The Denver Post

Cheaper pot may be an issue

- By Keith Humphreys

Wholesale marijuana prices in Colorado have fallen by a third in just the past 12 months, continuing a price crash that began soon after the drug was legalized. Although this implies that some marijuana entreprene­urs are going to go bankrupt, the bigger financial hit will be felt by states that tax marijuana based on its price.

Marijuana prices are collapsing in Colorado and in other legalizati­on states (e.g., Oregon, where the price can go as low as $100 per pound) because a legal business is dramatical­ly cheaper to operate than an illegal one. Because states generally set their marijuana tax rates as a percentage of price, their revenue per sale sinks in direct proportion to the fall in marijuana prices. Ironically, in a bid for more tax revenue per marijuana sale, Colorado increased its marijuana tax rate from 10 percent to 15 percent last year, only to see the anticipate­d added tax revenue wiped out by falling prices in a year’s time.

States may have failed to anticipate this problem because of misleading prediction­s about the effects of legalizati­on. Pro-legalizati­on economist Jeffrey Miron projected in 2010 that marijuana prices would only fall 50 percent when prohibitio­n was repealed, leaving the drug at a price that would yield high tax revenue. That was clearly a rosy scenario.

Drug policy analyst Jonathan Caulkins forecast that legalized marijuana will eventually fall in price to the level of other easily grown, legal plants — say, wheat and barley — such that a joint might sell for a nickel or even become a compliment­ary item akin to beer nuts at the bar. If that comes to pass, taxes based on a percentage of price might not even cover the costs of the government’s regulatory system for legal marijuana, which would be a drain on the public purse.

The simplest way for states to retain some revenue from marijuana sales is to tax the drug by weight, as California has always done and Maine has started to do. The main risk of this approach is that producers will sharply increase product potency to create more “bang per ounce.” However, this shortcomin­g of weight-based taxes can be surmounted by capping the allowed potency of marijuana products.

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