Politics, Society

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. Tony,

    Every thing you point to there can be quantified with a fair degree of accuracy. Not only should “sin taxes” be calibrated to that data and earmarked specifically for those expenditures (much like some states earmark lottery profits for education spending), it should be setup to require recalibration every five to ten years to keep the tax fair by accounting for both market and user base fluctuations.

  4. Didn’t someone post about the liquid THC beng the ultimate goal of he government….. Drug companies control congress…. So, why not…

    Excellent article Darren…. Fairness is not a doctrine that the government is familiar with…. Used to be….. But not so much anymore…. It’s all in dollars and cents…. Again tank you for an excellent article….

  6. It’s amazing out here in the middle of fly over country & big empty highways that the people allowed the DC polecats to force us to drive 55 mph for 24 YEARS!

    Like Idiots, people are to still to listen/obey those Aholes & yet we do.

    Looking at the unworkable govt tax scam above it shows we are still ruled by insane leaders & most obey.

    Tommy Chong speaks out & says just end probation & leave it along.

    I’m watching & thinking any discussion on the subject may be moot.

    On one side of Washington St. they have the Handford Nuke Mess pollution heading West.

    Coming at them from the West they have all the nuke radiation from Fukushima.

    So whether it’s cannabis or apples most everything in Washington st. is/or going to be contaminated by Nuke pollution.

    My friend with 4 tumors on him right now isn’t worried about much Fuk-us.

    Now we know why the new reports are coming that most everyone will have to deal with their own cancer at some.

    How about a Huge azz tax on Nuke Pollution & free meds for all of it’s cancer victims?

    Are we all not now “On the Beach” & like obedient slaves we obey the fools right to the very end.

    http://en.wikipedia.org/wiki/On_the_Beach_%28novel%29

  10. does this mean that the governor of the state of washington can be prosecuted and face execution under federal drug kingpin laws.

  11. A drug dealing person is a potential Kingpin. A state which provides the drugs to thrive is a drug haven. Never the twain shall meet. Person, place.

  12. Gene: if those taxes collected are used to offset other social costs associated with “the sin” …

    I suppose that is reasonable, if some figure can be put on those costs. I don’t smoke (two of my sisters do though) and I worry about the slippery slope of disproportionate response.

    For example,

    1) Habitual smoking is bad for your health (true).

    2) Habitual smokers eventually use a disproportionate share of taxpayer supported medical services (I think that is true, but it also shortens lifespan, so I wonder if dying early and thereby foregoing their “share” of taxpayer-supported elderly care and retirement offsets their higher end-of-life costs or not.)

    3) If (1) and (2) are true, lets tax cigarettes at 25c per cigarette. No wait, let’s make it $1. or how about $3 per cigarette?

    Without some requirement of the tax being proportionate to the costs it is supposed to cover, I think a sin tax slips into a morality tax (or profit center for slush funds and pet projects) pretty easily.

    I agree with the principle to an extent, my worry is that allowing that “sin tax” enables what I regard as “tax sins” by lawmakers. 🙂

  14. Darren, Washington is using the Colorado model of complete access and surveillance for medicinal cannabis. When Colorado first voted in medicinal cannabis they were determined to not become the wild west of California, where there are very few controls. What happened was what was actually intended, a rarity in government. Only companies w/ enough money to comply w/ these expensive surveillance system and w/ the good intentions of following the numerous regulations were able to set up shop. At first I didn’t like it because it excluded legit people who simply didn’t have the startup money. However, I see now the government actually saw the total legalization coming down the road[here now], and wanted to be prepared. Whomever had this intelligence, foresight, and organizational skills should be governor and hopefully a future president, or go into the private sector and make some real dough.

    Colorado has the companies in place to mass produce. In California, edibles, which are going to be a hot item, particularly for women, are made by mostly local bakers. There’s nothing wrong w/ that. They’re virtually all organic. Now, I’m always skeptical of the “organic” but I’ve actually met two bakers. They’re both women, really into organic and regular baking along w/ edibles, and I have no doubt their products are as labeled. Their products are pretty good as knowing just how much to consume. Almost all edible products are not for one dosage. A cookie is, depending upon your tolerance, anywhere from 1[a longtime consumer and over 200lbs.] to 3 dosages. Some are labeled w/ that info, but that’s where the “budtenders” in dispensaries come into play. People find budtenders and dispensaries that they know and trust to give them god info. The only company in California I’ve found that is on par w/ some of the Colorado ones is The Venice Baking Companies. They make the full range of products from candy to baked goods to drinks. They make a “Tootsie” that looks just like a Tootsie Roll, that is a single dose. Their baked items are labeled 2-3 doses, or whatever the product dosage is. Edibles have no carcinogens. Now, the carcinogens are not as lethal as tobacco when smoked, and NOBODY, even Rasta’s smoke the equivalent to a pack a day. But, if that’s your concern, there are vaporizers which eliminate all carcinogens. And, just within the last year or so, electric handheld vaporizers, just like the electronic cigarette, have come onto the market, making it easy to smoke cannabis anywhere. The Volcano type vaporizer is strictly for home use.

    Although edibles are the wave of the future IMO, they can lead to overdoses. Now, if you overdose you’re not going to die, but you will hallucinate, and it’s really scary, if that’s not your intent. The reason edibles can lead to overdoing is two fold. The product is not sold w/ proper dosing labels and/or the quality control of the producer/baker is not consistent. But, the bigger reason is, it takes a while for the effects to be felt. When smoked or vaporized, the effect is immediate and strong. However, for medicinal purpose, that is often not what the patient wants. It is for cancer, Aids, etc. patients who are suffering w/ chronic and severe nausea. But for people w/ MS, pain, anxiety, they want a longer lasting, more mellow, medicinal benefit. Unless you have a good caregiver, or knowledgeable budtender, it is hit and miss regarding dosage. We are an impatient culture. The effects can take an hour or sometimes even longer depending on your metabolism, weight, full or empty stomach, etc. So, the overdoses occur when someone eats a hash brownie[the most potent edibles I’ve seen]. most hash brownies are 4-5 doses. One should not eat more than 1/4 unless they’re like Willie Nelson maybe. Willie could probably eat a whole one! Well, a person waits an hour, says “WTF I’m not getting any relief” and eats another quarter. Then it starts to kick in and keep kicking in and “Houston we have a problem.”

    My apologies. I got up early, drank some espresso and worked out. I’m a bit wired. But, this is a topic that is very important to me and I have learned a bit about it over the past 5 years or so. I would be interested in you keeping us informed on your state as this progresses. Has Seattle started any Orwellian speech controls vis a vis cannabis. You know the different strains have great names like Presidential Bubba, White Trash Crack, etc. The names come and go and change a lot as strains are hybrid. Seattle will need a PC Czar to make sure NOBOBY is offended.

  15. Only churches can assess sin taxes.

    Washington State is turning a dream tax into a nightmare tax.

    Just sayin’ …

  17. electropig,

    It would be a shame if some of your salient points went unheard simply because of your overbearing condescension.

  18. Regarding the rules in the above link, after my analysis the regulatory costs, and the regulatory risk were too high to outweigh the possible benefit of engaging in a retailing business given the current rules, the uncertainty of the new market, the possibility of federal intervention, and the excessive taxation with the possibility of another market maker (medical marijuana) having high comparative advantage in pricing.

    I also objected to the fact the government would be effectively be given carte blanche to perform surveillance of the business by being provided access to store security cameras upon demand.

    The record keeping required is as granular as inventory requirements to itemize down to the seed level. Plus the fines and sanctions for violating the rules could easily put the business in jeopardy and a loss of investment.

    1. “Sin taxes” are just governments’ way of making a percentage of the population enjoy oppressively overtaxing another percentage of the population.

      It’s interesting how governments manipulate their own people to attack themselves, so that they not only don’t have to attack us directly in any way other than to overtax us, but when their plans inevitably fail, they get to blame the people for “pushing us to rape your wallets” in the first place.

      The degree of backpedalling and outright fraud is amazing, and only outdone by the fact that the people continue to buy into the same scams over and over and over again, as though they’d never seen it before.

      All the talk of “regulatory costs” are also a profiteering smokescreen. There would be no need for “regulatory expenditures” of any kind if you just grew a few plants in your own garden and were left alone.

      Let’s talk about the REALITY before we start telling ourselves that we need new taxes and new agencies and new government employees to be pulled out of the REAL economy and into the fraudulent, far more costly government drain-onomy. It’s too big, too wasteful, too costly and too fraudulent as it is…anyone who thinks that it’s going to get better if it keeps getting bigger is a fool.

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