Legalization cannabis may not be as good for the economy as we think
Over the years, analysts have touted the positive economic impact of cannabis legalization in many. It is believed that the legal marijuana market creates thousands of new jobs and produces millions of dollars through taxes. Such a scenario seems like the formula for economic advancement.
However, over the last month, new studies have presented a different view. The suggestions there propose the idea that legalizing cannabis may not be as economically lucrative as has been claimed. These studies suggest that cannabis advocates may have forgotten the many angles that can be factors when discussing economic benefits.
Primarily, with many players vying to position themselves in the legal cannabis business, supply and competition are bound to increase, thereby reducing the costs of the crop. With such price reductions coming into play, the estimated economical benefits that were expected prior to such reductions, may have become an overestimate.
Here’s a closer look.
Falling cannabis price is a problem
According to a new analysis from The Economist, in the past 12 months, wholesale prices of marijuana in Colorado have fallen. According to a state Department of Revenue report, the cost of a pound of marijuana fell more than $400 in Colorado in 2018. It’s the first time the price has dropped below $1,000 per pound since the state legalizes recreational marijuana in 2014.
Similarly, in Oregon, the wholesale price of cannabis fell by nearly 40 percent since October 2017, partially due to a huge crop harvested last fall. The trend goes beyond Oregon and Colorado; marijuana prices are dropping nationwide. According to Denver-based price-reporting agency, Cannabis Benchmarks, the national average price for a pound of cannabis had fallen to $1,562 by the end of 2017 from $1,789 in 2016.
Since obtaining marijuana is now easier than ever before, consumers avoid paying a premium. The thought process is perhaps as follows: Purchasing marijuana openly and in stores simply does not present the same risks as the illegal purchases of old that were orchestrated in secrecy through the black market, and thus should not require a premium price.
Further, more and more cultivators and dispensaries are entering the market, leading to price competition as the primary way to gain an advantage. These market factors have united to create a price war and a supply glut, causing a steady decrease in cannabis prices.
Cheap cannabis leads to reduced cannabis tax revenue
Drops in marijuana price may be good for consumers, but the opposite is true for local and state governments looking for extra revenue. States set their marijuana tax rates as a percentage of its price, making the dip in marijuana prices a significant factor as it decreases cannabis tax revenue.
Colorado reported the record-breaking marijuana revenue month in March 2018 with $106 million in recreational cannabis sales. Just two months later, however, the state’s revenue dropped to $96.9 million, while the state’s medical marijuana sales brought only $26.2 million in sales.
In order to raise cannabis tax revenue to compensate for the loss, Colorado raised its marijuana taxes from 10 to maximum 15 percent in 2017. But the additional money didn’t result in profits; instead, it was simply absorbed through the additional price drops that occurred over the past 12 months.
Why states failed to anticipate these problems?
In 2010, pro-legalization economist, Jeffrey Miron, forecasted only a 50 percent price decrease when prohibition was repealed, leaving marijuana at a price that would yield satisfactory tax revenue.
Another prediction came from the drug policy analyst, Jonathan Caulkins, who said that the price of legalized cannabis would eventually fall to the level of other plants, such as barley and wheat. He said that people might sell a marijuana cigarette for a nickel or use it as a complimentary item like beer nuts in a bar. If that happens, taxes calculated as the percentage of cannabis price might only cover the costs of the government’s regulatory system for legal marijuana.
There may be other problems
A report published in November 2018 by the Centennial Institute, finds that for every tax dollar generated by marijuana, Colorado spends $4.57 to mitigate cannabis’ effects on public health and safety. The state spends millions of dollars each year on the healthcare system, motor vehicle accidents, and other aggravating circumstances.
Jeff Hunt, Vice President of public policy and Director of the Centennial Institute, says commercial cannabis is likely to have serious health consequences that we won’t be able to identify for decades. He says the economic and social costs mentioned in the report are low, and actual costs are likely much higher.
Final words — New economic models needed
Ending prohibition of any substance is bound to create a boom. The question, however, is how long the boom lasts, and whether it shrinks to a size too small to sustain economic benefits predicted prior to the boom. Perhaps alcohol prohibition could have served as an example here, but most likely not. Alcohol manufacturing and distribution present a more difficult barrier to entry than cannabis manufacturing
and distribution. Unlike alcohol, marijuana is a farm product, grown in fields and greenhouses with basic agricultural or botanical knowledge. Further, residents are allowed to grow the plants themselves, in their homes, for their own consumption, in states where it is legal.
These factors provide for a marketplace with too much supply, resulting in continuous price drops. Price drops result in lower tax revenue collected, if such revenue is dependent on the price of the product.
Therefore, states and countries considering legalization of cannabis can study the economic questions faced by states with cannabis already legalized. Perhaps a different economic model solves the issue — one where tax revenue collected is not based on the price of the product, or one where governmental entities artificially increase the barriers to business entry in an effort to reduce supply and stabilize or increase prices.