New Bootleggers: Weed Restrictions Foster Black Market

The following article first appeared on Reason.com by contributor J.D. Tuccille. It is featured in the new Newsweek Special Edition, Weed U.S.A. by Issue Editor Tim Baker.

Even as they embark on a deliberate experiment in legalizing marijuana for recreational use, the states taking the plunge unintentionally (we can only hope) initiated a second experiment. In dropping overt bans on the stuff while appeasing critics with reams of regulation, could they so bind the marijuana trade in red tape and taxes that they retained all the flaws of prohibition and gained few of the advantages of legalized status?

The answer was very quickly a big "yup." But officials may just be learning from the experience and fixing their early mistakes. A little.

Last summer I wrote that federal financial restrictions, as well as restrictive state rules and high taxes, had conspired to keep the marijuana black market alive and profitable in Alaska, Colorado, Oregon, Washington and Washington, D.C., the four jurisdictions with nominally legal recreational marijuana.

My conclusions weren't a stretch—I quoted local publications and pot vendors pointing out the advantages illegal dealers retained in terms of service and pricing. The rules hobbled legal businesses by hiking prices and preventing consumer-friendly offerings. Long-established illegal dealers were already in place to take advantage of that hobbling.

So officials ruefully revisited the issue and changed their ways, right? Well, some. They're in no apparent rush, but they are slowly loosening the screws.

In December 2015, Washington's Liquor and Cannabis Board reported that, one and a half years after recreational marijuana was legalized in the state, the "best estimate on the breakdown" of the marijuana market is: "$480m medical (37 percent of market), $460m state-licensed recreational stores (35 percent of market) and $390m illicit (28 percent of the market)."

That is, the rules have been so restrictive in the "legal" Washington market for marijuana that people remain willing to risk arrest and imprisonment while trading hundreds of millions of dollars of the stuff in ways that violate the law.

The market breakdown from the Liquor and Cannabis Board came at the end of the announcement of rescinded residency requirements on who can fund marijuana businesses, looser testing requirements for products and looser restrictions on ingredients in products, among other changes. Those adjustments should make the industry more accessible to legal would-be participants and more able to respond to market pressure.

At the same time, state lawmakers and Seattle officials are pushing for legal home delivery of marijuana in an effort to counter consumer demand that's currently being satisfied by underground vendors.

Of course, City Attorney Pete Holmes couldn't admit the need for deregulation without throwing in some tough-guy posturing.

"I support our proposals to legalize and regulate marijuana delivery, but businesses that currently deliver marijuana undermine our efforts to demonstrate that there is a regulatory alternative to marijuana prohibition," he said. "All current delivery services are engaged in nothing less than the felony distribution of a controlled substance and must be closed."

Whatever, Pete. Just get out of the way. Colorado is experiencing "a wave of illicit marijuana cultivation in violation of federal law and operating outside Colorado's marijuana regulatory structure," according to the U.S. Attorney's Office for the District of Colorado. Strictly speaking, even if true, that's not the state's fault, because it's spurred by the opportunity to satisfy demand in neighboring states suffering under federal prohibition and restrictive local laws of their own creation.

The state has arguably been a bit more proactive than Oregon and Washington in responding to people's desire for competitive prices and services. When the state's black market remained healthy after legalization, state officials reduced one of the taxes on the stuff from 10 percent to 8 percent (though this small measure of relief doesn't kick in until 2017).

The state also allows sales of edible marijuana products to recreational users. Munchies that give you the munchies have proven popular enough to gobble up close to half the market (attention Oregon regulators). Perhaps inevitably, that popularity led to new regulations —but it's also evidence of a huge trade that would have been left to illicit vendors if the state had been more restrictive. Even so, Colorado Drug Investigators Association Vice President Jim Gerhardt approvingly tells people that marijuana is the "most highly regulated industry in the entire state."

Which, inevitably, leaves an opening for people to meet demand that can't be fulfilled within the law.

Should lawmakers in states with legal-ish marijuana markets be doing more to reduce taxes and restrictions? Of course. But the repeal of prohibition in those states was the first step in recognizing that black markets are the inevitable result of bans on popular goods and services.

Incremental reductions in taxes and steps toward deregulation since then—however grudging—are further evidence that officials aren't completely immune to messages sent to them by the world in which they live. It's not just bans, they're learning, but unreasonable restrictions that have to be done away with if you want to eliminate underground markets.

If they keep it up, we might just embark on a new experiment to see what a legal and free market in marijuana looks like.

This article was excerpted from Newsweek's Special Edition, Weed U.S.A., by Issue Editor Tim Baker. For more on Marijuana in America, pick up your copy today.