Cannabis Legalization :: Where is the Producer Incentive

Representing the Washington State Cannabis Tourism Association; I’ve been following the legal processes taking place in the State of Washington and nationally and it’s crucial that the arithmetic add up in order to induce the current lucrative underground market into the legal marketplace.  My aim is to provide an accurate picture of the effect the proposed tax structures on the retail cost of legal marijuana vs current underground market prices.

Without the producers, that have developed this opportunity over the last 40 years, there would be no legal market.  I don’t see any references in the literature to these producers or the current status of the underground market.

My references for this article have been derived from the following documents.
Initiative 502’s impact on the Washington State Liquor Control Board
FAQs on I-502
Fiscal Impact through Fiscal Year 2017
Marijuana Tax Equity Act

There are no references in the WSLCB literature to the estimated costs of production as outlined in the RAND Report entitled ‘Estimated Cost of Production for Legalized Cannabis’.  Their estimate for a starting producer price of $3 per gram is arbitrary and has not taken into account what an underground producer is currently getting.

Let’s begin with some history of the WSLCB (Washington State Liquor Control Board) process.

After I-502 passage on November 6, 2012 the WSLCB was charged with developing rules for implementation.  Public forums were begun in January and I attended the one in Seattle on January 24, 2013.

The public forums were preceded by a Fact Sheet released by the WSLCB.  The fees and taxes listed here are set in stone by the initiative. It would require a 2/3 majority in the state legislature to change them.

Licenses and Fees
Creates an application process that mirrors the liquor license application process
Creates three new marijuana licenses: producer, processor, and retailer. The fee for each license is a $250 application fee and $1000 annual renewal fee.

Tax Assumptions
Estimates assume 50 percent of marijuana is both produced and processed by the same seller. The remaining 50 percent is produced and then sold to a processor.
The initiative creates marijuana excise taxes equal to 25 percent of the selling price on each wholesale sale and retail sale of marijuana from a licensed producer, processor or retailer.

Marijuana Taxes
The initiative creates three new excise taxes to be collected by the WSLCB:

  • Excise tax equal to 25% of the selling price on each sale between licensed producer and licensed processor. Paid by the producer.
  • Excise tax equal to 25% of the selling price on each sale of usable marijuana/marijuana infused product from a licensed processor to a licensed retailer. Paid by the processor.
  • Excise tax equal to 25% of the selling price on each licensed retail sale of usable marijuana/marijuana infused product. Paid by the retailer.

These Excise taxes are in addition to any/all applicable general, federal, state, and local sales and use taxes, and is part of the total retail price.

The Fact Sheet also makes some assumptions as to what the price should be.

WSLCB Price Assumptions

  • Estimates assume a $3 per gram producer price, a $6 per gram processor price and a $12 per gram average retail purchase price.
  • Prices are based on a review of current medical marijuana dispensary prices in this state. (No reference to current underground prices)
  • Estimates assume 50 percent of marijuana is both produced and processed by the same seller. The remaining 50 percent is produced and then sold to a processor.
  • Estimates do not assume that increased consumption or competition will reduce prices.

Federal Producer Taxes
The elephant in the room entered with Federal Legislation put forth by Congressman Jared Polis and Congressman Earl Blumenauer; The Marijuana Tax Equity Act of 2013 that wants to add a 50% Federal Producer Tax on top of the state taxes

Taxation Summary of the Federal Legislation
The Marijuana Tax Equity Act creates a taxation framework similar to that in place for the tobacco and alcohol industries. It imposes an excise tax of 50% on the first sale by a producer (generally the grower) to the next stage of production (generally the processor creating the useable product). Along the supply chain it requires occupational taxes for those operating marijuana businesses. Those who do not comply with the taxation laws face civil or criminal penalties similar to those in place for the tobacco industry. The bill requires the IRS to produce periodic studies of the industry and make recommendations to Congress.

Based on the set in stone taxation levels of 25% by I-520, the proposed federal producer tax of 50%, retail sales taxes and the arbitrary producer price of $3/gram by the WSLCB; I have compiled a  spreadsheet to compare the viability of Legalized Cannabis (as presented with WSLCB assumptions) vs Underground Market Cannabis.  Note: The current underground market retail price of Cannabis in WA State is sourced from priceofweed.com.

I have also provided another spreadsheet that shows what happens when the arbitrary producer price of $3/gram by the WSLCB is brought up to the current underground market standard..

I have left out additional taxes such as: federal income tax and state B & O taxes that will also affect the final retail price.

My concern is that the drafters of I-502 never considered what a 25% tax might do to an already thriving underground market or how a proposed federal government producer tax of 50% would exacerbate the retail bottom line.  As you can see, from the spreadsheets, the WSLCB arbitrary producer price of $3/gram produces a retail price of $14.31 (after all the proposed taxes have been added). But when we let the producer get what he is currently getting ($4.33/gram) we end up with a retail price (after all the proposed taxes have been added) of $20.65/gram; not exactly a charming price for the consumer.  If we are going to try and ‘Get this right’, we can’t use smoke and mirrors to try and convince everyone.  So, where is the incentive for the underground producers to Go Legal?