Recent Brown graduate Max Chaiken’s senior thesis, The Other Green Economy, contributes vision, open-mindedness, and compulsion to the pastime of seeking MPMTR (maximum pot-ential marijuana taxation revenue). It predicts a whopping $212 billion, which ruffles the feathers of more experienced economists.
With over a year to ponder his figures from the time he defended his thesis until his CC interview in April 2010, would Chaiken take criticism from predecessors to heart? Does he believe there’s less MPMTR possible? Or more? And how did he arrive at his rather sensational numbers?
Find out in this extensive interview. If you care about cannatax, this is a must read!
Q.We’re talking with Max Chaiken. Max got a lot of attention because his undergraduate thesis at Brown University was called The Other Green Economy, and it is all about how much could be made in a legalized world by taxing marijuana. What inspired you to pick that subject for your thesis?
A.A good friend of mine and a former fraternity brother or mine was involved with the Rhode Island Patient Advocacy Coalition, which is the Rhode Island medical marijuana lobbying group, which has done really great work in Rhode Island securing rights for patients, and I was talking with him, and thinking about writing a thesis, and the question popped into my head “How much revenue could there possibly be?” So I started doing some reading, and eventually that became the topic.
Q.A certain amount of passion comes through. Is that a fair statement?
A.Sure. I certainly am an advocate for a more rational marijuana policy and drug policy in our country, and I think that this argument about the economic side of it is certainly not a trivial argument, especially given the state of our economy. So it is certainly something that I grew to be truly passionate about.
Q.Why you were writing The Other Green Economy, did you want to get some media attention? Did you intend for that to happen, or was it a total surprise for you?
A.As I began writing, the topic started getting more and more attention in the media, which I felt throughout my entire research process, and I guess it became more and more of a possibility. But I don’t know that I’ve gotten all that much attention for it. Certainly my efforts are a lot higher than whatever else is out there. So to whatever extent that could have generated a buzz, I’m glad it did, I guess.
Q.I believe The New York Times picked up on it?
A.It was mentioned briefly in the Freakonomics blog on The New York Times, yes.
Q.Got it. Now when that story came out, did you have to fight off a bunch of economics groupies?
A.(Laughs) No, not really. But it was certainly flattering that it was even linked to at all, in a very well-respected blog. So it was humbling.
Q.What grade did you get on your thesis?
A.You don’t really get a grade on a thesis, but I received honors from the department on my work. And it was certainly a learning process for me. Any time you undertake a serious, upper-undergraduate level thesis, it was a challenging process for me as well.
Q.A lot of people may not have read Freakonomics or your thesis, so let me just quote a little bit of the main figures so people know what we’re talking about.
Q.Here’s what you said. “If federal policy makers legally taxed and regulated marijuana, with an excise tax of $4 per gram, I predict that this would generate at least $72 billion under the most minimal of circumstances. Under my best estimate, this tax would generate approximately $211 billion, and under the most optimistic assumptions, could generate $300 billion annually in excise (aka sin) tax revenue. Now you were just talking about excise or sin taxes. Are there other taxes that could also come in for marijuana besides excise taxes?
A.Oh, absolutely. If you make this market, which is now in some parts of the country gray, in some parts of the country mostly still a black market, if you make this entire market on the national market legal, then you have to factor in payroll taxes, and social security taxes, a whole host of other taxes. Income taxes that people in the market pay if they’re not already paying some types of taxes, and so on. But an excise tax is sort of a common for goods like alcohol and tobacco that are thought by many to be harmful to society, and have some proven costs to society of their use.
Q.Do you feel that marijuana is greater, less, or about the same as alcohol and tobacco?
A.Well, it’s funny because a lot of the research indicates that it’s a less addictive drug. It is a less habit-forming independent drug for those who use it frequently than is nicotine or alcohol or opiates. And certainly we’ve, especially after the last fifteen or twenty years, discovered that the medical benefits for certain patients are extremely important.
Q.From a consumption standpoint, do you feel marijuana is greater, less, or the same as alcohol? Or, how much is spent, let me put it that way. . .
A.It’s hard to say.
A.My gut is that it’s more, because currently the black market status of marijuana makes it inflated in most places. In terms of pure quantity used, there’s much more tobacco grown than marijuana. Marijuana users don’t use nearly as much as a pack a day like tobacco, or two packs a day like cigarettes. So in that sense it’s less. But in the sense of how much it’s worth, or how valuable it can be if it’s grown right, and is of a high quality, it can be very valuable.
Q.The image came into my mind of what a pack of marijuana cigarettes would look like. . .
A.I don’t know that I actually think that that’s how it would necessarily be marketed or sold in a regulated legal market, but certainly that’s a funny image.
Q.It might be if the tobacco industry gets in on it. They already have the cigarette-making machines. I’m sure they could repurpose them.
A.It certainly could happen. And you’d certainly see a lot of products develop in the mold of the tobacco industry, as part of what would be the new marijuana industry.
Q.I want to ask you about that a little later. We were talking about the sin taxes. Did you account for local or sales taxes in your estimates?
A.No. Not really. Now my estimates, and the passage you read before was from my conclusion, basically said that if you follow everything that I’ve laid out up till this point, and if you agree with the various steps I’ve made along the way, then we wouldn’t be surprised to see 200 and 300 billion dollars in revenue from this industry.
But I also wouldn’t be surprised if it were closer to 100. I still think there’s more than what Professors Gettman and Miron – their work is groundbreaking in the field – are currently thinking could be gained from legally taxing and regulating marijuana.
Q.Did you have any contact with them while you were writing your thesis?
A.I had a little bit of contact with them while I was writing my thesis, but not much. They were certainly courteous in the few exchanges that we had. But it wasn’t very significant.
Q.OK. I know you’re aware they’ve had criticisms of your work.
Q.Has that made you reconsider in the 18 months since you wrote your thesis, or has it made you stronger in your convictions?
A.Well it’s been about a year since the date I placed on it, more like 18 months when you factor in when I started work on it. I think some of their criticism is valid. Professor Miron basically looks at the data out there and takes only the demand-side date, while Professor Gettman takes demand-side data and supply-side data, while I take only the supply-side data. And I lay out in detail why I chose that, and why it seems to me we should be looking at one data-set and not another, and also I think I expanded a little bit, and tried to use other sources that are not as traditional as well.
But there’s certainly some valid criticism that they have for my figures.
It does make me ultimately think maybe my more minimum estimates are in the better range rather than my more astonishing 200 to 300 billion estimates. But a lot of this comes because the data we have to answer questions like, how much revenue can there be, how much quantity is currently on the market . . . the data that we have to answer these questions is largely nonexistent.
There’s so much guesswork that goes on in any of these papers, that basically, at some point, you have to make assumptions that people could criticize. You have to decide which data you’re going to use, which data you’re not going to use, and try to justify it. Professors Gettman and Miron don’t necessarily agree, and I respect that opinion. But I still have a feeling that we’re talking about significantly more than their most recent efforts.
Q.Will the availability of dispensary data make future forecasts more accurate when it comes to seeking the maximum pot-ential marijuana taxation revenue?
A.It might. And certainly, being able to say that in South Denver, or in a certain location, this much is being sold at these prices in a month, or in whatever period of time. . . if you had data like that for every dispensary in California, that would be something to really work with and see, well, how much is really being sold, how do we think that differs from an illegal market, and so on.
In my paper, I basically created a hypothetical framework in which marijuana was made legal in the country, federally, as of, let’s say, tomorrow. Now clearly there’s going to be short-term and long-term effects. So the fact that you’re going to have this revolving slowly, state-by-state in our federalist structure, with medical marijuana laws, decriminalization policy, and so on. . . it’s not quite so black and white as the situation I laid out to estimate.
Q.Well we like that. We like visualizing what Complete Legalization looks like.
A.Sure. It’s certainly not so far off as it was a couple of years ago.
Q.Let me mention some things that could occur under Complete Legalization, and you can tell me what you think they might be worth. What if Big Food got into the act, and started coming up with a bunch of edibles and drinks. What kind of taxation can be gleaned from that? I’m talking about if General Mills got into the act. We’re legal, you’re General Mills. What happens?
A.Certainly they get involved trying to develop products of that nature. Whether or not those products would ultimately increase revenue, well, it matters whether they’d increase demand for THC, for cannabis products of all sorts. It could just substitute for what people are currently buying at marijuana dispensaries – they just now buy it from General Mills products. So it might not create that much more tax revenue than when we think about the whole market as it is now.
Q.It could just be sideways movement.
A.Or it could create demand, or additionally shift demand. Ultimately that brings up one of the biggest questions we have in this research, which is: what is demand? How many people in this country are using marijuana? How much are they using? How frequently are they using it? How do they respond to changes in price? Changes in quality? And all these things that we know will happen in a legal landscape.
Q.So, demand is all about consumption. Is that a fair statement?
A.Yes. Demand is consumption. How much of it are people going to use of the good.
Q.And for our listeners, when economists talk about marijuana supply, this data comes from seizure statistics? Can you explain how this works?
A.Sure. Basically I try to estimate a simple equation using a “variable of interest.” We want to know how much the federal government could conceivably earn if the marijuana market that we have today were legal, and regulated, and taxed. So there’s a few different ways to go about this. You have to know something about price, what the price of marijuana currently is on the market. We know that it varies regionally; we know that it varies by quality. It’s not too easy to know much about price, but we have some limited data on price to give us a general range of what’s out there.
Then you need to know something about the quantity, of how much is being consumed. So there’s two ways to know how much quantity is being consumed. Producers supply marijuana to the market. There’s a whole illicit chain of suppliers that we know very little about except what the DEA and the ONDCP (Office of National Drug Control Policy) kind of tell us about it.
And on the supply side, we have information about what the government has claimed to have seized in terms of pure pounds and metric tons of marijuana. We have information about how many plants have been eradicated in outdoor and indoor locations. We have some information about where most of this marijuana that we’ve seized is coming from, mostly at southwest borders, also some on the northern border as well. That’s all on the supply side.
So to get an estimate of how much is out there you have to say well, OK, how good are they at catching it? Are they getting 10% of all that’s coming in or are they getting 2%? Or should we be generous and say they’re getting a third of all that’s out there?
Q.Would it would be safe to say you’re more suspicious of their statistics than Jon Gettman?
A.I think so. Those sources that try to estimate how much is cultivated domestically, for example, will say that eradication efforts are getting 30 to 50% of the domestically grown market. I just think that’s pretty unrealistic. I don’t think that one of two plants grown in this country either indoors or outdoors is being seized or eradicated by the government.
Q.30% sounds a little high. I think you got criticized because you estimated as low as 2% – correct me if I’m wrong.
A.That’s right. So for the sake of understanding what the very maximum could be, it was helpful to say, well, what if they’re only getting 2%? What if the metric tonnage that gets seized is only 2% of the market that’s out there? Then it’s ridiculous, it’s probably unlikely, some of the data on the demand side that I did exclude, indicates that it should be, perhaps some of their data listed at 10% could be more realistic based on what we think we might know about how many people are using marijuana.
On the demand side, one of the criticisms of my paper was that I excluded demand-side data. What that means is that I didn’t use the National Survey of Drug Use and Health (NSDUH) that Professor Gettman used that basically says, “we think there are so and so Americans who use marijuana, and they use approximately so and so much.” Basically, we know that those surveys underestimate significantly how many users there are, and the most recent data that we have about frequency of use, about how many times those users are using, is fifteen years old.
So, a lot of that data to me, was more suspect than the amount of marijuana seized, the government saying we seized this much marijuana, a hard quantity of marijuana that came into the country, we took it off the market. I think another one of the criticisms is that I did exclude some estimates of data that would have resulted in estimates closer to Professor Gettman’s.
Q.Why is it so valuable to know the average weight of a joint?
A.It’s valuable if you’re using demand-side data.
Q.So it’s only valuable to the demand-side estimate? In your paper, it wasn’t a factor, correct?
A.Nope. Not a factor that I used. If a joint is .75 grams or 5 grams or a gram, will make a big difference, according to what, I believe, Professor Gettman said, cause he said it will make a big difference in court compared to how many doses you’re being charged with providing to the market in some states. Or it could make a big difference figuring out how much quantity is being consumed by the 25 millions of users, or 40 million users, whatever it is. It’s another one of the many assumptions to make with that data that I basically chose not to make.
Q.Max, I’m glad you mentioned chain of supply earlier. One of the problems that I see with the current data is, everyone’s obsessed with the weight of a joint, they’re very obsessed with seizure statistics, but they seem to act like every transaction is just a few joints or maybe an ounce, when there’s all these layers of middle men and plenty of wholesaling that doesn’t seem to be accounted for in any of the demand-side or the supply-side data. I think that could be extremely lucrative, cause I believe several people can make money on a given amount of pot, not just the grower and the end consumer.
A.Right. There definitely is a whole chain of supply between whoever is planting the seeds and watering them, and doing whatever they’re doing with technology which is really quite amazing, some of the things that you can do to enhance strains and get a better quality product, which should fetch a higher price.
But between that guy, whoever’s doing that, and the end user, there are a couple of steps that we will know more about in a legal landscape, and so many people will be factored into that market when you try to understand how big that market is, how much it generates as part of the economy, how much it contributes in tax dollars to state and local and federal purses.
Q.So your minimal figure of $71 billion, that’s a starting point once we start to add on the wholesale factors, when we start to add the income taxes that those people will pay and the local and state taxes.
A.I think so. I think it’s hard to know exactly, because when I created this circumstance, I basically extracted from assuming that I don’t know anything about whether there will be licenses for distributors or retailers or if every person that wants to purchase marijuana or some sort of cannabis products needs to have some sort of user registration. There could be a ton of fees and regulations. That still might bring the price of marijuana down if marijuana was allowed to be purchased legally.
Under different regulatory regimes, you can imagine that the costs to producers and consumers are going to change. But ultimately, in a legal landscape, we expect price to fall. And we expect there to be a price somewhere between that completely free market price if were able to be traded like rice, for example, which would be purely what it cost to grow such and such a strain of marijuana. And include the cost of regulation and include the cost taxes and still insure that we’re in compliance, and the government, in various legal levels, is going to be earning money from the price of this good.|
Q.How much will the price of an ounce of high-grade marijuana compress from its present price of approximately $400, do you think? You can just go with gut feelings; I know there’s no obvious “answer.”
A.I think even with tax you might see that same $400 ounce for $150, $50 of which could be tax, maybe even 75. It also depends on quality. We know from wine and beer that consumers will pay a high premium for better brands, higher quality, higher alcohol content. Beers, for example, do much better, and fetch a higher price, than your Budweiser and Coors Lite. The same thing will happen, and I think even more so, in a legally regulated marijuana market.
You’re finding strains out in California that might be up to $75 per gram because they’re so strong. Like you said, if the average price is around $400 per ounce, you might see some that are going for $550, and those might not fall as much. You’re going to see a pretty serious range of prices based on quality, and how close you are to the initial production ladder.
Q.Do you think we’ll see collectibility in marijuana, the way we see it in wine, if storage was invented that could preserve it for long periods of time?
A.That you’d see some sort of strain from this year and this place that was preserved and costs $5,000 a gram in five years? Um, I don’t think so. But it certainly isn’t that far fetched. You might see that the most unique growers, people who invent creative ways of growing this indoors with the right soil, and the right lights, it’s a very complicated process for people who are investing time and money into it, which producers would do more willingly if they didn’t have the risk of not getting their product to market in time. So certainly, it’s a possibility. I don’t know how much it would generate, I couldn’t speculate too much about that, but I don’t see it as terribly far fetched.
Q.Was there a lab portion of your thesis where you had to grow some superweed?
A.No. Nothing like that.
Q.Coincidentally, in the eighteen months since you undertook your thesis, there’s been an unbelievable avalanche of free publicity for the whole cannabis commerce scene. What monetary effect would you give that, or wouldn’t you? It’s been blasted on every news show, every newspaper, on every radio, it’s endless. If people were paying for this exposure, it would be unbelievably expensive. What kind of percentage would you give this boost, or wouldn’t you?
A.I wouldn’t say that gives a tremendous boost to the revenue. What I will say is that it does a lot to affect cultural attitudes – which affects demand. OK? So, in my paper I say that demand won’t shift over the long term, which means that a little more marijuana may be consumed if the price falls, but the overall demand for the product won’t change that much. Clearly, over time, that can change.
So over the last eighteen months, as you said, recent boosts in publicity have the potential to bring more people into the market, whether that will be as legal medicinal marijuana users in their respective states, or more black market consumption, that has the potential to bring people into the market and slowly push demand out before we get to a complete legal and regulated market. So, as you know, if a larger number of people are consuming marijuana there will be a larger amount of money going into government’s purse strings.
At the very least, it seems it’s removed the stigma that marijuana is a drug, which would encourage some people to enter the market. I’m not saying that everyone will flock to it. But removing the stigma because everyone’s doing it on TV, I think it could boost revenue relatively significantly.
It could change the demand. And that ultimately could change how much tax revenue is available from a regulated market.
Q.Let’s talk about supply, which is your field of expertise. Jon Gettman seems pretty sure there’s not more than 15,000 metric tons of marijuana produced in the United States. For people who don’t know, a metric ton is about 2,200 pounds. Your thesis got up as high as, I believe, around 175,000 metric tons. How did we escalate from 15,000 to 175,000?
A.When you change the parameters of the equation that you’re looking at, it can change fairly significantly. Those parameters include a few different things. First and foremost, those include the number of how much marijuana that was seized. In this case, we know that over the past few years, it’s been increasing. And we know that the amount of plants that’s been eradicated, both indoors and outdoors, is also increasing. Those numbers imply that more is being imported, and more is being grown domestically.
All these things would lead us to believe that more marijuana is being consumed in the country as time goes on. If I recall, that 15,000 metric tons or so is Gettman’s average of several computations. If you relax those factors to see what the maximum potential could be, you start getting up into a much higher number of metric tons that could be on the market. But it is somewhat speculative.
Q.How are you feeling today, in April of 2010?
A.My feeling is that there could be 15,000 or 20,000 metric tons on the market. I wouldn’t be surprised if it was a little bit more. You know, the 2010 National Drug Threat Assessment is out. That puts the number of how much is produced in Mexico at 21,500 metric tons. So even if only half of that is coming into the United States, that’s 10,750 metric tons right there. And we know that a lot of it’s being grown in this country as well. So it’s not inconceivable to me that we have 20,000, maybe 25,000 metric tons on the domestic market that’s being consumed by Americans.
Q.Under legalization, could we be putting import taxes on the marijuana grown in Mexico and Canada?
A.Under legalization, the international side of things is kind of complicated because if marijuana is legalized, what you might see if that if pot became legalized you might see a bunch of countries start to produce marijuana who aren’t necessarily doing it now if they could more easily export it and sell it in various markets.
Q.The precedent is liquor.
A.Right. I have a feeling that in a legally regulated market, that the more technologically advanced methods of growing that could take place indoors and outdoors would tend to favor an economy that has more capital, a first-world economy like ours, as opposed to Thailand, or a country that exports a lot of agricultural goods. It’s hard to say.
Q.Would the export side of things be any different? Is there the possibility for significant export taxes?
A.Absolutely. There’s a possibility that we could be exporting choice strains and importing choice strains. It’s a wide world of the unknown. Where could it go? How much could we get at the border for imported product and how much could we get when it’s sold at retail level. Really, there’s some potential there.
Q.So there is a lot of upside. We’re not talking about pie in the sky. We’re not talking about something that doesn’t exist. There is a real upside?
A.Well there’s a real upside, and I think what Professor Miron would say is that there’s not necessarily an upside, but they’re now being counted. And it does make a big difference. And if we all of a sudden are counting lots of jobs of people who were either out of the labor force or unemployed, and all of a sudden there’s an industry that’s starting to create jobs. . . let’s say this happened tomorrow. Let’s say that marijuana’s legal and regulated, and you wake up, and it’s a totally different situation. There are a whole lot of jobs that we’re counting automatically. And the industry itself is going to be eagerly looking to hire workers. To bring people in. To start settling itself on legal ground, depending on how you count, it makes a big difference.
Q.I believe Professor Miron would say there would be job “shifting” from people who were working at Radio Shack. But does cannabis commerce also create jobs? Are we creating jobs, are people just being repurposed into different jobs, or both?
A.Well, I believe people would be shifting jobs, but the fact that we could count it isn’t insignificant. We can see that less of the population than we thought is not gainfully employed. More people are supporting the social security base. Politically, it matters how you count it. I believe Professor Miron is probably right. Some of those jobs will come from Radio Shack, or from McDonald’s. But some of will come from an industry that is growing, that is going to be investing in new grow houses, that’s investing in new equipment, that’s investing in new products of all sorts.
Q.The other thing that we’ve noticed is that cannabis commerce stimulates existing industries. Security equipment, locksmiths, surveillance cameras, HVAC people, commercial landlords, it’s a big stimulation for existing businesses in the community. One dispensary owner just told me he hired over twenty different contractors, from the carpet installer, to the painting contractor. So there really seems to be a ripple effect of cannabis commerce. Do you see that?
A.Well, right. And it would all be able to be counted legally. There’s also people who may not even quit their day job, but they’ll make glassware (for pipes) on the side, adding more productivity to the economy, and, basically, I don’t think it’s trivial that it would be countable, even if it’s not true job creation as much as reassignment of jobs. I don’t think it’s trivial. I think there will be people put to work who might not otherwise be working right now, who would be willing to work legally as a grower, as a light technician. . . who knows what it would be. But I think there is at least some potential for true job creation.
Q.Plus, these people seem to really enjoy their jobs, which is a big thing to me. It’s not just a job number. Now in Massachusetts, I hear there aren’t any dispensaries there yet. Is that true? I don’t know if you saw it on our website, but I just happened to coincidentally move into a giant hotbed. I was under the impression that other medical marijuana states had dispensaries just like us. But that’s not true, is it?
A.Not true. On the east coast, the medical marijuana laws are more restrictive than they are in the west. For example, Rhode Island, just after I finished my work, passed their first dispensary. Massachusetts, to the best of my knowledge, doesn’t have any dispensaries. But it’s punishable by only a $100 fine in Massachusetts. So it’s effectively a speeding ticket. Tsk tsk, you shouldn’t do it, cough up a hundred bucks if you’re caught. And New Jersey, which also just passed medical marijuana, has a fairly strict stature from what I understand.
Q.That’s something I don’t think people around here realize. We thought we were just another medical marijuana hotbed. So there’s a lot of resistance to dispensaries? Here they’re all over regular neighborhoods. We’ll start putting the pictures on our web site. Here’s the barbershop, here’s the dispensary, here’s the donut shop. It’s just become totally normal. It’s amazing. Especially in South Denver because you’re allowed signage. In Boulder, for example, signage is very restrictive. Here there’s neon marijuana leaves everywhere.
A.Wow. California and Colorado are kind of a different world still in terms of policy and the de facto what’s happening on the ground from Massachusetts, and Rhode Island, and the east coast states that have started that move.
Q.So there are a lot of licensing fees possible, as I believe you said in your report and earlier this conversation. And that’s not trivial either.
A.No, that’s not trivial. And I think that even if a state slapped a $5,000 licensing fee on a dispensary. . .
Q.That’s exactly what they pay here.
A.. . . who knows. Even if it were a one-time fee, a lot of people would pay that fee and still make a serious profit for them in the market. There are lots of different regulatory options like that which could generate revenue, and, depending on how you construct it, could certainly be very significant revenue.
Q.OK. Well, we have to wrap it up. Let me see if I can sum up where we are. You are very strong in your conviction that your minimal prediction is the least amount of potential marijuana tax revenue that there is. Am I putting words in your mouth?
A.I still feel pretty good about those numbers. I don’t feel as confident about the 200 to 300 billion, but I also wouldn’t be surprised, and it really depends how you set the parameters on how big you think the market is now. That’s ultimately what I think Professor Gettman and Professor Miron and I fundamentally disagree about, how big is the market now.
I think that Professor Gettman trusts the NSDUH survey enough to say that he tempers down his estimates that are based on the supply-side data. Professor Miron, I think, only used that one report, if I recall, which counted an expenditure level. So I don’t necessarily think that I disagree with his numbers, I think his methodology is really quite fine. But I think that when you go more into depth into the data I chose, not to use the demand-side data to understand how much is on the market in terms of quantity, and so I used the supply side data, and that is basically the difference.
Q.Do you concur with Miron that you don’t believe that demand will change under legalization?
A.That’s the assumption that I use in my report. I do kind of think that demand could change. I don’t think that would necessarily be a bad thing. Increased consumption of a good is not necessarily economically bad, except that it could produce negative effects on society if the far right’s worst fears would come true,and everyone in the country all of a sudden doesn’t go to work anymore because all they do is sit and watch TV and eat Fruit Loops. I don’t think that would happen.
I think that by and large the people that want to use marijuana are using it now. I think like Professor Gettman said, there is absolutely a price by which the government can make a serious amount of tax revenue, that producers will pay, that consumers will pay, that producers will still be making a serious profit. And I think that we should be moving in that direction.
Q.If you could put your feet into the boots of a grower for a moment, where do you think their resistance would be to a sin tax? Do you think it would be under or over than 50%? Just think about it for a moment. You’re out there every day. You’ve nursed these plants through hail, through insects, whatever. Someone comes up to you and says, “Oh, tobacco’s taxed at 60%, so you won’t mind giving me 60% of your profits, do you?”
A.Well, I don’t think that’s the way it would work. What I lay out in my work is the idea that supply would be perfectly elastic in the long run, and what that means is that if supply is elastic, there’s such a glut of supply in this market, that producers basically just charge their marginal cost. Producers just basically push the entire incidence of the tax onto the consumer.
So I basically think that in a legally regulated market, supply is going to be elastic enough that producers are going to set their price based on how much it cost them to produce the products that they are producing, and the tax will be on top of that, an additional amount that the consumer will pay to purchase the product.
Q.Your $4 a gram sin tax, does that translate to a percentage, or not necessarily?
A.Depends what you think the price of marijuana will be.
Q.Gotcha. That makes a lot of sense.
A.My gut is that $4 a gram could be a solid starting place for a state or federal government, if they wanted tomorrow to say, “What should a tax be?” my answer would be $4 a gram. That starts us off; let’s see where that would go. And, recognizing that taxes change over time, taxes could go higher, they could go lower, it could go to an ad valorem or a percentage based tax, depending on how good enforcement’s been and how much revenue’s been created there. Then there are options after that.
Q.I like the $4 a gram, medical marijuana sold in local dispensaries averages about $16 a gram. Around 20, 25% – that’s my gut feeling that growers who put their lifeblood into this would tolerate. I have a lot of doubt that they would go up to 50%. But anyway, Max, thank you so much for being with us. It was really illuminating.
Q.You were great, and we appreciate you ramping up to talk to us. Are you doing anything else in the marijuana world? Will you write another paper?
A.I wouldn’t rule it out. I do hope to go to Law School at some point in the future, probably in the fall. And as a lawyer, I think drug policy is a really important issue. I think that it affects a lot of different parts of society. I think that there are arguments to be made for legally regulating and taxing marijuana that have nothing to do with the revenue as much as the revenue I think is also important. I think it’ll be an issue that I’ll feel passionate about for a long time to come, and we’ll see where life takes me.
Q.All right, thank you Max.
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