It appears that illegal pot growers are giving thanks this holiday for California lawmakers who legalized pot only to fuel demand for illegal cannabis due to massive taxes. It is the same problem that I wrote about in New York’s program in an earlier Wall Street Journal column. Politicians continue to pile on taxes as if they have no impact on pricing and demand. It just seems like free money if you ignore every economic metric and principle. Even with a recent recognition that they have killed their own market, California lawmakers are being criticized for offering too little too late in terms of tax relief.
Sgt. James Roy of the Riverside County Sheriff’s Department is quoted in Fox News as saying that “The illegal industry is competing with the legal industry and essentially putting them out of business.”
Why? As with bathtub gin after Prohibition, few people would prefer bootlegged products rather than the safer lawful alternatives. The only reason is economics — and the refusal of the California lawmakers to recognize basic rules of supply and demand. Not only is pot cheaper due to the massive taxes imposed on lawful businesses, but it is also being sent to the East Coast where similar price differentials are also fueling the illegal trade.
Despite being a relatively new industry, state and city officials imposed thick layers of regulations, charges, and taxes on the budding businesses. Some estimates put the taxes at 70 percent of current costs.
Even with a recent recognition that lawmakers strangled the industry, a temporary tax cut is not expected to be enough to make lawful businesses competitive. There remain a host of other taxes, required regulatory obligations, and even bars on claiming certain expenses used by other businesses. The result, according to one study, is that “the effective tax rate on marijuana in California ranges from $42 to $92 per ounce, depending on the jurisdiction, compared to an estimated wholesale production cost of $35 per ounce.”
So you have a high demand product that has been strangled out of the legal market by politicians who cannot resist adding their own taxes and demands on these nascent businesses. The result is a bonanza for illegal cannabis growers. The alternative was to show a modicum of restraint and allow this industry and market to stabilize and grow. It would then might produce greater revenue even with lower taxes. That, however, requires the one thing that is seemingly beyond our current political environment: restraint.