Twenty-one states have legalized some amount of marijuana for recreational use, and sixteen more allow marijuana for medical use.
Critics claim black markets remain despite legalization. This is true — because legalization has been accompanied by excessive taxation and regulation.
California’s legal marijuana industry, for example, has a tough time competing with the black market. The state’s illegal sales approach $8 billion annually, twice legal sales.
It’s not difficult to see why. Retailers must pay a $1,000 application fee and a minimum $2,500 licensing fee annually, and sales are taxed at about 38 percent (combining all applicable taxes). This causes the price of legal marijuana products to exceed that of illegal products by two to three times.
Moreover, California and other states allow municipalities to ban marijuana retail shops, further perpetuating black markets.
New York has a similar problem. Sales are taxed at a combined rate of about 45 percent. Illegal sales are still the norm despite legalizing recreational marijuana two years ago. A legislator who sponsored NY’s legalization bill said she “didn’t think this was going to happen.”
This should have been clear. Wherever there are high taxes, there are black markets.
This phenomenon is not limited to marijuana. New York imposes one of the highest taxes on cigarettes in the nation — $4.35 per pack. Consequently, over 53 percent of cigarettes sold in NY are smuggled. The governor wants to raise taxes by $1 per pack and ban flavored cigarettes. Researchers estimate this will increase the smuggling rate to 66 percent and thus reduce tax revenues by $167 million.
Black markets not only hurt tax revenues, but hurt people too. Black markets encourage violence and drive overdoses, especially for high potency drugs. Decriminalizing drug use in Oregon without legalizing supply has proven ineffectual in reducing the harms of black markets.
Legalizing marijuana, but with heavy taxation and regulation, is not enough to reduce black markets either. Legislators can raise revenue and avoid costly enforcement activities by legalizing marijuana without imposing excessive taxes.
