Many Americans celebrated the legalization of marijuana in their home states. However, with legalization comes the responsibility of the state to tax the drug accordingly. This means that the legal marijuana industry in the US may start to suffer as the price begins to drop.
If the sector operates in the same way as it currently is, that is, on a statewide basis, marijuana will not become the next great cash crop of America.
Colorado’s Untimely Marijuana Price Drop
The wholesale price of marijuana in the state of Colorado has recently seen a massive decline. Prices have fallen by up to one third in only one year. Marijuana has been legal for recreational use in the state for the past six years, and the price has steadily been dropping ever since legalization was put into place.
This means that many marijuana entrepreneurs are slowly becoming bankrupt, although the biggest effect will be felt by the state itself, as taxes on marijuana are calculated based on its price.
Stately Tax Implications
Other states where marijuana has been legalized, like Oregon, are also feeling the price pinch. Oregon experienced a price drop that is seeing prices as low as only $100 per pound of marijuana (which is an all-time low of the state).
This is because operating a legal marijuana business is generally much cheaper to run than an illegal one. In states where the recreational drug gets legalized, taxes are generally calculated as a percentage of the marijuana’s selling price.
Thus, the tax revenue that comes from marijuana sales is directly linked to the price of the marijuana itself. The states themselves are now also making a loss in the form of their tax revenue from the marijuana industry.
It is ironic, however, that the state of Colorado increased the tax rate percentage from 10 to 15 percent just last year in an attempt to increase their revenue from marijuana taxes, only for the overall selling price to drop further. This increase was completely wiped out a year later by the continuously dropping price of marijuana.
Anticipating the Problem
Many industry leaders and economists have been throwing their opinions around regarding the price fluctuations and tax methods of the marijuana industry.
While some have been quite accurate, there have also been some misleading predictions regarding how legalization would affect the industry. This affected state thinking and their lack of anticipation of problems such as drastic price drops.
According to Jeffrey Miron, an economist who is quite openly pro-legalization, there would be only a 50 percent decline in prices when marijuana was legalized. However, he made this prediction in 2010. Even a 50 percent drop was still an excellent scenario, bringing in a significant amount of tax for the legal sale of the drug.
If legalized states continue to tax the drug as a percentage of the cost, they may reach a breaking point. The tax revenue may not even cover the costs of the legal, regulatory system that the government has needed to implement.
This could mean that the marijuana industry will drain more money from the public’s pockets rather than helping to raise the bottom line of the state’s account. The anti-marijuana public may not be too impressed should this become the situation in the near future.
Jonathan Caulkins, a drug policy analyst, forecasts that the price of marijuana will eventually fall so low that it will fall in the same price bracket as other easily grown and legal plants, like barley and wheat. It’s a firm prediction that is backed by a vast amount of knowledge.
The public could legally pick up a joint for as little as nickel, or worst-case scenario, get a joint as a complimentary product next to the bowl of peanuts in their local bar or pub.
The percentage taxed on legal marijuana would not cover the legal costs of that state-wide regulatory system. It is a bit of a catch-22 for the legalized states, wouldn’t you say?
A New Way to Tax Marijuana
The simplest thing states could do is tax sales by weight and not cost to generate enough revenue. The state of California has always done this to retain tax, and we are now seeing other states heading in that direction. Maine has recently implemented this method of taxation. There is, however a risk involved in this approach.
Producers will begin to increase the potency of the drug to create a more value-for-money experience. As with any issue in this field, any alteration of the product comes with some form of limitation.
Should producers begin to increase the potency of their product, states are more than likely to implement restrictions of allowed potency per ounce, making weight-based taxes just as troublesome as price percentages. A good case has already been established as the foundations of such jurisdiction, especially on the grounds of public health.
The average cost of marijuana boils down to supply and demand. In the state of Washington for example, supply is so high that prices are plummeting as a result. Some consumers prefer to purchase more expensive brands as they are seen as the higher quality.
However, there will always be a market for the cheaper strains. More stores and suppliers will open up with prices that become lower and lower for one simple reason: this business model is highly profitable, just not for state taxes.