Cannabis Taxes: Start Low, Go Slow

With several states having legalized cannabis now, and taxing it, what lessons have we learned thus far?  It would seem that the biggest one of all is, "start low, go slow" when it comes to taxes.

As Rear Admiral Luther E. Gregory found out after the repeal of alcohol Prohibition, the black market does not vanish right away, and setting the tax rate too high at first will keep the black market in place, while setting it low to start with will undercut it.  And once the black market is gone, it will not return easily, so then one can raise the tax rate quite high without worrying about the black market making a comeback.  Of course, there is still such a thing as "too high" in that regard, but the threshold for significant black market formation and persistence is much higher afterwards than it is in the very first year or two post-prohibition.

Fast-forward to cannabis legalization in 2014, Colorado and Washington found out the hard way what happens when cannabis excise taxes are too high.  Though otherwise successful, their legalization success was hampered by a fairly persistent black market, albeit smaller than the pre-legalization one.  So they both ended up having to cut their tax rates as a result.  

So why did they start out with such high taxes?  Well, the promise of much-needed revenue certainly helped sweeten the deal for the fence-sitters.   But also, there was a widespread belief that before-tax prices would plummet by at least half, and perhaps even 80% or more, upon legalization or very shortly after.  And yet, that did not happen.  If anything, prices went up at first due to higher demand in the short term, and with or without the taxes the prices three years later still have not dropped very much compared with the status quo ante.  And while the price elasticity of demand for cannabis remains controversial to this day, it is generally thought to be relatively inelastic overall, though estimates vary dramatically.

Still, the long-term trend in cannabis prices does seem to be downward, both in legalization states and nationwide.  And contrary to what the fearmongers claim, that is not necessarily a bad thing, given how cannabis is overall safer than alcohol and generally tends to substitute for it.  Many studies strongly suggest that when one advances, the other retreats, albeit with some nuance.  Cannabis may even take a bite out our nation's deadly and devastating opioid epidemic as well, according to some studies.  Thus, cheaper weed, especially if it is legal, may very well be a net public health and safety benefit on balance.   And there is also no hard evidence that teen cannabis use has increased as a result of legalization--on the contrary, the latest NSDUH data find that cannabis use among 12-17 year olds nationally has dropped to a 22-year low, even as it has risen among both 18-25 year olds and those 26 and over since 2008.

As for specifics as to what the the tax on cannabis should be, it seems that an initial rate of 30% or more on final retail sales like Colorado and Washington originally had is too high to eliminate the black/gray market, and 10-25% is now what most legalization states are aiming for.  Alaska chose a flat $50/oz., which based on the average price of $250/oz. would be about 20%.  There are pros and cons to either method, ad valorem or by weight, and California is apparently combining both types of taxes.  And once the black market is gone after a year or two, then jack the rate up to a level just shy of what would cause a significant black market to return.   But to start with, Twenty-One Debunked recommends a rate of 10% and/or $10-20/oz. for the first year or two before raising it any higher, and perhaps even a "tax holiday" for the first three months of legalization like Oregon did.

Also, once the kinks are worked out, we think it would be a good idea to have the tax rate be at least somewhat proportional to THC levels and perhaps even inversely proportional to CBD levels as well.  For now, though, a simple single rate (whether ad valorem or by weight) will likely be the most workable starting point for any states that are new to legalization.  And if they wish to incentivize THC not being too high or CBD too low, the regulators are free to cap THC levels and/or set a floor for CBD levels.

As for California's idea of having a combination of different taxes (a $9.25/oz. cultivation for flowers, $2.75/oz. for leaves, and a 15% ad valorem tax on retail sales, plus any additional taxes levied by municipalities if they so choose), that's fine.  But both the state and municipalities really might want to consider reducing their rates for the time being, as the combined rates  may be as high as 45% in some parts of California by the time it reaches the consumer.  Ouch.  And unlike in Colorado and Washington, medical cannabis will soon be taxable in California as well, so that's a double ouch.   Best advice?  Municipal taxes shouldn't be too much of an issue, since one can just go to the next town.  But the state should aim for a retail excise tax of 10% and $10/oz. for flowers at the cultivation level.  Ten and ten.  The lower rate for leaves makes sense too, given their generally far lower THC content.  "Start low, go slow."

Of Death And Taxes

While the opioid epidemic has recently been declared a public health emergency, what if we were to tell you that there is another drug epidemic that kills even more people (a whopping 88,000 per year vs. 65,000 per year for opioid and all other drug overdoses combined), a number that has actually been increasing in recent years?  And that number, though staggering in itself, is merely the tip of a very large iceberg of injury, illness, crime, violence, motor vehicle crashes, family breakdown, addiction, and other social costs linked to this deadly yet ubiquitous substance.  Meanwhile, the powers that be are responding to this epidemic with a collective shrug for the most part.  I think the reader would figure out by now that we are talking about alcohol.

And aside from its overall banality, what is particularly notable about the alcohol epidemic is how ageist our response has been.  While the epidemic clearly affects all ages, the powers that be have been focusing in laser-like fashion on people under 21 while largely ignoring people over 21, despite the fact that people over 21 make up the vast majority of this epidemic.  Not only does this scapegoat young people for largely adult problems, but it also hinders any real solutions to such problems as well.  It's basically the "pink elephant in the room".

Fortunately, we know now after decades of reams of research evidence that there is in fact a very simple solution for reducing the death rates and other harms of excessive drinking.  And that solution is raising alcohol taxes.   The higher the price of alcoholic beverages, the fewer deaths and other alcohol-related problems occur, all else being equal.  Even modest increases seem to have a significant impact.   We know this, yet not only have the powers that be generally let the alcohol taxes lag behind inflation, but are currently trying to lower such taxes.  

So what should the ideal alcohol tax be?  According to researchers, the externality costs of alcohol are estimated to be around $45-58 per proof-gallon, yet the federal tax on distilled spirits is $13.50 per proof-gallon, and for wine and beer it varies but tends to hover between $4 and $5 per proof-gallon.   And while state and local alcohol taxes vary, they are also generally very modest in most states, especially for beer.  So there is a very wide range by which such taxes can be raised while still being socially efficient.

Twenty-One Debunked believes that, along with lowering the drinking age to 18, that alcohol taxes should be raised significantly.  Specifically, we support raising and equalizing the federal tax on all alcoholic beverages to the inflation-adjusted 1991 level for distilled spirits, which would be $24 per proof-gallon in 2016 dollars.  It should also be simplified by getting rid of all credits and lower tax rates, with perhaps the exception of ones for the first X number of gallons produced by very small domestic producers.  At the state level, it would also be good to equalize alcohol taxes across all beverage types, while allowing localities to levy their own alcohol taxes (including sales and gross excise taxes) as they see fit.  The latter is especially important for college towns.

Even a smaller hike, such as to $16 per proof-gallon across the board, would likely save thousands of lives per year according to researchers.  And of course it would also raise more revenue.  As for job losses, the best research suggests that the net effect is actually neutral or even positive with respect to jobs overall.  So it should be a no-brainer.  A win-win-win situation for everyone but the alcohol industry, basically.

Oh, and by the way:  craft breweries (both macro and micro) not only exist in high-tax Canada, but actually appear to be thriving over there.  Keep in mind that the tax hikes we propose would still leave American beverages cheaper than Canadian beverages.  So even if we raise such taxes dramatically without reduced rates or credits for small producers, they will likely continue to thrive here as well (at least if such tax hikes are phased in somewhat gradually).

Don't get us wrong, Twenty-One Debunked does not believe that alcohol is inherently evil or anything like that.   We are certainly not in league with the neo-dry lobby.   But when we as a society fail to appreciate that alcohol has a very real dark side for all ages, there are very serious consequences to doing so.  History speaks for itself.  So what are we waiting for?

O Cannabis!

The Government of Canada under Prime Minister Justin Trudeau still plans to legalize cannabis nationwide.  Though not finalized yet, it is tentatively set to go into effect sometime in July 2018.  And various provinces are already preparing for it.

As for what the age limits will be, that will be up to the provinces to decide.  The federal age limit will likely be 18, and most provinces have tentatively decided that their own cannabis smoking ages will match their drinking ages (currently 18 in Alberta, Manitoba, and Quebec, 19 elsewhere).  Thus, the age limit for cannabis in Canada will most likely end up being 18 or 19, depending on the province.

For the record, Twenty-One Debunked believes that the age limits for alcohol, tobacco and cannabis should be 18, or at least no higher than that.  We in the USA (where in the growing number of states in which cannabis is legal, the age limit is 21) can really learn a lot from our friendly neighbor to the north!

How to Quash a Black Market in Five Easy Steps

A black market (or underground economy) typically occurs when the legitimate market for a particular good or service is either nonexistent, out of reach, or otherwise far too insufficient to meet the demand for that good or service.  Black markets are by definition illegal to one degree or another, while informal markets that are technically legal or quasi-legal are known as gray markets.   While the usual proximal cause for a black market is prohibition of a good or service (and thus no legitimate market existing), a black market can also occur (albeit to a much lesser extent) when the taxes and/or other government fees on or surrounding the product or activity are excessively high relative to what consumers are willing to pay (and relative to the informal economy).  Sometimes taxes can be so high so as to be considered "prohibition by price", though the relative price difference is typically far more important than the absolute price.

Twenty-One Debunked believes in raising alcohol taxes significantly in conjunction with lowering the drinking age to 18.  The level we suggest ($24/proof-gallon, equalized for all alcoholic beverages), though significantly higher than now, would still be too low to encourage a significant amount of moonshining and bootlegging.  But what about cannabis, which is currently being legalized in more and more states, many of which started out with fairly high taxes and/or licensing fees?  Though a positive development overall, in some of such places, the black market still exists to one degree or another, albeit much less so than when cannabis was illegal.  And of course we all know that places like NYC with extremely high cigarette taxes have their share of black markets in untaxed, out of state, counterfeit, and/or stolen cigarettes as well.  So how does one solve such a problem?

Enter Rear Admiral Luther E. Gregory.  In the 1930s, Prohibition was repealed, and Washington State along with other states were now faced with the task of shutting down the well-established bootleggers and speakeasies that persisted even after Repeal.   Admiral Gregory was asked to head the state's Liquor Control Board, and given carte blanche to come up with a solution, one which worked surprisingly well in fact:

1. End Prohibition, first of all.
2. Give amnesty and issue licenses to anyone willing to play by the state's rules, whether former bootleggers or otherwise.
3. Set the alcohol taxes as low as possible at first, the lowest in the country in fact.
4. Punish sellers who don't play by the rules, with an iron fist--i.e. blacklisting scofflaws from ever selling liquor in the state again.
5. After holding down alcohol taxes for three years, abruptly raise taxes to the point where they're now the highest in the nation.

Problem solved.  The legal market proved to be competitive with what was left of the black market, and drinkers preferred the former over the latter, driving the latter out of business.  And the black market never came back even after raising taxes dramatically.  Looking back, it should have been so obvious indeed.

Substitute "cannabis" for "alcohol", and there is no reason why this strategy would not work in this day and age.  And instead of holding down taxes for three years, merely one year should be sufficient to get the same results, even if the hike is automatically scheduled.  Doing so would minimize the greatest risk of the strategy, namely, that the fledgling legal cannabis industry would then become so powerful that they would resist and successfully quash any attempt to raise taxes in the future.  They would not become that powerful in just one year, and probably not for several years, but the black market could be easily quashed in that timeframe all the same.

As for cigarette taxes, both NYC and NYS should implement this strategy as well.  And of course, the low-tax states such as Virginia should also raise their cigarette taxes (within reason) so as to not be such a source state for cigarette smuggling to other states.  And of course, lower NYC's age limit back to 18 as well.  Same for cannabis in legalized states as well.

In fact, this strategy would work for just about any type of black market.  That's because it is based on the hard facts of economics, not half-baked wishful thinking.  Unlike prohibition or unrealistically high age limits, taxes are not a "blunt" policy instrument, but rather a razor-sharp, double-edged sword.

So what are we waiting for?

Legalization of Cannabis Not A Disaster After All

Five years after cannabis was first legalized for recreational use in Colorado and Washington in late 2012, over three years after full implementation of such legalization in 2014, and several more states since then, what can we conclude from the data so far?  The best evidence shows that such legalization was NOT a disaster after all, the fears were ridiculously overblown, and if anything legalization turned out to be a win-win-win situation for everyone but the crooks, creeps, cops, and cronies.  It saved a ton of money on law enforcement and related costs, brought in major tax revenue, and the supposedly large social costs of legalization that the naysayers feared still have not panned out even several years later.  And thus, no good reason for cannabis to remain illegal anywhere else at this point.

And now that California Dreaming has finally become a reality in a critical number of states, Twenty-One Debunked will become that much more aggressive in advocating that the age limits for cannabis in legaliztion jurisdictions be lowered to 18 going forward.  While we very grudgingly supported legalization initiatives with an age limit of 21 while they were being debated and voted on in the name of pragmatism, now that the proverbial dam has broke it is time to take on the age limit issue with at least the same tenacity that we have shown with alcohol.

To all of those who still support cannabis prohibition:  how does it feel to be on the wrong side of history?  Because we wouldn't know anything about that.

The 21 Drinking Age Is An Inherently Violent Law

Let's put this as bluntly as possible.  The 21 drinking age is an inherently violent law, at least the way it is typically implemented.  And insofar as it is violent, it its also therefore a hate crime against young people.

Except perhaps for those shrinkingly few jurisdictions in this country where it is not vigorously enforced or only enforced on vendors, enforcing such an illiberal law against a victimless crime is inherently violent.   In fact, it is literally impossible for police to enforce against young people themselves without violence or the threat of violence.  And if you resist such efforts, that is "resisting arrest".   Try to imagine a non-violent version of such an abomination--you literally can't!

One yardstick we like to compare it to is the smoking age for tobacco in still many parts of the country.  New York State, for example, has a legal minimum sale age of 18 for all tobacco products and e-cigarettes.  NYC and Suffolk County set it at 21, and a few other counties such as Nassau set it at 19.  But in all of the state, the age limit only pertains to who can buy it, and only vendors are penalized for it.  Purchase, use, and possession (PUP) under the legal age are not actually illegal in NY.  I believe that even furnishing cigarettes to people under the legal age in private is not a punishable offense either.  That is an example of a (relatively) non-violent smoking age, if one can argue that there is such a thing.

Yet we can't seem to recall anywhere in the country, except maybe Louisiana, that has a 21 drinking age that follows such a model in theory or practice.  And unfortunately many parts of the country are increasingly following the typical drinking age model (or worse) for cigarettes and now cannabis as well.

That said, we would still vehemently oppose the age limit for alcohol, tobacco, or cannabis set any higher than the general age of majority regardless, as it is still an unduly paternalistic violation of civil rights and liberties.  That means no higher than 18, period.  As for people under 18, ideally there should be no penalties for simple possession or private consumption per se, but if there must be, they should be no worse than a traffic ticket and there should be no jail time or criminal record involved.  We would grudgingly support such a thing only to avoid making the perfect the enemy of the good (and thus ending up with neither).  But otherwise, any age limit should be enforced only on vendors (with violations punishable by liquor licence suspensions/revocations) and perhaps people over 18 who otherwise knowingly furnish such substances to people under 18 (for example, by fining and "blacklisting" such scofflaws from buying alcohol for a period of time).  The criminal law is far too harsh a tool to apply to such things per se, except perhaps in truly egregious cases.

But as for drunk driving, drunk violence, and other alcohol-related crimes with victims, we say, NO MERCY!  Do the crime, do the time.

Oh, and by the way, during Prohibition (1920-1933) when alcohol was banned for all ages, it was actually NOT illegal to possess or consume alcohol per se.  It was of course illegal to sell, manufacture, transport, or give away such beverages, but drinking itself was not a crime.  Thus, the current ignoble experiment that is the 21 drinking age is in fact more violent than 1920s Prohibition for people under 21.

Let America be America again, and lower the drinking age to 18.  If you're old enough to go to war, you're old enough to go to the bar.  'Nuff said.

Kudos to Puerto Rico (and the U.S. Virgin Islands)!

With all the monumental and unprecedented devastation to Puerto Rico and the U.S. Virgin Islands due to Hurricane Maria, we at Twenty-One Debunked have been thinking about just how much integrity they have shown over the past three decades.  As you probably already know, since 1988 they have continually chosen to keep their drinking ages at 18 instead of raise it to 21, even at the cost of 10% of their federal highway funding being withheld from them.  Even Guam eventually sold out in 2010, yet Puerto Rico and the Virgin Islands still show no signs whatsoever of selling out anytime soon, despite how battered they are by the hurricane.  Now that REALLY says something!  So thank you, and kudos to both Puerto Rico and the Virgin Islands.  You are excellent role models for the sort of integrity that one can only wish that the mainland states had shown.

Of course, there have repeatedly been fleeting movements to raise the drinking age to 21 in Puerto Rico over the years, but every single one of them failed due to lack of public support.  But keeping the drinking age at 18 did not stop them from harm reduction.  In fact, even the temperance-oriented Robert Wood Johnson Foundation concedes that Puerto Rico was able to reduce both alcohol-related traffic fatalities and underage (under 18) drinking since the 1990s without raising the drinking age at all.  Rather, they simply started enforcing the existing drinking age of 18, passed tougher DUI laws (and enforced them), and also raised the excise tax on alcoholic beverages.  From 1982 to 2009, Puerto Rico saw a whopping 84% decline in teenage (16-20) drunk driving fatalities, while the nation as a whole saw a 74% drop, in both cases to record-low levels.  Now that's a great American success story!

In other words, it appears that Miron and Tetelbaum (2009) were spot on when they said that the drinking age appears to have "only a minor impact on teen drinking," just like they were right about its lack of a lifesaving effect on the highways.

Have We Got the "Teen Brain" All Wrong?

One thing that is commonly accepted as a truism in the USA is that crime, especially violent crime, is a young person's (and especially a young man's) vice.  It typically rises rapidly in the mid-teens and peaks around the late teens and very early twenties before rapidly and then gradually declining from then on, and it is often said that "the best cure for crime is a 30th birthday."  The statistics do indeed bear this out, but it is often accepted without question that the causes of this phenomenon are biological (particularly neurological and/or hormonal) as opposed to cultural ones.

Well, a new study by researchers at Penn State seems to put the lie to the biological determinist theory.    While previous studies tended to look only at Western cultures (which all show a similar age pattern for crime), this one compared the USA to Taiwan instead.  If brain development (or lack thereof) is the cause, then the age pattern for crime should be pretty much the same worldwide, but it turns out that this was not the case for Taiwan.  Over there, crime peaked in the late twenties and early thirties, roughly a decade later than in the USA.  Thus, the researchers concluded, that cultural factors, not biological/neurological ones, are primarly responsible for the crime patterns by age.   Notably, this is true even though the drinking age in Taiwan is 18, compared to 21 in the USA.

It is rare that a single study can overturn such an apparent mountain of evidence.  Unless, of course, that "mountain" turned out to be a molehill all along--and a rather shaky one at that.

Reflections on the Penn State Tragedy

In the wake of the Penn State tragedy which led to the untimely death of 19 year old sophomore Timothy Piazza, Twenty-One Debunked was initially quiet about it lest we be accused of cynically exploiting this tragedy.  But as time goes on, I have decided that as an activist and a Penn State alum myself, I cannot remain silent about it any longer.

First, I must say that the fraternity brothers who were present at the event in which Piazza was fatally injured should not be in any way absolved of responsibility for what happened.  It was bad enough that they gave (or more accurately, force-fed) him ludicrous amounts of alcohol in a short amount of time, enough to reach a BAC of 0.40 (!), apparently as a hazing ritual.   But when he fell down the stairs and sustained a nasty head injury and was barely responsive, they could have very likely saved his life by calling 911 or otherwise getting medical attention for him, but chose not to.  Instead, they basically treated him like a rag doll and subsequently let him "sleep it off".   Regardless of the drinking age and the age of the people involved, what the brothers did, and failed to do, was nothing less than reckless, selfish, and cowardly, and they should certainly never be allowed to get away with it.  So don't even think about putting any sort of words in our mouths.

But then a very ageist article was wrtitten to try to explain this tragedy away as a result of brain development or lack thereof.  And that's when we at Twenty-One Debunked really saw nothing but red.  The article was not only blatantly ageist, but completely missed the point by a long shot.  If the drinking age was 18, for example, this tragedy would have been far less likely to have happened.  There would be less reason for frats to even exist begin with, since 18-20 year old students would readily have more reliable alternative sources for alcohol and parties, and most of all drinking would occur in safer environments in which people would be more far likely to call 911 or otherwise get help for injuries or overdoses without fear of legal reprisals.  Even medical amnesty policies, which are good, are still no substitute for full legalization or at least decriminalization of "underage" drinking in general.  While lowering the drinking age is not a magic bullet, it will nonetheless go a long way towards reducing the problem of extreme and dangerous drinking on college campuses and towns, particularly among Greek organizations and athletes.  Additionally, we need to hold rogue individuals and organizations accountable for their behavior regardless of how powerful or privileged they are.

How many more must die or otherwise have their lives ruined for such an ignoble experiment as the 21 drinking age?   Are we as a society really so pharisaical that we don't even follow our own advice when we selectively say "if it saves one life, it's worth it"?   Because the logical conclusion of that line of reasoning is that the pro-21 crowd has some serious blood on their hands.

Teen Drinking Drops in Germany Despite Low Drinking Age

The pro-21 crowd often likes to claim that the recent and secular trends towards less drinking among young people in the USA was largely a result of raising the drinking age to 21 and tightening up its enforcement. But the drinking age hike was at most a minor contributor to such trends, since similar trends can also be seen in several other countries that did NOT raise the drinking age to 21.

One such notable example of this is Germany, whose drinking age is 16 for beer and wine, and 18 for distilled spirits.  In fact, one can even drink at 14 in public when accompanied by a parent or guardian, and there is no age limit for drinking in private residences.   Such laws have essentially been in effect for as long as anyone can remember (with the notable exception of the Nazi era), so what were the results of maintaining them in recent decades?  From 1979 to 2016, the percentage of 12-17 year old Germans who drink at least weekly dropped from 25.4% to 10.0%, a relative drop of more than 60%.  For 18-25 year olds, the percentage dropped by nearly half during the same timeframe, and from 1973-2016 dropped from from two out of three (67.1%) to less than one out of three (30.7%).  These trends are comparable to if not faster than the corresponding figures for American youth.

In other words, consider this the final nail in the coffin for the specious claim that the 21 drinking age had anything more than a minor impact on overall teen or young adult drinking.