Bill Virgin: When a vice is magically transformed into a tax revenue stream

Staff writerJanuary 5, 2014 

Outside of dedicated tokers and those who hope to make money off them, the prospect of legalized sales of marijuana and pot-enhanced and derived products evokes reactions ranging from indifference to eye-rolling to scoffing.

For nonindulgers, it’s a nonissue. For political conservatives such as this columnist, there’s some sympathy for the libertarian argument that what people ingest in their own homes is their own business. Prohibition hasn’t worked and isn’t working. Alcohol, while legal, can be a far more lethal substance. But those arguments are tempered by the realization, reinforced by reality, that increased use will carry real-world costs and consequences (see: alcohol) that someone else is going to pay for.

For drivers, it’s another road hazard to avoid, as if there aren’t enough distractions and bad behaviors already. For employers, it’s one more potential assault on employees’ motivation and job performance. For parents, it’s one more corrosive influence on their kids from a culture overloaded with such threats.

And for taxpayers, it’s a lovely pipe (or bong) dream of millions of new-found tax dollars flowing to government at a time when budgets are squeezed — a lovely dream rudely disrupted by the suspicion that guesses of revenue are inflated, and the direct and indirect costs are underestimated.

Some of these sobering realities are already making their appearance, as Colorado launches into the realm of quasi-legal (those pesky federal laws coupled with the current federal administration’s decision to enforce them by shrugging its shoulders a lot) pot sales. Washington is currently processing applications, but many of the same concerns are already surfacing as officials start asking “the voters approved what?” questions, decide they don’t like the answers and postpone allowing retail outlets for as long as they think they can get away with.

That’s opened the officials to criticism that they’re thwarting the will of the people and cutting themselves out of a lot of revenue in the bargain.

We’ll focus for the moment on that second point, because skeptics aren’t wrong to question just how much of a windfall they’ll be missing out on.

True, that doubt is based on as much conjecture as are the estimates of tax revenue to be gained. But we do have a parallel and recent example to draw from, one right in our own state, courtesy of a change in the legal retailing status of our old friend, Demon Rum.

The News Tribune’s John Gillie recently had an excellent report on the plight of small retailers who bought former state liquor store locations. More than 60 percent who bought the former state stores are out of business, and most of the rest are struggling, according to a trade group.

The reaction of readers was, to put it mildly, unsympathetic (not that sympathy abounds in the comments section of any story anyway). Those who bought stores should have known that the ballot initiative that got the state out of the booze business was written and pushed by Costco and other large retailers for a reason, and that reason didn’t include the health of small retailers. It was entirely predictable that the bulk of sales would go to the big chains with established stores and customer traffic, lots of shelf space and lots of marketing dollars.

So what’s the parallel here? The state got its money from the sale of its stores and liquor retailing licenses, and is collecting taxes on spirits sales at those big retailers, so the failure of some small businesses isn’t its problem. Furthermore, legalized marijuana sales won’t be the same sort of business as the liquor trade — you don’t have large retailing chains as competitors to small entrepreneurs.

Fair point, although if more states follow the lead of Colorado and Washington (latest to consider it, according to an Associated Press story earlier this week: New Hampshire) and the feds continue their policy of not caring, it will be interesting to see if some establishment retailer decides it wants in on the action and pushes for a rewrite of the law to allow such businesses in. If Amazon is the “everything store,” as the recent book title described it, might it someday make pot and accessories just one more category on a drop-down menu?

But the absence of big retailers in the pot business does not mean there is no competition. In reality the competition will come from the existing retail base of, for lack of a better term, independent entrepreneurs — your neighborhood stoner with a small grow operation of his own or connection to a supply chain.

While I-502 was designed to legitimize pot sales, its effect is to remove incentives for going legit. Taxes and fees for legal retail outlets will establish a price ceiling under which the independent can continue to sell his product at a healthy margin and without the infrastructure and regulatory costs of the competition.

In addition, a major source of cost and risk — the threat from law enforcement — has effectively been removed. Unless you’re doing something too conspicuous to be overlooked, like receiving raw material by the bale, the police are not going to be spending a lot of time looking for people who don’t have the right tax stamps. And to the extent there will still be some social stigma attached to being spotted at a pot retailer, similar to that of visiting a book-and-video emporium specializing in “adult” fare, the nonregulated, untaxed retailer can count on retaining at least some of his clientele.

Those skepticisms notwithstanding, the prevailing belief in marijuana as an oil-well-like gusher of prosperity for both the state and its purveyors will push Washington further into this experiment in reclassifying a “vice” as a “revenue center.” And perhaps all the economic concerns will prove unfounded and that government will reap the financial benefits of this boomlet.

After all, it worked so well with the lottery and education funding.

Bill Virgin is editor and publisher of Washington Manufacturing Alert and Pacific Northwest Rail News. He can be reached at bill.virgin@yahoo.com.

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