Note: “Learning to Love Economists, Surveys, and Statistics” is also Part 1 of Cannabis Commerce in the USA, found in its entirety here.

The RAND Corporation’s Rosalie Liccardo Pacula is a prolific pot economist we might like to know.

Cannatax describes an estimate of all the money, from individuals and businesses, that could be collected if marijuana was legal, regulated, and treated like other commodities.

The “magic number” theory

If politicians currently sitting on the fence had a dollar number representing their jurisdiction’s portion of marijuana taxes — an amount that could keep existing programs running and fund urgent needs in the imminent future — convincing their constituencies that legalization is in their best interests would be a lot simpler.

Just how much cannatax is convincing? Is there a “magic number?” Is it $5 billion? $25 billion? If this number actually exists, does it need a few zeroes before the first comma to make it “pop?” In that case, $100,000,000,000 might just do it.

On the other hand, maybe there is no magic number persuasive enough to overcome ethical and moral concerns held by some voters and politicians. Some influential persons, President Obama and the world’s leading marijuana tax authority included, do not feel the “revenue issue” ought to have anything to do with whether marijuana is legalized. Others feel passionately that this number will have a profound impact on whether or not the economy can claw its way out of crisis.

Forecasting cannatax tests economists

Around 2000, economists began seriously assigning numerical values to the public’s appetite for all things cannabis. It would be difficult, if not impossible, to discuss the current surge in cannabis commerce without looking to economists for a quote, a forecast, a nice juicy white paper, or all of the above.

Economists naturally believe they are the experts in putting percentages and numbers to issues that affect the lives of people. That’s historically been true, and it’s true today if you want to know how soybean consumption habits in the US have varied from 1910 to 2010.

Things are a little less cut and dried when illegal substances are involved.

Three experts, we’ll be meeting shortly, explain why:

The crucial problem with figuring out how much taxation revenue we would get is we don’t know the size of the market. And it’s hard to determine the precise size of any economic market, especially if it’s underground – you don’t have the standard ways of measuring it, so it’s subject to a lot more uncertainty. –JM

If this were a legitimate industry, we would have much more refined data about the economic transactions. –JG

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. –MC

These statements tell us that when they’re tackling cannabis commerce, economists have to make assumptions. Lots of assumptions. Working with known data, economists are in their comfort zones. Juggling too many unknowns forces economists out of their element. They may find themselves juggling one ball too many.

Suddenly, someone with twenty years experience growing, drying, trimming, curing, packaging, and wholesaling vast amounts of Humboldt County holy buds has a lot to tell us about the future of the marijuana trade, too.

That said, economists are still the “first-call” experts for calculating cannatax.

The starting gate

Generally economists look to “literature” (past studies, not Proust) to find out if someone has done the “heavy lifting” before them. Literature can take the form of previous white papers, articles, or surveys conducted by reputable sources.

If you look over the literature discussed in this report, you’ll quickly discover that economists are just as likely to write for an audience of fellow economists as they are to write for public consumption.

Unfortunately, no known cannaboloid has been isolated with brain-stimulating properties enabling the uninitiated to unlock equations like:

ln Ci = α + β ln Qi + δ Ei + γ Xi + ε i

Fortunately, you won’t have to. This report translates the economist-speak for you.

Where you live affects point of view

Just like living in the jungles of Rwanda enhanced Jane Goodall’s study of great apes, it’s wise to supplement statistical analysis with personal observation in a biosphere of cannabis culture and cultivation. The finest empirical data, currently available for first-hand observation, is found in medical marijuana hotbeds like Colorado and California.

Walking past ten to fifteen thriving dispensaries a day is eye-opening; it greatly affects one’s perception of how cannabis commerce’s largely untaxed contribution to the economy undermines GNP (gross national product).

Venturing inside dispensaries offers insight into the variety of products and services on offer. Bakers, cultivation specialists, massage therapists, and all sorts of vendors fulfilling needs in the industry are regular visitors. Without actually setting foot in dispensaries, it’s hard to grasp the enormity of the retail explosion.

Allow me to condense the concept of “enormity” into two words: money, jobs.

Similarly, living in places where cannabis commerce is out of sight and out of mind — insulated behind the walls of academia, for instance — requires economists to comb through stale reports for lifeless statistics. In essence, they’re operating in a vacuum, deprived of viable observation about how robust the marijuana market becomes, once its integrated into the retail landscape.

 

Factors economists consider when projecting MPMTP

  • Survey data
  • What excise or “sin tax” rates the market will bear
  • Supply and demand dynamics
  • How trustworthy the surveyed statements of people arrested for trafficking really are
  • The relationship between seizure statistics and reality
  • The average weight of a joint
  • How much a pound of marijuana is worth
  • How many metric tons of “weed” are grown annually in the US
  • How much weed is imported
  • How many of us buy marijuana
  • How much we collectively spend on marijuana
  • How to “model” data
  • “Elasticity,” the amount by which price stretches one way or another with respect to a given tax or given event (like legalization).

Let’s examine some of the top considerations.

Survey Data

Economists commonly cite a few major surveys on “drug” use conducted from 1999 to 2008. The surveys, often conducted by firms like Abt Associates working for the White House drug czar, or related entities like the DEA, confound economists the most.

Respondents replying to these queries have often just been arrested for “drug” offenses.

Even if surveyors reach respondents by phone or mail, it’s highly questionable how honest people are responding to questions about their personal consumption of illegal substances.

Does that mean surveys querying persons about their consumption of illegal substances have little value? Not at all. They’re an important piece of the puzzle. But they don’t complete the whole puzzle.

There’s also the issue of whether or not drug surveys ask the right questions. These surveys are heavily slanted toward gathering information about retail transactions. Data is woefully lacking for information about the buying and selling habits of wholesalers. For example, a typical NSDUH (National Survey on Drug Use and Health) question is “How much marijuana do you purchase in a typical month?” If the average answer is “seven or eight grams,” consumers are answering, not wholesalers.

Wholesaling questions like “What did you pay for your last bale (25-50 pounds of compressed, usually Mexican, weed in the form of a hay bale)?” or “How many pounds do you sell in a typical month?” are conspicuously absent from drug surveys.

Agencies that conduct drug-related surveys

ONDCP (Office of National Drug Control Policy)

NHSDA (National Household Survey on Drug Abuse)

NSDUH (National Survey on Drug Use and Health – successor to NHSDA)

MTF (Monitoring the Future)

STRIDE (System To Retrieve Information From Drug Enforcement)

SAMHSA (Substance Abuse and Mental Health Services Administration)

NDIC (National Drug Intelligence Center, releases National Drug Threat Assessment)

Demand-side data vs. supply-side data

Essentially:

  • Demand-side data corresponds to consumption, how much marijuana is being “used.”
  • Supply-side data corresponds to seizure statistics, how much weed has been intercepted at the border, along with how many plants have been “eradicated” domestically.

When calculating cannatax, some economists use demand-side data exclusively, some choose supply-side data exclusively, and some incorporate both.

Understanding excise taxes and sin taxes

Excise taxes are taxes levied on specific goods with rates considerably higher than those applied to normal goods. Gasoline is a common example. Sin taxes are essentially the same as excise taxes, only they carry the built-in stigma intended by their authors. Each state sets its own excise or sin tax rates.

Taxes on “sinful” goods, like alcohol and tobacco, can run as high as 80%. Compare this to the 10%, or so, local and state sales taxes paid on coffee, cream, and sugar.

The sin tax rate levied on marijuana in a legal, regulated, society will have a pronounced impact on cannatax. A 10% difference in the sin tax rate could mean billions and billions in tax money lost or gained.

Arriving at really high cannatax figures generally involves invoking really high sin tax rates.

So, if you run across a really high cannatax estimate, there’s a good probability whoever did the estimating used a really high sin tax rate.

In 2010, a palatable sin tax rate for buyers, sellers, and state governments can only be guessed at – giving the “common man” as good a chance at determination as a PhD economist. Your chances might even be better if you’re actually working in the marijuana industry, and you regularly talk with the same people sin taxes would affect.

Sin taxes from a different perspective

Some economists start with the assumption that marijuana can be taxed at rates anywhere from 50% to 80% because people bear these rates for alcohol and tobacco. They feel the substances are comparable, which justifies setting similar sin tax rates.

Let’s consider sin taxes of 50% to 80% from a different perspective.

Imagine you’ve been raising ganja in northern California for the past 20 years. You’re an outlaw. You enjoy being an outlaw. You’ve grown tons and metric tons over your career, learning to increase potency and yields year by year. In your mind, you’re growing a plant with as much therapeutic value as recreational value. As you tend your crop from seed to smoke, you believe you’re helping people out.

So, when economists nonchalantly assume career outlaws will docilely accept sin taxes north of 50%, just because alcohol and tobacco are taxed at these rates . . . they might not have their fingers on the pulse of a nation.

You could argue that growers won’t be paying the tax; it will just be passed on to the consumer. That argument assumes consumers are somehow less ornery than growers.

Maybe they are, but that doesn’t mean they’ll accept paying 50% sin taxes for a medicinal plant, just for the convenience of buying in a dispensary. Government has a say in this debate as well – if a decent amount of sin taxes can’t be collected, is ending prohibition really worth it?

Then what is a palatable excise tax for all concerned? That remains to be seen, but 25%, at the most, might be more in line with reality.

Should economists be motivated to seek cannatax?

“Should” is a strong word.

It would be nice, if not downright patriotic, if top-gun pot economists emulated bloodhounds, sniffing over hill and dale for choice morsels of data. That’s not always going to happen. Economists usually adopt the Dragnet approach, i.e. “just the facts, ma’am, just the facts.”

That would be fine, or at least acceptable, if there were more facts. Fewer facts call for more imagination. There is no “economists’ oath” prohibiting them from exploring viable revenue streams that haven’t been considered in previous literature. Sometimes economists explore less traveled paths. Not too often, but it happens.

Can you predict cannatax?

You’ve taken a glimpse at the various factors economists weigh as they prepare pot tax forecasts. While this pursuit is serious stuff, it’s also a game . . . a guessing game, to be exact. If you want to get in the game, you have access to the same data economists do.

You never know . . . sometimes the guy in the stands does a better job of predicting the Super Bowl results than the world’s leading “pigskin prognosticators.” You might just beat economists at their own game, especially if you happen to have some specific insight economists don’t.

You probably don’t want to challenge economists over legal substances, but when it comes to illegal substances . . . game’s on! Playing the game requires learning to love, or at least live with, statistics – like the ones some of you turned to, comparing quarterback ratings and turnover ratios, before you bet on the Super Bowl.

By the time you’re done with this report, you’ll be able to jump into any cannatax conversation. How far you want to take it is up to you.

 

Conclusion

There’s no escaping the fact that economists have something valuable to tell us about cannabis commerce. But as they’re the first to admit, they have a lot more problems forecasting tendencies for cannabis commerce than they have predicting the fate of everyday commodities.

At some point you may want to go the horse’s mouth and read exactly what economists say in their reports, or check out their interviews with Cannabis Commerce. Don’t let the Greek equations throw you.

And don’t neglect the human element, above and beyond statistics.

No less an intellect than Albert Einstein observed:

Concern for man and his fate must always form the chief interest of all technical endeavors. Never forget this in the midst of your diagrams and equations. Information is not knowledge.

Next section preview

Literature, statistics, elasticity: welcome to the economists’ domain. You know what consumes them, but who are they? Are they number-crunching androids, devoid of personality? Or are they warm, soulful folks you’d want to . . . dare I say . . . share a bowl with?

Let’s find out.

grow