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Legalization in Colorado
Black Market for Pot Persists

In Colorado, legal pot doesn’t pay—at least not yet. At the Daily Beast, Abby Haglage deflates a recent viral media meme that Colorado was raking in the money from legal marijuana sales. In fact, it’s the opposite: in 2014 the state brought in $25 million less in marijuana sales than expected. More:

In July, the Denver Business Journal showed analysts’ estimates for the yearly total of recreational pot tax revenue to be somewhere from $60 million to $70 million. The Denver Post called Gov. John Hickenlooper “bullish” about the potential tax revenue streams, which he estimated would exceed $100 million […]

High predictions or not, the fact remains that Coloradoans bought less recreational marijuana than they could have—which means either they stopped using it or bought it somewhere else. With one in eight Coloradoans smoking marijuana in the last month, the latter seems more likely.

Looking at the taxes on cannabis in the state, it’s not hard to see why. Pot taxes in Colorado are steep. In Denver, for example, an eighth of cannabis can come with four taxes: an excise tax, regular sales tax, special sales tax (for pot retailers), and a special city tax. That equals a markup of roughly 30 percent.

One of the theories behind legalizing marijuana is that it would undermine the role the “black market” played in supplying people with the drug. That would mean less money and power flowing to drug dealers or gangs, and fewer people behind bars who were caught selling on the black market. But as Mark Kleiman, the drug policy specialist brought in to set up Washington state’s market, has argued, unless you set the price of marijuana just right, the black market will persist—and might do so even if you get the price right. Colorado apparently has not yet reached the correct price point, which means less state revenue and more black market transactions.

We may decide that legalization is the lesser of many evils when confronting the damage of the drug war, but when it comes to eliminating the black market, we still haven’t figured it out.

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  • JR

    So you are telling me that increasing taxes on something (in this case, marijuana) to the point of making it too expensive to go through legal cause people to seek “black market” (un-taxed) alternatives. What a completely weird and unpredictable side effect. Next you will say crazy things like making employing low skill workers in full time positions more expensive will cause an increase in part-time employment.

  • LarryD

    When has government estimates of revenue from a tax ever not been too high? Just like cost estimates are always too low.

    One in eight using! I really want to avoid CO.

    • Clayton Holbrook

      Perhaps they were too high when they estimated the tax revenues.

  • Kevin

    A 30% markup for taxes is pretty low for a “sin” tax. The tax on cigarettes is over 100%.

    • Andrew Allison

      The thriving black market in untaxed cigarette sales tends to prove the point.

  • Andrew Allison

    It appear to me that TAI, at least, has figured out that if government makes the cost almost the same as the black market price via taxation, the black market will continue. I also suspect that, like good capitalists, the illegal suppliers have lowered their prices to compete with the legal market price. The good news, such as it is, is that consumers are saving money.

  • FriendlyGoat

    There is nothing much more morally questionable than governments which attempt to balance the budgets on tax revenue from alcohol, tobacco, gambling and pot. Why not just tell all our teenagers flat out that their adults are two-faced opportunists?

  • Jacksonian_Libertarian

    Cigarettes are legal but there’s a black market in them as well. The fact is Marijuana is a weed and should sell for its agricultural cost, about $5-$10 for 100 lb bale like hay, instead of $200 per oz. This is why there is still a black market, the price is outrageous even criminal as it is the same as what the black market prices were before legalization.

    • Kevin

      The idea of some guy driving up to a feed lot to buy a 100 pound bale of pot is amusing – or horrifying. But this price difference shows that it’s not taxes but other production and distribution issues driving up the price. I wonder what te regulations on growing it is – I doubt they just let any farmer plant a few hundred acres if it.

  • ddh

    Untaxed moonshine is still being distilled in its traditional haunts.

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