Study: Pot Prices Would Plummet If California Legalizes It
July 8, 2010 - 5:55 AMA ballot measure to legalize marijuana in California would so upend supply and demand that pot prices could plummet by as much as 90 percent and possibly undercut the tax windfall that supporters have touted to sell the initative, a study says.
The study by the nonpartisan RAND Drug Policy Research Center forecasts some interesting scenarios if California in November becomes the second state, after Alaska, to legalize pot for recreational use by adults and the first to tax commercial cannabis sales.
Pot prices could drop from $375 an ounce under the state's current medical marijuana law to as little as $38 per ounce before taxes as legal pot suddenly becomes available to the public, RAND researhers concluded.
"Right now, when individuals purchase drugs, they are paying for the drug dealer taking risks of being arrested," said Beau Kilmer, the center's co-director and the report's lead author.
The exact amount of revenue legalized pot would bring California is still up in the air. The ballot initiative authorizes counties to license and tax commercial pot sales to adults, leaving it up to local jurisdictions to decide what kind of tax rates to apply to marijuana.
The researchers said legalization could bring substantially more revenue if California sees an influx of "marijuana tourism" similar to Amsterdam, where pot is legally sold at coffee shops, and if out-of-state dealers purchase California cannabis to sell back home.
"You would certainly guess that if it's cheaper to produce it in California legally than to import it from Mexico, it would reduce imports from Mexico," Jonathan Caulkins, a Carnegie Mellon University who also worked on the study, said. "Presumably, it would decrease them a lot."
Yet intervention from the federal government, which classifies marijuana as an illegal drug, or regulations limiting marijuana sales to California residents, as is the case now with medical marijuana, easily could defeat dreams of tourists flocking to the coast on pot vacations, Caulkins noted.
RAND analyzed existing research on marijuana prices, cigarette taxes and current pot consumption and applied modeling techniques to determine possible outcomes if pot were to be legalized.
The California Board of Equalization studied the financial impacts of pot while evaluating a bill introduced in the Legislature last year that would have taxed and regulated marijuana like alcohol. Sales taxes and a $50 per ounce excise tax on commercial pot sales would generate $1.4 billion for the state, according to that study.
But that estimate could prove overly optimistic, depending on how pot users and sellers respond to the idea of paying hefty taxes on a weed that can be grown at home, the RAND anaylsis said.
Consumer prices for pot would rise to about $91 an ounce if local governments adopt that same $50 an ounce tax scheme following passage of the ballot measure -- still substantially lower than what Californians pay now but high enough to create incentives for growers to sell the drug under the table to avoid paying the government duty.
"When the purchase price goes way down, that cuts down on sales tax revenue, which was $400 million of the $1.4 billion (estimate)," Caulkins said. "What could adversely affect the excise tax is the gray market" that could be created by tax evaders.
Another difficulty the researchers said they faced in trying to tally the economic benefits of marijuana legalization is not knowing how many local governments, if any, would decide to license and tax marijuana sales and if they do, at what rate.
The RAND team was more certain that legalizing adult use of marijuana would cause pot consumption to go up in California, although they said they could not say by how much. Under one model they used, it would grow by about half and under another it would double, reaching rates last seen in the late 1970s.
"We have to realize that marijuana legalization in California would not be a marginal change, it would be a large change," Kilmer said.
The researchers did not try to draw any conclusions about whether legalizing marijuana was good public policy and instead hoped their findings would make voters question "any estimates of revenues and consumption that claim precision," Kilmer said.
RAND, a nonprofit think tank headquartered in Santa Monica, Calif., paid for the research to educate voters ahead of the election, he said.
Rosalie Liccardo Pacula, who co-directs the RAND Drug Policy Research Center, acknowledged that as a California voter, she was uncomfortable with "the lack of specificity" in both the ballot measure and the bill that would have put pot in the same regulatory category as alcohol.
"Neither was sufficient for us to get an idea of what the effect of this was, and as a voter that was disturbing to me," she said.
Dale Gieringer, president of the California chapter of the National Organization for the Reform of Marijuana Laws, said legalization advocates have long expected marijuana prices to go down and pot use to go up if criminal penalties were removed.
"Overall, this report casts more smoke than light on the issue , but that is in the nature of any academic study where so many basic facts remain in dispute," Gieringer said. "The most important lesson to be taken away is that the benefits of legalization depend strongly on how it is implemented.
Some veteran growers in far northern California oppose legalization, fearing it would increase competition and cut profits, while others are embracing it as a way to legitimize their line of work.
"I think it will get a big vote up here," said Dan Hamburg, a former Mendocino County congressman and medical marijuana advocate who has endorsed Proposition 19. "Even though you would think all the growers will be against it, I don't think the smarter ones look at it that way. They realize the marijuana-growing counties have a lot to benefit from being legal ... because people up here have been doing it for 40 years."
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