Marijuana tax yield may prove the final blow to war on drugs

The war on drugs, commonly said to have been declared by US president Richard Nixon in 1971, has, by popular acclaim, been lost. There are dissenters, most notably many national governments, but plenty of expert studies have long since declared that the game is up.

Typical of the dozens, if not hundreds, of analyses is a report published in 2011 by the Global Commission on Drug Policy, a body comprising a former UN secretary general, a former US secretary of state, a former chairman of the US Federal Reserve and other luminaries. Their report began with a bold declaration: “The war on drugs has failed.”

The US authorities immediately rejected the findings. The report ended up in the usual place: on the shelf.

The war on drugs has cost a great deal of money and has corrupted nation states. The destabilisation of many Latin American countries by the trade has been well documented. More than half of US federal prisoners are doing time for drugs offences (compared with 0.4 per cent of inmates in prison for banking-related crimes).

Health consequences
Expert opinion argues that the health consequences – and costs – of cannabis use are less than those of alcohol and tobacco use (though they are nonetheless significant). The arguments are familiar. And they are mostly ignored by policymakers. Politicians don't go near the subject of drug law relaxation, fearing a visceral electoral reaction. Until recently, that is.

In the US, the recent decision by two states to legalise the sale of marijuana is already having some interesting effects. Where weighty reports and expert opinions have failed to shift policy, old-fashioned economics might be about to prove far more effective.

If historians ever look for a single document that marked the beginning of the end of the war on drugs, they might be well-advised to look at a 15-page guide produced by the Colorado tax authorities. This somewhat dry manual gives precise instructions on how producers and retailers of marijuana are to collect and pay excise and retail taxes.

As is common with much of the US tax code (and those in many other countries), the guidelines are byzantine. First, there is an excise tax of 15 per cent, payable by the grower. The authorities are very sensitive about this tax: while it may be passed on to the final consumer, it must under no account be called a sales tax. Ironically perhaps, they think this would be politically unpopular – myriad sales taxes are levied in the stores.

In the example given by the nice tax people, the excise tax is worked off a “market” marijuana price of $1,876 (€1,345) per pound, to yield a tax payment of $281.40, to be paid in short order, preferably in an electronic filing and bank transfer. Perhaps not coincidentally, that wholesale price is not far off the estimated cost of production of marijuana that can be gleaned from other, less official, websites.

Then there are the sales taxes. One-eighth of an ounce, again according to the authorities, might sell for $60 (what a huge profit margin that represents) and will attract a state sales tax, a special state marijuana sales tax, RTD sales tax, SCFD sales tax and two different Denver sales taxes. All of which add up to 21.12 per cent.

Fascinating insights
A back-of-the-envelope exercise leads to a number of fascinating insights. On current (but by no means reliable) estimates of US marijuana production and consumption, a Denver-style tax regime on a US-wide basis would yield about $40 billion a year. Stretching the analysis further than is probably reasonable (reliable data is, unsurprisingly, not available), that
would correspond to tax revenues in Ireland of about €400 million a year, in the unlikely event that we did something similar.

These kinds of numbers will attract much attention from cash-strapped governments. And these very rough figures are obtained before we start to add in the savings associated with not sending lots of people to jail as well as scaling back (or diverting) the various arms of law enforcement involved in all of this.

It is the banality of drug taxation and its incorporation into the bureaucratic handbook that gives us the biggest clue about where all of this is likely to lead. The very existence of that dull Denver taxation guide is revealing of a fascinating cultural normalisation of marijuana production and consumption. Applause and horror will be the inevitable reactions.

But the taxman’s opinion is a pretty powerful one in most societies.