Over six months have passed since Colorado opened the nation’s first retail marijuana shops in January 2014, and now it’s Washington State’s turn. Washington recently granted licenses to 25 recreational marijuana shops whose doors opened for business on July 8th, 2014. The state will eventually license up to 334 retail operations. Rationing and shortages have been reported, and prices are roughly double the rate offered by medical dispensaries. The success of legal marijuana as a state revenue source will depend on the ability of recreational pot sellers to compete for market share with medical and black market competitors.
A bill (SB 5887) which would’ve put taxes and tighter regulations on medical marijuana passed the state Senate in the 2014 session, but died in the House. The state’s Liquor Control Board which regulates recreational pot has publicly recommended that the medical marijuana system also be put under their governance but it will require action from the state legislature to make that happen.
How big is the marijuana market in Washington? Research commissioned by the Washington State Liquor Control Board estimated that residents consume a combined 175 metric tons of marijuana annually. About 565,000 state residents (8.2 percent) report using marijuana within the last month. Medical marijuana’s market share in Washington is unknown, but reputable studies suggest that it may be under 20 percent. The leaves around 80 percent of the pot consumed in Washington, up until now, purchased through the black market.
The state’s Economic and Revenue Forecasting Council estimated taxes on marijuana will generate $51 million for the 2015-17 biennium, and an additional $138.5 million for the biennium ending in 2019. That revenue estimate is fairly conservative. A study released in June 2013 by three Carnegie Mellon University professors claimed that “depending on initial assumptions, the total revenue over ten years could easily be anywhere from $650 million to $3.2 billion.”
In the first three days of business, excise taxes alone generated a $150,000 haul.
- Testing and labeling requirements now enable residents to understand what’s in the marijuana they consume
Can the state’s cannabis compete?
Brian E. Smith, Communications Director at the Washington State Liquor Control Board, downplayed the high prices and inadequate supply of the early pot shops as a temporary hiccup in an “emerging market.” Singer explained, “This market did not exist yesterday and it exists today. Supply in this initial market is going to be tight right now.” The state issued growers’ licenses in March 2014 so the initial shortfall will be alleviated as more of those licensed plants reach harvest stage. Washington residents can be reassured by looking to Colorado, where a similar supply crunch eventually gave way to lower prices and ample supply. Singer says the state aims to be capturing a quarter of black market transactions by the end of 2014.
To generate revenue, the state-licensed retail shops will need to compete with a relatively unregulated medical marijuana system and an “anything goes” black market. That won’t be easy given the expenses that will come baked into every gram of recreational pot. First there’s three layers of steep taxation: a 25 percent tax levied at three different levels (grower, processor, and retailer).
Ben Schroeter, a Seattle-area pot dealer who brazenly advertises on Facebook, commented that the highly taxed recreational product would struggle to compete with a medical product that’s not burdened with the same taxes. Schroeter said, “The only way that the state is going to be successful with the legal pot shops is to put a clamp down on the medical marijuana.”
The state requires that each plant be tagged with a barcode and digitally tracked. Product must be packaged, labelled, and transported to meet strict specifications. Facilities must be digitally surveilled 24-7 in a format accessible to police over the Internet. Complying with these regulations carries costs which are passed onto consumers through higher prices. Taken by itself, this undercuts the competitiveness of state-sanctioned retail shops.
Smith of the state’s Liquor Control Board reasoned that compliance costs will be more than made up for by the advantages to be enjoyed by firms operating in the state-sanctioned pot market. Risk of prosecution, Smith said, is baked into the price of black market pot. Operating at full scale and in broad daylight, firms are likely to discover new efficiencies and innovations, he posits.
One benefit of the new regulations is already being appreciated by some consumers: testing and labelling requirements provide consumers “explicit certainty” about the contents of their purchase.
Colorado: one step ahead
Colorado’s approach to launching recreational marijuana has differed from Washington’s so far. For one thing, Colorado permits licensed operators to grow, process, and retail marijuana to consumers; while Washington bans vertical integration, separating growers and processors from retailers. Colorado actually requires retailers to produce at least 70 percent of their product. It remains to be seen which regulation will work better: Colorado’s mandatory integration or Washington’s mandatory separation.
Washington has capped the amount of marijuana growing space at two million square feet. Economics would suggest this will cause market inefficiencies, unlike in Colorado which places no cap on growing space. Washington’s cap is designed to provide an adequate supply of retail marijuana while limiting the amount illegally diverted for black-market sales. Though the numbers are largely unknown, anecdotal evidence suggests that Washington State has long been a significant exporter of marijuana to other states. Demand for exported Washington marijuana could provide fuel for black market production to continue.
In 2012 when the two marijuana ballot initiatives passed, Colorado had a tightly regulated medical marijuana system, and it built it’s recreational system on top of it, giving medical stores the first crack at opening recreational shops. Washington’s medical marijuana system was more loosely regulated and the recreational system was built separately.
Much from Colorado’s experience should ease anxieties about the supply crunch seen in Washington’s first week of retail sales. In Colorado an ounce of high-grade marijuana rose past $300 in the first few days of recreational sales. Six months later, one large chain of Colorado marijuana stores is selling ounces for $85, plus tax.
Colorado residents appear to be enjoying the new status quo as well. The ballot initiative which legalized pot in 2012 passed by a 10.5-point spread. But a poll in March 2014 by the Public Policy Institute found Coloradans now favoring their legal pot by a 22-point spread. Colorado’s revenue department reports over $24 million in tax revenue generated to date, and anticipates $98 million by year’s end. Additionally, the Colorado Center on Law and Policy estimates the state will save $12-40 million annually through the new decriminalization.
- There are no edibles available in Washington’s retail shops because the state has yet to license any edible manufacturers.
Making legal pot work for Washington
Expectations vary as to how much tax revenue marijuana will generate for Washington State. Washington’s pot taxes are much higher than Colorado’s. Colorado imposed a 15 percent excise tax on wholesale marijuana and a 10 percent sales tax on retail sales, whereas Washington charges a 25 percent tax at three different stages of production. This creates the distinct possibility that Washington will hobble those playing by the rules so badly that they will be unable to effectively gain market share. An overzealous approach aimed at collecting more revenue might actually have the opposite effect. Whether efficiency can flourish in the state-run marijuana market will depend on whether state officials can govern with a touch light enough to unleash innovation and competition. At 175 metric tons consumed per year, Washington resident’s marijuana usage could generate significant revenue if even a slice of it shifts into the new recreational market.
Drive Growth Through a Competitive Business Environment – PLAN Washington Economic Development Strategy #1.