Is Washington State Becoming a Drug Kingpin?

Submitted By Darren Smith, Guest Blogger

Washington State SealA controversy is developing in Washington State involving revenue collection between Recreational Marijuana, legalized by Initiative 502, and existing Medical Marijuana dispensaries.

Medical Marijuana has been available for over ten years and the language of the original initiative was such that the purpose of which was for the treatment of various ailments users were suffering. Those possessing a medical marijuana card could legally possess a small amount in either usable form or owning a small number of plants. Collectives could also be formed where patients would aggregate their grow and share among themselves the drug for their own use. Since according to the statute the use of the cannabis is for medicinal purposes, like prescription drugs or medical devices, it is not subject to state recreational marijuana taxes.

With Recreational Marijuana the taxation is nearly a polar opposite. The state imposes a twenty five percent excise tax on sales from a producer (farmer) to a processor, a twenty five percent excise tax on sales from the processor to the retailer, and a twenty five percent sales tax on the consumer who purchases marijuana from a retailer. Could this difference be influencing the state toward protectionism or undue influence?

In macroeconomics having one segment of the market with a tax advantage can often lead to imbalances in which the tax favored segment can drive out competition if the tax discrepancy is high. In this situation the imbalance is high. We can briefly look at some numbers.

The market for Recreational Marijuana has not been fully established in the legal market due to the system not being open for business. The following numbers are speculative and not vetted in the market but are used for illustrative purposes.

We will assume the cost of marijuana produced at a medical collective to be eight dollars per gram and due to economies of scale five dollars at a recreational marijuana producer. We will assume also a profit margin of thirty percent at each stage and factor in statutorily mandated excise and sales tax for each to be imposed upon the consumer. Prices are per gram.

Medical Marijuana:

Cooperative: $8 cost x 30% markup = $10.40 + $0.90 sales tax = $11.30
(The Washington State Department of Revenue interpreted medical marijuana to be subject to regular sales taxes (which vary by locality) and to B & O tax)

Recreational Marijuana:

Producer: $5 cost x 30% markup = $6.50 + Tax = $8.13 ($1.63 paid to state)
Processor: $8.13 cost x 30% markup = $10.60 + Tax = $13.25 ($2.65 paid to state)
Retailer: $13.25 cost x 30% markup = $17.23 + Tax = $21.54 ($4.31 paid to state)

The discrepancy to the consumer is high. Using these assumptions and statistics those obtaining marijuana for medicinal purposes pay $11.30 per gram while the recreational consumer pays $21.54. The state’s cut is $0.90 and $8.59 respectively. There is great incentive for the citizen to obtain marijuana for medicinal purposes and the state to shunt users into recreational usage.

MarijuanaMoreover, a business needs to maintain a markup on their products or services that is sufficient based on expected sales volumes to pay for operating expenses. The regulatory cost of being a marijuana retailer could be argued as being almost extreme compared with other retailers such as restaurants, hardware, or widgets. The state mandates surveillance equipment, high amounts of record keeping, floor plan approvals, procedures, and makes draconian fines for rather minor violations. In fact, a retailer can be fined several thousand dollars if their employees forget to wear their name tags for a day and a producer can have 25% of their crop seized by the state if a state mandated security system fails twice upon inspection. All of these regulations add to the cost of doing business and add to the cost and hence taxation of the consumer. These could force the markup higher than the percentage used here.

But with the tax favoritism facilitated by the two sets of laws, there is going to be extreme price pressure placed upon retailers to be competitive with the medical marijuana cooperatives. If there are a number of medical marijuana cooperatives in a particular area, and the medical marijuana cards are easy to obtain, being a recreational marijuana retailer might not be a viable business model.

The state is looking at this with much interest and now one can see some rather bizarre behaviors of the legislature. The legislature was expecting the state to receive about $500,000,000.00 annually in tax revenue from the sale of recreational marijuana but it now apparent it is not going to receive anything close to this amount due to the presence of medical marijuana cooperatives and those citizens who possess medical marijuana cards may legally under state law produce their own.

Where formerly the state legislators were more or less indifferent to medical marijuana, many of them are turning against it and this is mostly, if not entirely, driven by the thirst for tax revenue. There was recently an unsuccessful attempt to impose a twenty percent tax on medical marijuana sales. But where does the state find the ethical courage to impose a twenty percent tax on what by statute is a medical industry? The state does not impose sales taxes on prescription drugs or medical devices, though as described above, the DOR interprets the law that sales taxes apply on medical marijuana. But if the effort to impose a twenty percent tax on marijuana where it is used as a treatment for nausea during chemotherapy how can it not charge a tax on Marinol, a prescription containing THC, the active ingredient in marijuana, for the same affliction? What would be the reaction of the public if politicians put a 20% tax on all prescritption drugs? It would be an outrage to say the least, but that is essentially what the legislature wants with this tax on medical marijuana.

There is also the likelihood the illicit market might not be driven away due to the taxation issues on recreational retail marijuana. If the cost of illicit marijuana is low, and recreational is high, the consumer might still obtain marijuana from the traditional illegal sources for economic reasons if they cannot obtain a medical marijuana card. (or of the act of obtaining the illegal product remains easy and anonymous, which the retail marijuana seller being forced to have surveillance equipment that is viewable by the State Liquor Control Board and people are required to produce ID might be dissuasive to the consumer,)

Recently there have been several raids by federal DEA agents of medical marijuana dispensaries in the state and seizures have happened. The federal government has been rather unpredictable in how it is dealing with medical and recreational marijuana that is legal in several states. One worry is that the state will collude with the federal government to oust the medical marijuana dispensaries from their business through selective enforcement. The state has a great financial incentive to put medical marijuana establishments out of business and to favor recreational marijuana retailers due to a possible nine fold taxation advantage.

The oddity of this is that before the recreational marijuana law was ratified, the state received zero revenue from recreational users. Now that the law is in place, it wishes to make certain it receives all the revenue it can get its hands on, and it does not like competition with those that might keep some of that revenue for itself. So can one make a point of calling the State of Washington a drug kingpin? It dictates who can and who cannot produce marijuana. It grants permission and directs others to process and deliver the drug. It takes a cut from each person in the supply chain. It acts as an enforcer and punishes those who “violate the rules”. It also makes efforts to drive out competition from those who threaten its income stream.

Strange it is how just three years ago legislators often wrapped themselves in the flag by proclaiming they were dedicated to fighting organized crime linked to the illegal marijuana market and now they are fighting over how much money they can make from essentially, though less violently, some of the same practices.

50 thoughts on “Is Washington State Becoming a Drug Kingpin?”

  1. Well, I hope it doesn’t get legalized anywhere else for a while so we can see how it works out in the states that have gone down that road. I read somewhere that The Netherlands have had to change up things some over the last couple of years. In the meantime, with the taxes it will be the whole revenooer thing again, and all our traditional songs will have to be updated, to wit:

    Once two strangers climbed Old Rocky Top
    Looking for some pot on the cliffs
    Strangers ain’t come down from Rocky Top
    Still up there smoking spliffs???

    Squeeky Fromm
    Girl Reporter

    1. Yes, we wouldn’t want to stop other countries wasting billions just because every country that has stopped persecuting cannabis has saved billions and seen their crimes rates dropping across the board.

      No, no…we have to wait and see what happens as people return to what we had with 12 millennia of no prohibition before we can guess whether or not leaving people alone and not wasting our own money attacking ourselves is a good idea.

      The very idea of taxing cannabis is designed to attack the sick who NEED the plant at the absolutely worst possible time in their lives, AND when they are least able to pay the oppressive taxes that people like you seem to en joy heaping on other people’s wallets. For that matter, it is morally reprehensible AT BEST to so desperately want to attack the sick just because idiotic media morons and politicians have worn the idiocy that “in order to fix anything, you have to create new taxes” into your mind.

      I really with that more people would think, just a little bit, before they speak. Just sometimes. Every once in a while.

      Stop parroting political propaganda.

      As far as the Netherlands “having to change things”, it’s because of TRADE AGREEMENTS with the United Nations. You see, as the rest of the world sees that they’re at least on the right track, they might wake up and realize that attacking THEIR people might not be such a bad idea either…so they’ve been pressuring Amsterdam for YEARS for doing the right thing for their people, and their economy.

      Once Amsterdam caves to international pressure to start attacking its people again, they’ll be shocked how quickly the crime rates will bounce right back…and once people realize that they can no longer smoke freely and unmolested in Amsterdam…their tourist revenues will drop like a stone, and they’ll understand that international trade organizations are NOT in the best interests of their people, or their country.

      (sigh…)

  2. The pricing is insane. Weed is the least processed of the available drugs so it should be the least expensive. Keeping the price inflated just makes other, potentially more harmful, competitively priced drugs more attractive. I’d opt for a South-facing window and some seeds.

    1. Pricing should be little more than the price of seeds & labour, and the price of seeds should be comparable to that of tomatoes you can find at any hardware store or garden center every spring.

      Not anywhere from $10.00 to $250.00 PER SEED, but more along the lines or one to five bucks a package of a few dozen.

      Even better, people should have enough sense to collect their own seed once they find something they like, or need for medicinal purposes, and get their next season’s seed for FREE.

      If you can get a pound of for $5.00, then you should also be able to get a pound of cannabis for an equivalent price.

      Of course, that does NOT take into account the fact that organically grown cannabis doesn’t require fertilizers, pesticides, herbicides, fungicides, or other “chemical soil additives” in order to grow, and it actually removes toxins from the soil, making other crops both less toxic, and cheaper to grow, as the farmer won’t need as much herbicide on his next crop because it’ll be healthier due to the reduced toxin load in his fields, which will then mean that his third crop in rotation will also be healthier, as it won’t have to try to grow through as many toxic chemicals either.

      Then again, we have to get rid of GMOs if we want to seriously lower chemicals in the food supply, and hopefully we’ll have sense enough to do that before all natural food sources are replaced with “phude-like products” and there is no “natural” left in the environment that hasn’t been tainted by MonToxins™ already…

  3. electropig,

    Your comment went into moderation at first because you used three links and WordPress will only accept two links. I deleted your Wikipedia link since it didn’t affect your content. In the future please only use two links. This is a non-profit website, run by Professor Turley. Guest bloggers like myself only help out with the WordPress spam problems, on a catch as catch can basis. We don’t have the resources to edit individual comments, nor the desire to.

  4. Darren,

    You brought up an issue that I hadn’t considered and it raises interesting points. I pretty much agree with Tony’s points on this and yes I did immediately think of my blog today. The way I see it is that the hunger that State Governments have for generating revenues is because of the politicians fear of using progressive taxation methods. All sin taxes fall much more heavily on those who can least afford it. Grover Norquist and his anti-tax movement has shaped the meme that scares the hell out of politicians and so these politicians look for ways to raise tax money that don’t seem obvious. The “new nobility” have the wherewithal to live any damn place they please and so feel little loyalty to any governmental structure.

    Washington’s legalization of marijuana should have been about the equity of legalizing it and about the destruction to our legal system wrought by it criminalization. With it becoming legal for consumers w/o medical issues, the focus should not be on how to maximize revenue, since this view will as Nick points out incentivize a black market and lead us around in a circle back to heavy enforcement. If one needs marijuana for medical purposes its costs should be as low as possible and there should be encouragement of the coop method of production. For recreational purposes I don’t mind reasonable taxation, but I would not like to see it become a profit center, as seems to be happening in Darren’s State.

    The thing that pisses me off though is that I’ve waited many years for grass to be legalized and as that legalization is now on the cusp, I won’t be able to benefit since THC supposedly interferes with my anti-rejection medication. On the bright side though, I’ll probably be alive to see full legalization and that in itself is a blessing.

  5. #Cannabis was “legalized” the second they wrote the first statute which made it “illegal”, thereby “importing cannabis into the realm of statutory control and enforcement.” It’s been 100% “legalized” ever since.

    What most people meant to say was that #prohibition should be REPEALED. Of course, since nobody ever looks up the meaning of words any more, they think that “decriminalize” or “legalize” or “re-legalize” or “tax and regulate” or “regulate like _____” mean “it’s free again.”

    They don’t.

    “EVERYTHING that people have been begging for” hasn’t resulted in the FREEING of the plant, or your ability to access, possess, or grow it yourself…and yet, the one word that DOES represent what everyone “believes they have been saying” is the one word they REFUSE to say…while wondering why every effort to regain their freedom fails…

    http://dictionary.reference.com/browse/repeal

    re·peal [ri-peel] Show IPA
    verb (used with object)

    1. to revoke or withdraw formally or officially: to repeal a grant.
    2. to revoke or annul (a law, tax, duty, etc.) by express legislative enactment; abrogate.

    noun

    3. the act of repealing; revocation; abrogation.

    Origin:
    1275–1325; Middle English repelen < Anglo-French repeler, equivalent to re- re- + ( a ) peler to appeal

    A #repeal is the removal or reversal of a law.
    There are two basic types of repeal, a repeal with re-enactment (or
    replacement) of the repealed law, or a repeal without replacement. The
    motion to rescind, repeal, or annul is used in parliamentary procedure to cancel or countermand an action or order previously adopted by the assembly. Removal of secondary legislation is normally referred to as revocation rather than repeal in the United Kingdom and Ireland. Under the common law of England and Wales, the effect of repealing a statute was "to obliterate it completely from the records of Parliament as though it had never been passed."[1] This, however, is now subject to savings provisions within the Interpretation Act 1978.

    So now that you've FINALLY actually read the definition of the word that DOES represent what you "believe you were saying" since the 60's…NOW does it make a tiny bit more sense why ALL EFFORTS HAVE FAILED to restore our freedoms so far?

    It's time we REPEALED prohibition. For everyone. Everywhere.

    "More of the same" isn't working. It never did. It never will.

    IT CAN'T…because it was never DESIGNED to.

    Not "decriminalization." Not "legalization." Not "tax and regulate." Not "regulate like _______." Not "government controlled." Not "corporate monopoly controlled." Not even "for approved and specifically licensed medicinal use only."

    ALL of those are just different forms of "specifically delineated" PROHIBITION.

    If you want it over, you have to REPEAL it.

    Unless you really WANT "more of the same?"

    http://overgrow.ning.com/profiles/blogs/the-fallacy-of-the-legalize-and-tax-cannabis-initiatives

    #OvergrowTheWorld

  6. Gene, I never heard of this flick. The trailer got me to look it up and it looks good. I’ll add it to my Watch list. I like Daniel Craig and I love drug flicks.

  7. I could say the same thing as this clip, but instead I’ll let you hear it from one of my favorite movies . . .

  8. The power to tax is the power to destroy, and I know of no better example than the Marijuana Tax of 1937. Until now. That’s how this mess got started in the first place. Would it be reasonable to tax & regulate lettuce at these levels? I can tell you (from a friend, OK?) the cost of hydroponic homegrown is WAY less than your examples. There is no right to tax, this is simply another abuse of power, by the same bureaucrats who’ve been throwing our people in prison for years. Ever heard of taxes of this sort being reduced? Me neither.

  9. These draconian taxes are supported by the three main opponents to legal cannabis. The liquor industry, Big Pharma, and the Legal/LEO industry. The first two want it taxed way above their mind altering substances. The LEO industry wants black market so they don’t lose too many jobs. Money talks.

  10. All sin taxes, sales tax, and fees for all things related to owning/operating automobiles, could, should, and WOULD be eliminated if they were replaced with a wealth tax.

    As we all know, regressive taxes and fees are inherently unfair.

  11. Tony,

    I don’t approve of sin taxes if they are used as financial discouragement of an activity. However, if those taxes collected are used to offset other social costs associated with “the sin” like education or health care, that’s acceptable to me. Using them as discouragement is just moralizing under another guise.

  12. Gene, Raff: I am philosophically opposed to sin taxes. I think, in this case, the decision should be binary: Outlaw it or do not, I do not believe in financial discouragement of an activity.

    Doing so is preferential to the wealthy, who do not care what things cost. It promotes precisely the feudalism Mike S just wrote about; the royals can do as they wish, the poor are priced out, and end up having to use illegal back channels and black markets that can literally put them in jail.

    I believe we have a similar situation with “justice” in our court systems. Members of my family would be in jail if it weren’t for my money, and despite the availability of court-appointed attorneys, the actual cost of protecting their Constitutional rights and preventing them from being railroaded is high, and I have seen some of their peers suffer exactly that fate. Justice and Rights have unfortunately become something that tends to apply to only those that can afford to pay for it, and I find that situation reprehensible, and quite analogous to sin taxes.

  13. hahahahaha washington is definitely the drug kingpin of the world. ask the cia/dea/nsa and the rest of all the 3 letter agencies we arent supposed to know about. where exactly do you think they get the money to fund those so called ghost agencies and the ghosts who work for them?

  14. Darren,
    Excellent post. Those of us distant from Washington state were not aware of that development. If certain agricultural products are taxed, once significant amounts of money start flowing into state revenue departments, it might have a moderating effect on enthusiasm for enforcement by certain Federal agencies.

  15. I don’t know, raff. Sin axes are a totally different deal. Just ask Lizzie Borden’s folks. 😀

  16. Very interesting topic Darren! I agree with Gene that sin axes are ok, but fairness is the key. Is there any evidence of corporate greed combining with the state thirst or revenue coming into play here?

  17. Excellent article. I am a medical user in WA state. Another factor to consider is the cost to patients for the initial exam, a 90-day follow-up, and then yearly exams after that to continue treatment. For me it was $135 for the 90-day, and another $100 for the annual thereafter. Without it, some days I would not be able to type.

    The primary problem with the WA plan is there need be no “processor.” The plant requires zero processing from root to lip.Over-processing will destroy the drug’s efficacy in any event. It does not requires huge investments in stills, boilers, and other fancy equipment. Maybe a rolling machine for spliffs. That’s it. Yes, further processing yields the bases for edibles and capsules and creams and such. But the default state of the plant is pick and smoke.

    This is quite different from alcohol, and even tobacco, which requires many more plants to get the desired effect. Big Tobacco getting into Big Weed means all the horrible addictive crap added to cigs will be added to spliffs, creating smoke that was designed by humans to cling to everything forever. I have a piano that has not been in my mother’s nicotine asylum (called a “house”) for 20 years, and it still smells of smoke when “cleaned.”

    And then we come to home-grown, something impossible with either alcohol or tobacco. This will be difficult to enforce with pot springing up on he roadside in the very near future. Lost seeds will germinate.

    Add the shifty deals described buy our August contributor Mr. Smith, here, and those of us on medi-weed would like to just continue that, thanks. It’s the best weed there is.

    Thanks again, Darren!

  18. “There is also the likelihood the illicit market might not be driven away due to the taxation issues on recreational retail marijuana.”

    I’m not opposed to “sin taxes”, however, this is a legitimate issue. When taxes alone become burdensome, people will avoid them in the name of profits no matter what the item in commerce happens to be. Ask the British. Their overly burdensome and woefully opaque VAT systems encourage black markets on all sorts of goods which have no medicinal or recreational chemical value whatsoever. Taxes are necessary. They are not theft. But they must be fair and not damage commerce to the point that consumers (and that is key here – the consumer driving demand) is willing to go to black markets to avoid high prices.

    Good show, Darren.

  19. Many people, including myself, knew this would happen. The FAIR and Smart way to tax cannabis is imposing the same Federal and State liquor tax, on cannabis. The govt. is 0 for 2 when discussing fair and smart.

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