GREENERY, ROBOTS and TAXES

That is not a drug; it’s a leaf. ~ Arnold Schwarzenegger 

Aside from offering a slight helping of food for thought, is my first vegan blog. I’ll verbally taste a plateful of two quite dissimilar and sometimes organic green plants that made the news recently. The first one I’ll examine, asparagus, is fairly distinctive but lacks public awareness. It remains an enduring but minor contributor to our overall agricultural output. The second green plant, marijuana, has a polemic history and far more community standing.

Asparagus is also called sparrow grass. Humans have cultivated it for several millennia. Its origins are shrouded in the mists of horticultural history, but include temperate, often maritime climes in most of Europe and western Asia. Some agronomists believe an Egyptian hieroglyph from 3000 BCE shows asparagus being grown. Ancient Greeks ate wild asparagus’ tender shoots. In the West it was the Romans who first began farming asparagus more than 2000 years ago. Cultivators spread this triffid throughout their empire. The Sun King, Louis XIV was a big fan, calling asparagus the king of all vegetables. He had several greenhouses built so he could eat it throughout the year.

Asparagus has been cultivated in America since the late 17th century. Hoping to entice travelers to move to his part of the new world, William Penn advertised that asparagus grew well in Pennsylvania’s climate.

Growing up in Philadelphia, my parents apparently were not enticed by Penn’s ancient advert. They did not ever grow any asparagus in their gardens. But I do remember eating spring asparagus shoots, shown below, on a semi-regular basis at dinnertime. Yum.

 

Young asparagus shoots doing their version of the hula.

I also remember one of asparagus’ signature post-consumption effects, my urine smelled strange. Asparagus contains aptly-named asparagusic acid which during digestion produces sulfur compounds in one’s intestinal tract. Hence the pungent smell. Benjamin Franklin, among many others, characterized this odor as “disagreeable.”

Only four (4) states account for the entire US asparagus production. It is a very minor crop in America, just 37,200 tons most recently, which accounts for a trifling 0.09% of all US vegetables produced. In contrast, China grows about 900 thousand tons of asparagus every year.

Unlike many other veges, California isn’t the largest producer of asparagus. Michigan produces 40% of the total crop, followed by Washington, then California and finally New Jersey. However, asparagus’ growing season in California is the longest of any state, from January (in far southern valleys) through mid-June (on the central coast).

Because of dire shortages of agricultural workers in the US, growers are eagerly hoping that viable, robotic harvesting machines can take up the slack. As the supply of seasonal agricultural labor has withered, crops have been plowed under. The reduced farm worker supply has been caused by multiple reasons. One of which is that exclusions for using temporary, nonimmigrant H-2A workers principally from Mexico have increased. In 2019 there were 442,000 H-2A admissions; in 2021, just 258,000.

First attempts at automating crop harvesting began in the 1950s and 1960s. Abundant challenges have slowed expected progress in making autonomous, robotic harvesters for commercial produce like almonds, apples, grapes, oranges, strawberries and tomatoes. For these crops, robotic harvesting still remains on thin ground.

 

The Sprout asparagus harvester

But asparagus’ distinctive and unusual physical shape may make it a shoe-in for fully-automated harvesting, hence its recent newsworthiness. Asparagus consists of a single stalk without any confusing foliage that can styme robotic harvesters. A single plant can produce up to 20 stalks during its 2-month growing season. It is also fast growing – up to 0.8 inches in an hour – so the robot can return in a couple of days in peak season for another go at the same field, rather than wait for a reappearance next season. One prototype robotic harvester, shown above, is the Sprout, made specifically for asparagus. It’s been successfully tested at several locations in the UK. More US farmers continue to face conditions that lead to giving up and leaving their fields behind. Could the Sprout help asparagus growers provide a more sustainable supply? Let’s hope so.

The second green plant under consideration is marijuana. For at least 2500 years it has been grown for its psychoactive effects. Originally native to Central and South Asia, its use spans recreational, medicinal and spiritual purposes. It is the most commonly used illegal drug in the world, including America.

No matter whether you call it cannabis, kush, bud, herb, dope, reefer, tea, ganja, grass, weed, head, mary jane, doobie, hash, bhang or, if you must, pot, it has a far higher public profile than asparagus. Currently, 19 states have legalized the sale of recreational and medicinal marijuana; 21 states allow only medicinal marijuana to be sold. Eleven hold-out states, you know who you are, do not allow marijuana of any sort to be legally sold or grown.

California voters approved Proposition 64 in 2016 that legalized recreational cannabis; its medicinal use was permitted 2 decades earlier. Legal recreational cannabis sales began in 2018.

 

 This bud’s perhaps for you.

     Prop 64 was heralded at the time as a fine way to shrink the state’s large, illicit, black market weed, and give people harmed by the war on drugs and other historical events a chance to join the licit economy. They could become cannabis growers or distributors. However, local and state politicians soon dismissed any real interest in reducing black market “street” weed when they imposed significant, multi-jurisdiction taxes on legal cannabis.

California’s system of reeferegulation that attempts to control the cultivation, processing and sale of cannabis is exceedingly byzantine and ultimately based on politicians’ fiscal greed. California’s taxes on cannabis may mount to 50% of the retail price for consumers, which can make legal weed a harder sell on the street against some of the world’s best (and illegal) kush from the Emerald Triangle.

A recent guestimate of the total size of California’s cannabis market states that the legal market is merely 35% as large as the black market. Doesn’t sound like California’s legalization has crushed the mature, well-established unlawful market, does it.

The legal framework established by Prop 64, together with California’s flawed implementation, have contributed to continuing problems for legal producers and distributors. One predominant reason for such problems is centered on Prop 64’s requirement that local governments must opt in to allow recreational sales to adults. Sizeable portions of California officialdom have prohibited recreational cannabis sales; 67% of the state’s jurisdictions still block sales.

At last count, there are only 866 licensed cannabis dispensaries in the state or 1.6 per 100,000 residents. This low number puts California far behind other states in terms of dispensaries per capita, one-tenth as many as Oregon. When and where there are no legal dispensaries, black market cannabis rules at far lower prices.

Experts believe the street price of an ounce of weed is 50% lower than the taxed, legal weed. No wonder growers are unhappy, although they’ve known since the very beginning of California’s legalized cannabis that their products cannot compete purely on price with street weed.

But cannabis spot-prices have steadily dropped over the past 3 years and more so in 2022, in part because legal production had increased. Over just the past 2 months, national spot-prices fell 17%. In California, statements of a legal weed “glut” are commonplace.

Nevertheless, legal weed has found a valuable niche in California’s cannabis firmament. We’re not talking penny-ante change here. The state is now the largest legal cannabis market in the world, the biggest Kahuna, raking in $5.2 billion (B) of taxable sales in 2021, a 17.1% increase from 2020. Last year, $1.5B in cannabis-related tax revenues were provided to selected localities and the state. California politicians may be happy. But other actors in the legal market are not and have made their complaints clear in Sacramento.

Governor Newsom and the Legislature’s Democrat leaders finally reached a deal to restructure the state’s oppressive taxes on legal cannabis. He signed the legislation into law on June 30 that will eliminate the growers’ cultivation tax. In addition, the new law provides $150 million from the state’s seemingly huge budget surplus to recipients of this tax’s revenues over the next 3 years as a back-stop for the resulting tax revenue reductions.

Beyond growers, another key group of market participants are dispensary owners, including what’s known in liberal nomenclature as social equity operators (SEOs). SEOs are folks who have received their dispensary licenses through local programs, like in Oakland, San Francisco and LA, intended to diversify the industry with more people of color, formerly incarcerated people and residents of neighborhoods with historically disproportionate marijuana arrest rates. SEOs represent about 23% of all cannabis dispensaries in California.

SEOs have been vociferous in their displeasure with the tax restructuring legislation. After all, issues surrounding the numerous facets of equity have established a prominent place in the hearts and minds of true blue Californians, include legislators. The new law provides SEOs with a $10,000 tax credit and allows them to keep 20% of the excise tax revenue they collect for the next several years.

SEOs dismissed this benefit as “crumbs.” They wanted much more, including a complete elimination of the sizeable excise tax. They thought they would get it, given their cause and the cobalt blueness of much policy-making in Sacramento. They did not.

The retail price of California’s legal weed may be reduced a bit due to the new law, but wholesale cannabis prices have already rebounded from last year’s slump because of increased demand. Meanwhile the price of asparagus has dropped, due to decreased demand and increased supply. A plate of asparagus spears and a pre-roll thus offers mixed fiscal blessings, depending on your taste. What will it be?

 

 

 

AN ALMOND TREE, LUTHERAN HOPS AND GREEDY WEED BUREAUCRATS

A fool sees not the same tree that a wise man sees. ~ William Blake 

Here’s a belated trick or treat. These three related events occurred during the just-past Halloween. Each one features a plant that is grown in the Golden State.

A tree grows in Hughson, not just Brooklyn.  This is an all too rare, whole-hearted good news story about caring people and an almond tree planted near Hughson, a small town in California.

Last year, the millions and millions of California almond trees that cover about 800,000 acres of Central Valley farmland, produced total cash receipts of $5.16 billion (B). California almonds represent the entire US almond crop and 82% of the global crop. That’s a lot of almonds.

But here I’m talking about a single, unique almond tree, shown in the pictures below. The Modesto Bee discovered this tree’s marvelous story.

This particular almond tree stands in the corner of an orchard near Hughson. It’s decorated each year on Halloween, Christmas and Valentine’s Day in commemoration of Danielle Genzoli, who died in a car accident 12 years ago when she was 16.

The tree had failed to thrive, and David Genzoli, Danielle’s father, planned to rip it out. But Danielle objected. “She was a nature girl and just loved the trees,” Kimber Genzoli, Danielle’s mother, said. “So it became their project to save this little tree. Before her death Danielle and her dad started the tradition by hanging a single bulb on the tree during the holidays.

The year Danielle died, David Genzoli didn’t have the heart to continue the tradition. But one day, when he and Kimber went by the tree they found that someone had hung homemade ornaments on it. They never found out who did it, but suspect it might have been a neighbor. “And it kind of morphed from there; people coming by just started adding to her tree,” Kimber Genzoli said. “It’s became a community project, and we are grateful for the people who contribute to this tree.”

Kimber Genzoli said Halloween was Danielle’s favorite holiday, so a few years later she hung some small pumpkins from the tree. This also was adopted by the community, with people stopping by regularly to add decorations.

From a single bulb, the tree at Christmas is now covered in ornaments and lights and even has a star at its top, as you can see above in the right-side picture.

Friends and strangers alike add ornaments, some personalized with pictures or their family name and the year.

People have left letters to the Genzoli family about Danielle’s kind heart and how she affected them, like one from a fellow student at Hughson High School who said Danielle one day sang “Don’t Worry Be Happy” to her when she saw her crying at school.

One year, Danielle’s first-grade teacher had her students make paper Valentines that hung from the tree in February. The tradition, too, has continued with Valentines from a new class each year, as shown in the left-side picture.

After Halloween and Christmas, the Genzolis take down the decorations and store them until the following year, and every year the collection grows. Danielle’s wonder-filled tree and its spirit is one more reason I enjoy eating almonds.

Lutheran Hops.  This Oct. 31st marked the 500th anniversary of Martin Luther’s protest to the Catholic Church. That’s because Oct. 31st isn’t only Halloween, it’s also Reformation Day, which celebrates Luther’s nailing his 95 Theses to the door of the Wittenberg Castle church in Germany on Oct. 31, 1517. His theses challenged the authority of the Catholic Church, and inspired the historic split in Christianity known as the Protestant Reformation. Apparently, historians now question whether Luther actually nailed his theses to that door. They think he might have merely mailed them to the archbishop. But beyond quibbling about whether they were mailed or nailed, it started something momentous.

That something wasn’t limited to changes in religious precepts. Nope, it also had to do with changes in beer production.

Every trendy craft brewery today touting hoppy beers should tip a brew towards Luther and thank him and his followers for stimulating the use of hops. Luther did it as an act of insurrection against the Catholic Church. He and his disciples provided a reformation in the production of beer. For the record, California grows a tiny amount of hops; much of our domestic hops come from Washington State, Oregon and Idaho. Here’s the story of Lutheran hops.

In the 16th century, the Catholic Church had a near headlock on beer production. History is repeating itself. My previous blog, “Wither My Craft IPA,” mentioned the heady concerns I have about today’s beer market where a very small number of producers (e.g., two) now dominate almost 40% of global beer making and distribution.

But let’s get back to the 16th century. The church’s control of the beer market came from its monopoly on the herbs and spices (e.g., sweet gale, mug wort, heather, rosemary, juniper berries, ginger and cinnamon) used to flavor and most importantly preserve the beer. The church taxed these needed beer ingredients.  

In an age when you risked your health by drinking plain water, beer was drunk by everyone. This widespread use of much safer fermented beverages was the norm in Germany and beyond for centuries. In the New World, beer and hard apple cider, whether it was made by Johnny Appleseed or not, was consumed by virtually everyone for the same reason. Treatment of public water wasn’t common until the late 19th century. Paisley Scotland seems to be the first Western European city to filter its water in 1832.

Fortuitously for Luther and other early German beer-makers, hops were not taxed by the Church. The Church’s priestly brewers considered hops unworthy, nasty weeds. In addition, Middle-Ages folklore which the Catholic Church adopted held that hops might not be healthy or good for you. Little did the Church know.

 

       Hops flowers

Beyond its being untaxed, hops were a far better preservative than herbs. Hopped beer thus contributed to local public health. It also contributed to regional and international business as hops’ preservative qualities allowed hopped beer to be safely sold further away from its brewery. This is why high-hopped beers like what came to be known as India Pale Ale could be transported across several oceans without problems. So, if you were an early Protestant brewer and also wanted to scorn the Church, you used hops instead of herbs. Such brewers changed the world of beer.

These Protestant brewers included Luther’s wife, Katerina. She opened a successful brewery that produced large amounts of hopped beer. Luther was delighted. Lord Katie, as he kindly called her, had assured him a steady supply of his favorite drink. We should thank Martin Luther for his bravery in pushing hops into beer. I’ll drink to that.

Some folks consider Luther’s strong promotion of hopped beer his second Reformation, and perhaps the most important one that many benefit from every day, not just Sundays.  

Greedy Weed Bureaucrats.  This tale is a coda to my blog last month, “The High Price of Getting High,” about marijuana, which California grows plenty of. One knowledgeable policy analyst said that high marijuana tax rates "will prevent the minimization of the black market,” a clear policy goal of marijuana legalization. More information about the California marijuana taxes became available on Halloween.

The expected price of California’s recreational marijuana sold legally after January 1st keeps growing. Why? In large part because marijuana is California’s single biggest cash crop. Cannibas’ production value is roughly 50% greater than that of grapes, the state’s second most lucrative crop. Thus, local authorities see legalization as a big new revenue-enhancement opportunity. They are proposing multiple large taxes on marijuana consumers, distributors and growers. Revenue-hungry municipal and state agencies will, in effect, feed the black market by increasing the tax-inclusive price of legal, recreational marijuana. The price of getting high in the Golden State is getting higher.

The fundamental economic relationship that tax authorities may have forgotten is this: high prices of legal marijuana will reduce its sales and will allow California’s existing, large black market weed to prosper. This is in spite of the relatively price inelastic nature of the demand for cannibas.

A new study issued by Fitch Ratings and reported by CNN on Halloween notes the breadth and height of these expected taxes on California recreational marijuana. They are shown in the table below.

California’s Proposed Taxes and Costs for Recreational Marijuana

Tax Type	Tax Rate or Level
Consumer sales tax	22.25% to 24.25% (includes 15% state excise tax)
Local business/distributor tax	1% to 20% of gross receipts or $1 to $50 per square foot of plants
Grower’s tax	$9.25/oz. flowers and $2.75/oz. leaves
Grower’s cost for registration and environmental compliance	$100,000 (est.)

Source: Fitch Ratings and CNN

These proposed consumer and distributor tax rates may total 45%. Notice also the hefty potential costs of growers registering and complying with the state’s environmental regulations. Such substantial “entrance fees” for the thousands of California’s illegal growers will act as a large disincentive for them to enter the legal market.

These sizable tax rates have a familiar ring to them. My experience with public authorities in several states’ municipalities is few have any systematic sense about how consumers or businesses may respond to their tax increases. They seem to believe that if for example they increase a tax by 10%, then tax revenues will also increase by 10%. This is a naïve expectation, especially when there is a substitute good not subject to the tax, like Emerald Triangle cannibas.

The authorities appear to believe businesses and consumers have virtually no sensitivity to high taxes; they will supply and buy the same amount of marijuana regardless of the taxes’ rate. This is a mistaken belief.

The tax-induced high prices of legal recreational marijuana in California will be good news for growers of black market weed. There will certainly be new buyers of marijuana after the New Year who will pay the high legal price because it’s legal and a less risky transaction. However, it’s also likely that other consumers (including many existing buyers of Emerald Triangle marijuana) or price-sensitive shoppers will buy from black-market suppliers and doubtlessly enjoy lower prices, just like happened in Washington State.

California’s marijuana policy-makers should learn about and/or remember Washington State’s, Oregon’s and Colorado’s early legalization experiences that forced these states to lower their initial,-uncompetitive, high tax rates. Given their fiscal greediness, I’m not sanguine that California’s marijuana tax authorities will remember basic economics and other states’ experiences. Time will tell as January 1st approaches.

THE HIGH PRICE OF GETTING HIGH

Let me get to the point / Let's roll another joint / Turn the radio loud / I'm too alone to be proud. ~ Tom Petty 

State marijuana markets are becoming white as well as black. More states are passing laws or propositions that legalize recreational and/or medical marijuana; creating legal white, regulated markets. Currently, 29 states and the District of Columbia have laws broadly legalizing marijuana in some form.

Despite characterizations by advocates, there is no national market for marijuana because of strict federal rules and regulations from the Justice Department’s Drug Enforcement Administration (DEA). According to federal statute, no marijuana (not even a single preroll) can be legally transported across state lines. All markets for medical or recreational marijuana are thus legally confined to individual states. Each state has its own rules and regulations for cultivation, production, sale and use of marijuana.

The Department of Justice Secretary Jeffrey Beauregard Sessions has clearly expressed his distaste for marijuana of any sort. As Alabama Attorney General he strongly supported an Alabama law that would have established mandatory death sentences for a second drug trafficking conviction, including for dealing marijuana. It was never enacted. Other cannibas-related statements by Mr. Sessions include: “Good people don't smoke marijuana;” marijuana reform is a "very real danger;" and it is “not the kind of thing that ought to be legalized.” I’d say Mr. Sessions is the kettle calling the pot black.  

According to federal statute, marijuana remains classified as a Schedule I drug, along with heroin and peyote. Schedule I drugs are those that have “no accepted medical purpose and a high potential for abuse” according to the DEA. Classifying marijuana as a Schedule 1 drug is a farce. If Mr. Sessions believes marijuana’s Schedule I designation is correct, then alcohol should be added to the list of Schedule I drugs, because its “high potential for abuse” is a matter of demonstrable knowledge (just ask one of the 2 million AA members). Oops, then he’d be battling the alcoholic beverage industry  that had sales totaling $223.2 billion in 2016. Not gonna happen. Like all too many of the president’s cabinet who play follow the leader, Mr. Sessions espouses his faith in inconsistent, misbegotten policies. States’ rights are fine and dandy when they “enhance” religious freedom or school choice, but nasty when they relax outmoded federal policy.

I believe marijuana/cannibas legalization for recreational and medical use is worthy and worthwhile. There are several useful objectives that can be met with legalization. The potential benefits from shelving prohibition and establishing publicly-regulated (white) marijuana markets – that The Economist terms “reeferegulation” – include: protecting consumers, promoting improved health, reducing penal sentencing of non-violent (mostly black) youth, saving the police money, raising tax revenues and putting criminal black markets out of business, as well as extending personal liberty. Beyond direct marijuana sales are benefits involving increased property values and more jobs (both in government and in marijuana production and distribution). Hey Mr. President, perhaps you should provide training and travel vouchers for former coal miners from WV and WY to head for states that have already legalized weed, where jobs are budding.

I highlight in this blog how stakeholders in legalized marijuana markets – producers/distributors, consumers and particularly state regulators – have affected its white market price.

Marijuana’s market price is a crucial factor and serves as a foundation for several available policy choices to achieve the above-cited benefits, especially dousing criminal black-markets and raising tax revenue. Despite the lengthy and expensive War on Drugs conducted by the DEA, the black-market supply of marijuana has never been acutely compromised. Curiously, pro-legalization advocates now echo the same benefits – lower criminal activity and increased tax revenue – that champions of Prohibition repeal proclaimed over 80 years ago with passage of the 21st  Amendment.

As mentioned above, legalized marijuana markets continue to expand across the US and beyond. This coming January, California expects to begin establishing the nation’s largest recreational marijuana market alongside those already operating in Colorado, Washington State, Oregon, Alaska and Nevada. In these states the legalized market for marijuana operates proximate to the traditional, illegal black market.

One of the important, repeatedly-mentioned goals of legalization is to eliminate black market marijuana supplied by criminal enterprises, a crucial goal that states need to achieve if they want to avoid federal intervention under the 2013 Cole Memo. It is a basic policy challenge for the regulated white market price to reflect this goal.

Public agency intervention with taxing and regulating white-market marijuana is a balancing act. This involves both interceding with the demand of legalized marijuana and its supply. Public authorities in each of the eight states now dealing with white market marijuana have confronted this challenge differently. If the tax rate is set too high, thus escalating the retail price, demand for white-market marijuana may be stunted. If growers and distributors believe that authorities have imposed too many or too stringent licensing and related regulations and not permitted sufficient numbers of retail dispensaries, then the supply of legalized marijuana may be inadequate. In either case, post-legalization customers can return (or remain) where they were before, in the underground black market. Also, if the price of the newly-legalized marijuana is much higher than the black market “street weed,” marijuana consumers may stay with their traditional sources rather than switch to the white market. If this happens, optimistically-forecast marijuana tax revenues won’t be collected, as happened in Washington State.

The growth of legalized medical and recreational marijuana sales has been impressive. In 1996, California became the first state to legalize medical marijuana when voters approved Proposition 215. Five years ago recreational marijuana wasn't legal anywhere in the US. Yet in 2016, sales of legal weed grew to $6.6 billion (B), according to New Frontier Data that includes $4.7B for sales of medicinal marijuana (in 29 states and Washington DC) and $1.9B for recreational weed (in Colorado, Washington, Oregon and Alaska).

The table below presents several facets of the 8 state recreational marijuana markets where it’s been legalized so far. The table lists states in chronological order of legalization. Cannibas shops that sell legal recreational marijuana and “edibles” have been open for business in Colorado and Washington since 2014, in Oregon since 2015, in Alaska since Oct. 2016 and in Nevada since July. The industry as a whole is projected to exceed $24B in sales by 2025, an annual growth rate of 16%. Despite its widening legality, if you show up for work and flunk a drug test due to marijuana use in these states, you still can be fired.

The State of State Recreational Marijuana Markets

State	When Legalized	First Month Sales ($M)	Aver. Mkt. Price* ($/oz.)	Sales Tax Rate
Colorado	2014	$15	$242	22%
Washington	2014	$3.8	$324	37%
Washington DC	2014	NY	$600	0%**
Oregon	2015	$15	$210	17%
Alaska	2016	$0.75	$298	$50/oz.
Nevada	2016	$27.1	$270	15%
California	2016	NY	$250	15%
Massachusetts	2016	NY	$340	3.75%
Maine	2016	NY	$297	10%

Sources: Priceofweed.com, The Cannabist, Tax Foundation. NY: Not Yet.

*Price of “high-quality” marijuana. **Federal law prohibits DC from taxing weed.

From the table, first-month sales of marijuana and related products have varied quite a bit for the 5 states where legal retailing has occurred. Nevada’s first-month revenues are the largest so far, by a wide margin. Because only Nevada-grown marijuana can be legally sold there, many dispensaries soon closed their doors after opening them. They had no product to sell because demand had far outstripped supply. After July, legal supply has become more available for the increased number of dispensaries.

The last column shows each state’s tax rate on marijuana as of January 2017. These rates can include either retail sales or excise taxes on marijuana, but don’t include wholesale taxes, optional local taxes or standard sales tax.

Washington DC’s rate, 0%, an obvious outlier, was set by Congress. After DC voters approved legalization in a 2014 an initiative, conservative members of Congress, who at times seem to work in DC, were upset, especially Rep. Andy Harris (R-MD). Medical marijuana has been available in DC for almost two decades. Rep. Harris did not want legal recreational marijuana on the streets around or beyond his Longworth Building office. Luckily for him, the House of Representative holds complete fiscal power over DC’s budget. Republicans have passed annual spending bills since 2015 that contain a rider written by Rep. Harris that prohibits the DC Council from using any appropriated funds for taxing or regulating marijuana. If you come to or live in Washington DC, anyone over 21 can legally possess up to 2 oz. of marijuana, but you cannot legally buy or sell it anywhere in the District. So it goes.

Beyond DC, state sales taxes vary considerably. Washington State’s marijuana tax remains the highest (37%), even though it was reduced in 2016. Massachusetts’ 3.75% is the lowest. States’ marijuana tax rates have tended to diminish after the first two states – Colorado and Washington – allowed legal sales.

Looking at Colorado and Washington illustrates the trade-offs and consequences arising from “more lenient” versus ”stricter” regulation. Colorado initially set its marijuana taxes fairly low, at 28%. It also took a somewhat lenient approach to licensing sellers, meaning there were many of them. In 2016 there were 698 storefronts in Colorado that sold medical or retail marijuana, more than triple the number of Starbucks in the state. Colorado has more than 2.5 times the marijuana dispensaries than Washington State initially had, after accounting for the population of each state.

First-month total revenue in Colorado was $15M, four times higher than Washington State’s. Perhaps not surprisingly, Colorado is now the most popular spring vacation destination for US college students; the Colorado Cannibas Chamber of Commerce (yes!) has done its job. Beyond spring, almost one-quarter of Colorado’s 77M yearly visitors, and one-third of those between 25-34 years, said that availability of recreational marijuana was a reason they chose to visit the state.

In 2015 Washington initially set its taxes much higher, at an effective rate of 44%, and was much stricter with licenses for growers and retailers. Only 334 retail shops across the state were approved by the State Liquor and Cannibas Board. First-month sales were $3.8M. The Board hastily increased the total licensed retailers to 556 after it became obvious that there were too few outlets (and tax revenue). Given supply and demand and all that, Washington State’s legal marijuana prices were 67% higher than Colorado’s in 2014. Washington’s Board has since reduced the effective tax rate but it’s still the highest of any state. The legal white market marijuana price in the state is often higher than the black market price.

As a consequence, Washington’s legal sales accounted for only about 30% of the state’s total estimated cannibas market (both the white and black markets), whereas Colorado’s legal sales met about 70% of total estimated demand in Colorado. Hence, a strong majority of Washington marijuana users continued to buy from existing black market sellers after legalization. This outcome was not only due to Washington State’s early higher prices but because there were fewer licensed sellers, especially when compared to Colorado. Price differences remain; Colorado’s current average market price is $82/oz. less expensive than Washington’s.

Lower marijuana tax rates may reduce overall tax revenues, but essentially can increase the market share of legal marijuana relative to the total demand, and make life harder for black market suppliers.

The crowd-sourced average market price for “high-quality” marijuana, posted by priceofweed.com, also varies considerably. The table shows that Oregon has the lowest market price, $210/oz. Washington DC’s price of $600/oz. stands out as the highest, but remember DC as yet has no legalized recreational marijuana sales due to Congress’ restrictions. It’s a fair assumption that in DC the quantity of marijuana demanded strongly exceeds the quantity supplied, hence high market prices.

In general, market prices in eastern states exceed those in western states. The average market price in northeastern states – DC, DE, MA, ME, NY, PA and VT – is $376/oz. The average price in western states – AK, AZ, CA, CO, NV, OR and WA – is $270/oz. A fair amount of premium-priced California marijuana ends up on the East Coast as well as points in between.

The chart below shows how US wholesale prices have dropped between April 2015 and June 2017, as state-legalized marijuana sales have dramatically expanded. 

Source: Cannabis Benchmarks. Wholesale price in dollars per pound.

The marijuana harvest usually occurs each fall, as shown with price decreases on the chart for the latter part 2015 and 2016. The expanding legal markets in Oregon, Colorado and Nevada contributed to the dramatic reduction in the 2016 fourth quarter price according to Cannabis Benchmarks. Wholesale cannabis prices dropped 18.6% in the first half of 2017.

The “biggest Kahuna” California market for legalized recreational marijuana is to begin in less than three months. But all is not going smoothly in the Golden State. Taxing white market marijuana is not likely an issue – the prospective marijuana tax rate for consumers is 15%. One concern centers on the long-time existence of a sizable black market whose suppliers have been loath to adopt new supply-side regulations. Another problem is that localities have important responsibilities for establishing rules and licensing retail dispensaries, but local and county governments are behind schedule in these essential duties.

Voter approval of Proposition 64 legalized recreational marijuana last November. It also decriminalized the possession of certain amounts of marijuana (it’s now a misdemeanor, not a felony), allowed individuals to grow six plants at home, set rules for the sale and cultivation of regulated plants, and sought to better manage the largely unregulated medical cannabis system. Unlike other states that embarked on creating a white market for marijuana, California has had a well-known, substantial black market that produces high-grade weed. California’s newly-enfranchised marijuana regulators face a unique conundrum that can be summed up in two words: Emerald Triangle.

Growers in Northern California’s Emerald Triangle region have produced large amounts of mostly outdoor, superior marijuana for decades. It’s the largest cannibas-producing area in the US. According to Arcview, its market value is about $7B. Many connoisseurs believe it’s the best in the world and are quite willing to pay high prices. California produces seven times more marijuana than it consumes, according to one estimate. Because the potential rewards are so significant, the Emerald Triangle along with the rest of California is almost certain to remain a major (illegal) exporter to other states even after the white market becomes established. However, the huge wildfires in Northern California aren't just destroying homes and vineyards; cannibas cropland is also going up in flames. For cultivators whose crop hasn't been directly destroyed, the fires' heavy smoke will reduce the value of their crop.  

So far only about 3,500 marijuana growers in the Emerald Triangle have applied for permits to farm within the white market. This number sounds like a lot of cultivators and would be in virtually any other region. But it represents just 11% of all growers in the Emerald Triangle. Many cultivators/growers have been dissuaded by what they consider significant effort needed to obtain a permit, as well as the fees, taxes and enduring regulatory requirements. If they stay beyond the new, white market system, these growers probably face lighter punishments and avoid paying taxes, fees and the costs of meeting environmental standards. The way one local grower put it, “Why do I have to get permits? My parents didn’t have to and my grandparents certainly didn’t have to.” Confirming this reluctance, Bruce Smith, a lieutenant with the Mendocino County Sheriff’s Office who leads the county’s efforts to shut down illegal marijuana farms stated, “The vast majority aren’t permitted.”

If these trifling levels of white-market participation continue through January, California may face the ironic circumstance of producing an insufficient amount of legal marijuana, despite being the nation’s largest domestic producer. That situation won’t reflect much balance between demand and supply; legal prices will likely spike and make the task of slaying the black market marijuana dragon difficult.

Can California sufficiently merge its large, existing black market with its nascent white market? It’s the key question that will influence the success of California’s initial foray into legal recreational marijuana. This issue hopefully can be resolved through discussions with growers, regulators, sellers and consumers before the New Year. Paraphrasing the late, great Tom Petty, I doubt if these discussion participants will be too alone, but they may be too proud. 
A Coda on Greedy Weed Bureaucrats.

New information became available on Halloween about the expected total taxes to be charged on California's legalized, recreational marijuana. One knowledgeable policy analyst said that high marijuana tax rates "will prevent the minimization of the black market,” a clear policy goal of marijuana legalization. Minimizing California's sizeable black market for marijuana is not likely.

The expected price of California’s recreational marijuana sold legally after January 1st keeps growing. Why? In large part because marijuana is California’s single biggest cash crop. Cannibas’ production value is roughly 50% greater than that of grapes, the state’s second most lucrative crop. Thus, local authorities see legalization as a big new revenue-enhancement opportunity. They are proposing multiple large taxes on marijuana consumers, distributors and growers. Revenue-hungry municipal and state agencies will, in effect, feed the black market by increasing the tax-inclusive price of legal, recreational marijuana. The price of getting high in the Golden State is getting higher.

The fundamental economic relationship that tax authorities may have forgotten is this: high prices of legal marijuana will reduce its sales and will allow California’s existing, large black market weed to prosper. This is in spite of the relatively price inelastic nature of the demand for cannibas.

A new study issued by Fitch Ratings and reported by CNN on Halloween notes the breadth and height of these expected taxes on California recreational marijuana. They are shown in the table below.

California’s Proposed Taxes and Costs for Recreational Marijuana

Tax Type	Tax Rate or Level
Consumer sales tax	22.25% to 24.25% (includes 15% state excise tax)
Local business/distributor tax	1% to 20% of gross receipts or $1 to $50 per square foot of plants
Grower’s tax	$9.25/oz. flowers and $2.75/oz. leaves
Grower’s cost for registration and environmental compliance	$100,000 (est.)

Source: Fitch Ratings and CNN

These proposed consumer and distributor tax rates may total 45%. Notice also the hefty potential costs of growers registering and complying with the state’s environmental regulations. Such substantial “entrance fees” for the thousands of California’s illegal growers will act as a large disincentive for them to enter the legal market.

These sizable tax rates have a familiar ring to them. My experience with public authorities in several states’ municipalities is few have any systematic sense about how consumers or businesses may respond to their tax increases. They seem to believe that if for example they increase a tax by 10%, then tax revenues will also increase by 10%. This is a naïve expectation, especially when there is a substitute good not subject to the tax, Emerald Triangle cannibas.

The authorities appear to believe businesses and consumers have virtually no sensitivity to high taxes; they will supply and buy the same amount of marijuana regardless of the taxes’ rate. This is a mistaken belief.

The tax-induced high prices of legal recreational marijuana in California will be good news for growers of black market weed. There will certainly be new buyers of marijuana after the New Year who will pay the high legal price because it’s legal and a less risky transaction. However, it’s also likely that other consumers (including many existing buyers of Emerald Triangle marijuana) or price-sensitive shoppers will buy from black-market suppliers and doubtlessly enjoy lower prices, just like happened in Washington State.

California’s marijuana policy-makers should learn about and/or remember Washington State’s, Oregon’s and Colorado’s early legalization experiences that forced these states to lower their initial,-uncompetitive, high tax rates. Given their fiscal greediness, I’m not sanguine that California’s marijuana tax authorities will remember basic economics or other states’ experiences. Time will tell as January 1st approaches.