A Principled Approach to Taxing Marijuana:THE GOLDILOCKS PRINCIPLE

THE GOLDILOCKS PRINCIPLE

The point of legalization is to substantially eliminate the black market and its attendant ills. Literal eradication is a stretch; after all, there are still some moonshiners, and when 21-year-olds buy alcohol for 20-year-olds, that is technically illegal diversion. But if even one in four criminal traffickers keep their jobs after legalization, the policy will have failed.

Hence, for legalization to succeed, the after-tax legal market must win the price war against the black market. The RAND Corporation’s Drug Policy Research Center surveyed heavy marijuana users about where they’d buy drugs under various scenarios, and how much they would be willing to spend. While a few ethical or risk-averse people said they’d pay much more for marijuana that is “legal, labeled, and tested for pesticides and other contaminants,” most wouldn’t pay more than a few dollars per gram over the black-market price; people who said they’d buy whatever was cheapest accounted for fully one-third of consumption.

So it is possible to err by making taxes — and hence prices — too high, but for several reasons it would also be an error to make taxes too low. One is that the federal government runs enormous chronic deficits, and is unwilling to increase rates on existing taxes. Low marijuana taxes would squander a rare opportunity to broaden the tax base.

Another is tactical. The majority of Americans answer yes to the survey question, “Do you support legalizing marijuana use?” But more than one-third say no, and probably a greater proportion would oppose creating a for-profit marijuana industry. Higher taxes may be a quid pro quo for winning swing voters’ support for legalization.

A third is the traditional argument for “Pigouvian” taxes to lessen negative “externalities” associated with certain products. Marijuana can harm third parties, for example, through impaired driving. And if marijuana makes consumers less productive, that is a collective concern. Higher taxes would help account for such externalities.

A fourth, non-traditional but important argument is to control “internalities” — the harms users inflict upon themselves. Economists differ on whether harms to friends and families are externalities or internalities, but either way, mitigating them is an argument for higher taxes.

The concern with cheap marijuana is not that tens of millions more Americans might smoke marijuana once or twice a week. That would not matter much, because occasional use is, by and large, not terribly harmful. Rather, the concern is that millions more would become habitual users. Over the last decade or so of liberalizing policy, the number of people who report using marijuana at some point within the past year has increased moderately, but the number reporting heavy use has soared. In 1992, fewer than one million Americans self-reported daily or near-daily use of marijuana; by 2014, the figure had ballooned to 7.8 million. Half of the marijuana used in the U.S. is consumed by people who spend more than half their waking hours intoxicated.

Whatever one thinks about the long-term consequences of chronic heavy use, acute marijuana intoxication can interfere with the ability to perform useful and even necessary tasks. Marijuana is not a cognitive-performance enhancer. And while we welcome low prices for most consumer goods — if health care and rent were cheap, it would make life a lot easier for most people — that approach may not apply to “temptation goods.” Suppose people could buy essentially unlimited candy and desserts for 50 cents a day. Would that be a good thing? Maybe not. Lots of Americans already struggle with their weight, and consumption tends to go up when prices fall.

Libertarians may want prices to be as low as possible even for temptation goods. But the internalities argument goes as follows: Marijuana is a dependence-inducing intoxicant that leads many users to systematically make bad decisions that harm themselves as well as third parties; more than four million Americans report suffering enough problems with chronic marijuana use to meet clinical criteria for a substance-use disorder.

Chronic drug use involves repeatedly ingesting chemicals that bind to one’s neuro-receptors — literally altering the brain in ways that are visible in brain scans. Changes in the brain’s reward circuitry can compromise the neural system that normally helps rational actors successfully negotiate free markets. Even if each dose considered on its own seems appealing, regular drug consumption can leave long-term users regretful. The phrase “drugs hijack the brain” is sensationalistic, but not altogether wrong. So there is nothing illogical about adopting a libertarian perspective toward conventional consumer goods but making an exception for temptation goods, particularly for artificially introduced neurotransmitters and their chemical cousins.

To be sure, taxing to protect the minority for whom cheap marijuana would trigger habitual use is paternalistic, and it sacrifices the interests of the majority whose use would not create such problems. But the sacrifice would not be large: A $5-per-gram tax would cost someone who smokes a half-gram joint every weekend only $125 a year. Furthermore, the taxes would not actually increase out-of-pocket costs, but merely lessen the decline in price that would inevitably accompany federal legalization. So even with high taxes, legalization would still save marijuana users money.

 

 

 

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