heavy lobbying and big money of the beverage industry. The median state excise tax on beer is 20 cents per gallon, or about 2 cents per 12-ounce can.
States with an existing medical marijuana market will also have to make sure that users are not abusing it to evade taxes. In Colorado, for example, there are more than 111,000 people with medical marijuana cards. Those users can buy the drug at much lower tax rates than people buying recreational marijuana; in Denver, cardholders pay combined city and state taxes of 7.62 percent, compared with the 21.12 percent in taxes paid by recreational users.
The problem is that almost anyone can get a card on a doctor’s recommendation. Regulators need to tighten access to cards and penalize doctors who churn out recommendations by the hundreds. Otherwise, tax rates on recreational marijuana will be easily subverted.
— Don’t Market to Minors: One of the most important lessons from the country’s long battle with the tobacco industry is advertising’s outsize role in creating and sustaining an addiction to nicotine, particularly among teenagers and young adults. Though marijuana is far less addictive than tobacco, states that choose to legalize it must impose limits on the promotional activities of marijuana businesses. The controls should emulate the restrictions on targeting young people, banning outdoor advertising and product placements that the tobacco industry accepted as part of its settlement with state attorneys general in 1998.
States must require proper labeling and packaging of products that contain mind-altering substances. Beau Kilmer, a drug policy expert at the Rand Corp., said regulators can restrict the sale of foods like candies, beverages and cookies made with marijuana or limit how much of the drug’s active ingredients are in each serving. The ingredients should also be distributed evenly throughout the product, and regulators must test samples for harmful levels of pesticides, mold and other impurities often found in illicit cannabis.
To discourage the use of marijuana with alcohol, states can require that they be sold in different places and ban the use of cannabis at bars and restaurants. Experts say using marijuana and alcohol together is much more dangerous than using them separately. One study on the effects of marijuana use on driving published in the American Journal on Addictions in 2009 found that combining the two drugs “results in impairment even at doses which would be insignificant were they of either drug alone.”
— Growers Shouldn’t Be Sellers: States should keep the production and retail sales of marijuana separate to ensure that the industry does not evolve into a group of politically and financially powerful vertically integrated businesses. After Prohibition, U.S. lawmakers adopted a three-tier system for the alcohol industry to make sure the country did not see the return of “tied houses,” or bars that were either owned or beholden to brewers through loans and other financial arrangements. Tied houses had encouraged excessive drinking by their customers, which helped to galvanize the temperance movement. Colorado initially required growers to also be retailers in the interest of getting the legal market going quickly but has since allowed them to specialize.
Over time, the state should consider dividing production and sales, as Washington has done. But states should not blindly copy-and-paste alcohol regulations onto marijuana, either. State beer distribution rules, for example, have unfairly prevented craft brewers from selling their products in many places, a situation that shouldn’t be replicated in the marijuana business.
For each level of the industry, licensing systems ought to discourage the concentration of market power in the hands of a few businesses. It’s important for regulators to recall the U.S. experience with the tobacco industry, which is dominated by a handful of large corporations. For decades, those big cigarette companies undermined scientific research into the damage their products were causing and blocked sensible regulations. If states allow marijuana businesses to become too big, they could face corporate juggernauts that may be hard to regulate.
States should also monitor each level of the industry closely, including tracking how drugs move through the system. This should help to keep legal marijuana from being diverted to other states or countries that have not legalized the drug.
Whatever states decide to do, it is important that they stand ready to modify policies as legal marijuana markets evolve. Policymakers have little experience regulating a fully commercial market in this drug. It makes sense for states to proceed with caution and reserve the right to change course as they learn more.