Ben Livingston writes in Slog about how the state Office of Financial Management was using some fuzzy calculations to overestimate the tax revenues that’ll be generated by I-502. It’s not terribly unusual to see drug law reformers overstating this case, but it’s a clear sign of how times have changed when a state agency is doing it.
This concern over failing to pull in the expected revenues from I-502 is echoed by Mark Kleiman, the state’s new “pot consultant”, in his recent interview on TVW (which you can see at the bottom of Livingston’s post). From that same interview, Kleiman is additionally concerned about whether people who are already in the medical marijuana community will switch over to the non-medical market when it’s available:
Washington state many he headed toward a situation where recreational sales of marijuana are not profitable due to heavy taxes, regulations and, most importantly, competition from the untaxed “collective gardens” where the state’s medical marijuana is grown, Washington’s newly hired pot consultant said last week.
“Any revenue estimate depends on actually having people come to the licit market rather than having them use one of the parallel markets,” UCLA professor and author Mark Kleiman commented last week’s episode of the Washington-based news program “Inside Olympia.” “What if you gave pot legalization and nobody came? It is entirely possible that by the time we finish regulating and taxing this product, it’s going to be uncompetitive with what you can get at the collective gardens.”
This is a very interesting question with a lot of variables. For some background, the medical marijuana bill signed by Governor Gregoire in 2011 allowed for 10-member collective gardens, but disallowed a state-regulated system of dispensaries. This created a lot of confusion and the state entered into another phase of having our medical marijuana industry living in a very gray area of the law.
Permissive cities like Seattle still allowed storefronts to open serving medical marijuana patients. In order to comply with the collective gardens language, however, these establishments would have a rotating 10-member list. When you came in the door with your medical marijuana authorization in hand, you became a member of that collective garden, and once you’ve “made a donation”, picked up your medicine and walked out the door, your membership spot was then freed up for someone else.
In other parts of the state, city councils implemented bans on collective gardens, which they technically couldn’t do, but which effectively discouraged people from setting up a storefront and testing out the gray area. So dispensaries don’t exist in much of the state, but there’s nothing legally stopping a group of up to 10 medical marijuana patients from forming their own collective garden and following the law to the letter. In fact, being a medical marijuana patient remains the only way to legally grow marijuana in the state of Washington without being regulated by the state under I-502.
So part of this question is what happens to the dispensaries once I-502 is implemented and state-regulated retailers are competing side-by-side with them? I’ve been convinced that once we get to this point, both state and local officials will stop tolerating the gray area of the 10-member rule and either convince the storefronts to shut down or end up battling it out in court. But that doesn’t make Kleiman’s argument moot. Medical marijuana patients will continue to be able to grow their own plants and form collective gardens that better conform with the law. And if they can do this efficiently in a private space, it could very well be cheaper than paying retail prices.
(as a short aside here, a bill has been introduced that would change some of the laws around medical marijuana – including imposing an additional tax – but I haven’t had the time yet to look through it yet, and I have no idea whether it has a chance to pass)
But there’s an additional cost to being a medical marijuana patient – paying a doctor for the privilege. For patients with serious illnesses like MS or cancer, a doctor will simply write an authorization as part of their overall treatment. But for many of the folks who currently have medical marijuana authorizations, they just went to some doctor who specializes in these authorizations, cited back pain (everyone has back pain), plunked down $200 and walked out the door with that paper in hand. Will the difference in price between the retail outlets and the cost of organizing and maintaining a private medical marijuana garden be enough to go through with the next doctor visit (these authorizations are usually only valid for 1 year)? We’ll find out. We could see doctors at Hempfest advertising authorizations for a “grower card” and drumming up decent business by taking advantage of the only avenue the state still gives people to grow their own plants.
The other side of this equation is the pricing. Matt Yglesias has written about how a legal and regulated market for marijuana would drive down prices to almost nothing. I think he’s somewhat underestimating the amount of work it takes to grow high quality marijuana plants versus something like corn or wheat, but his point is largely correct. Even without massive farms growing marijuana, efficient medium-scale production could allow for prices to go way down.
The other side of that coin, the one that Kleiman is concerned with, is the series of high taxes imposed at each transaction point along the way. I-502 specifies a 25% tax from the producer to the processor, the processor to the retailer, and the retailer to the customer. Each. At the end of that chain, the cumulative cost of those taxes gets passed on to the customer. Will the price-lowering phenomenon described by Yglesias and the burden of I-502’s taxes end up at a happy medium?
One thing that leads me to believe that it will is related to something that I ran across a few months ago. This study [PDF] discusses user behavior when looking at search results for consumer products. What the researchers found was that when users were presented with two items, A and B, with A being lower quality and lower cost, people generally clicked on A first. But when they added an item C, which was higher cost than B, but only slightly higher quality, people generally clicked on B first. While this experiment didn’t track purchases, only browser clicks, it showed that a person’s expectations about how much they might be willing to spend on something is in part influenced by the knowledge of how much other versions of that thing cost (and what their relative quality is).
I certainly find myself doing that a lot when I shop for things. Unless I have some expertise in what I’m buying, I generally avoid buying the cheapest or the most expensive thing and determine what’s a smart middle-of-the-road amount to pay for something, generally based upon what other items in that category cost. I don’t bring up this experiment to say that it’s necessarily a perfect representation of how marijuana buying purchases will occur, but instead to show that our expectations of what things should cost – relative to quality – can play a major role in how much we’re willing to spend.
Most marijuana consumers who walk into a store and see marijuana for sale at various prices are going to purposefully avoid options that are cheaper than what they’re used to paying, merely out of fear that they’ll be getting an inferior product, even if it’s just as good as what they’d normally gotten in the black market. I suspect this will happen even if THC measurements appear on the packaging and there’s little difference in actual product quality vs price. But if the retail outlets start charging way more than what people have been used to paying, you’ll definitely see some downward pressure on price and people will certainly pay more attention to the labels to make sure they’re getting their money’s worth. And if retail outlets are unable to lower prices to match that demand, you’ll certainly see Kleiman’s scenario start to unfold.
One of the fascinating things about the marijuana black market in Seattle is that over the 12 years or so that I was a regular consumer, I paid nearly the exact same price for it every time. The prices never went up, never went down. And that’s built up a certain expectation about what it actually costs, and unless you’re a heavy consumer, it’s rather affordable (especially compared to various forms of alcohol).
If the regulated retail outlets keep their prices in the same range as what it’s always cost, and I expect that they will, I’d also be surprised to see much if any movement in the price as the industry expands. Instead, you’ll likely see a number of companies claiming to have a superior product in order to justify a slightly higher retail price. And you may also see lower-THC products filling a niche for cheaper “lite” products.
(another aside, I’m guessing we’re about 1-2 years away from the first cannabis cup judge-bribing scandal, as there are now potentially very lucrative benefits to having your product crowned as “the best”. Then again, bribing a judge may not work terribly well as the judges may forget who it was that slipped that C-note in their pocket)
In the end, what I expect to happen is that the retail outlets will eventually be able to provide such a wide variety of high-quality products at near the prices that they once cost in the black market. And that even folks who can produce their own plants more cheaply will eventually discover that the time and effort required to match the quality and also fully supply themselves doesn’t add up, even if prices at the retail outlets are higher. I think we’ll gravitate towards what exists for beer, where there are some folks who homebrew, but also still buy from retail outlets as well. I’ve never met a homebrew hobbyist who only drinks his own beer and nothing else. And I think you’ll see the same with marijuana growing in the future. Over time, people who come of age in this system will only think to grow their plants for hobby-ish reasons, rather than feeling it’s necessary in order to ensure a steady supply.