Marijuana taxes and testing

As a tax person, I got involved in marijuana policy in 2009, since I figured that prohibition might not stand the test of time – and that whatever replaced prohibition would have revenue for the public. One of the problems with taxing marijuana is that heavy taxation can stifle the legal market, and thereby help the black market.

Well, it turns out that testing marijuana, at least at first, can create the same problem – high prices that consumers pay for legal product.

Here’s what happened in Oregon, according to an official and well-researched California report:

“Legal cannabis prices rise by 27%–39% in the two-month span after testing rules take effect. Revenue falls by $23,500 per dispensary due to supply constraints. Half of legal segment ($187.5 million) shifts back to illegal market. The illegal market grows from 50% to 75% while the legal market falls from 50% to 25%.”

http://www.bmcr.ca.gov/laws_regs/mcrsa_lab_isor.pdf

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So testing requirement created supply constraints, which shifted sales to the black market.  I asked my friend Rose Habib, a chemist who has been working on cannabis for a long time, what she thought. Here’s her take:

“The testing paradigm is definitely something to take into account when opening a regulated system. While there are several testing labs in CA already, testing is not compulsory, and the results are not recorded and tracked. If you have product that got a poor result, you can just take it to another lab and get better results. The results are not linked to any particular lot of product and are not traceable by any other entity. Also, many places will still buy product with no test results. Also, there are different categories of testing. Consumer safety testing would be pesticide screens, solvent residue in extracts, mold testing versus quality testing, which would be cannabinoid profile.

“The point is that none of the growers currently operating have had to be held accountable for their product passing quality control testing. The truth comes out when product is tracked and testing is mandated. Under a brand new regulatory paradigm, nearly everyone’s first crop fails testing.

“The labs suffer through a learning curve as well. It’s one thing to do some cannabinoid profiles, a dozen a day and turn out results in a pretty format. It’s another to receive, track, prep, analyze, manage data, review data, publish reports in a timely manner, save ‘retain’ samples in case your analysis needs to be performed again for some reason. And do that for hundreds of samples a day, dozens of analytes, multiple instruments and methods, weigh, record, extract, dilute dozens of little vials at a time without mixing them up. That’s contract lab work, that’s a whole different way of working. And it’s extremely difficult to not mess it up, and you have million dollar crops on the line and producers breathing down their throats demanding results ASAP so they can bring their product to market.”

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Author: patoglesby

From 1982 to 1990, I worked in tax policy for Committees of the United States Congress. In recent years, I was Adjunct Lecturer at UNC-Chapel Hill's Business School and then Adjunct Professor at its Law School.

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