Is Washington State Becoming a Drug Kingpin?

Submitted By Darren Smith, Guest Blogger

A 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.

Moreover, 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.