Going for the pot of gold or a society going to pot?

2016 is shaping up to be a banner year for proponents of marijuana legalization. Since 2012, Colorado, Washington, Oregon and Alaska have already legalized recreational marijuana. In November, 2016, California Massachusetts and Maine seem likely to pass legalization initiatives, while Arizona, Nevada and Florida could also be joining the fray. Federal prohibition notwithstanding, these measures would bring the beginning of the end of prohibitions of not just medical marijuana, but also marijuana for recreational consumption. This paper lays out a potential framework for taxation and regulation of a legalized marijuana market that utilizes lessons learned from the taxation and regulation of other “sin” industries (e.g. alcohol, tobacco, gambling).

In transitioning from a black market to a legal one, taxation and regulatory policy for “sin” industries should have three social goals: limit consumption, greatly reduce the size of the black market, and, subject to these constraints, generate significant government revenues. 

The first goal of regulating legalized marijuana is to control consumption. Without the implicit price supports of a prohibition, the market price of marijuana would plummet, likely leading to a significant increase in demand. The social costs that go along with society’s use of these products, such as addiction, criminal activity, and treatment and prevention costs, need to be mitigated. 

The second goal is to eliminate the black market. There is a choice in regulation between order (keeping society safe from any potential abuses of these substances or activities) and liberty (tolerating and mitigating any potential abuses from the use of a product which the majority of the population deems should be accessible). The marijuana black market is currently a shady underground economy that leads to criminal activity. The most effective way to destroy this underground economy is through a regulatory policy and a taxation and enforcement system that encourages participation in the legal market.

The final goal of regulation should be to generate state revenues, while simultaneously minimizing consumption and promoting an open market. One of the goals of the paper is to utilize panel regression models to establish the best tax rates that states should be employ in order to balance revenue needs versus the elimination of the black market.