Relax Californians, Cheaper Weed Is Coming

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The excitement that marijuana devotees felt as California initiated legal, recreational sales this month was tempered by sticker shock from prices as high as $40 per eighth of an ounce. These prices included state and local taxes totaling up to 45 percent. Commentators are warning that high taxes will strengthen the black market, advocates are calling for marijuana tax cuts, and angry customers are posting their receipts online with the taxes circled in red.

Everyone needs to chill.

Nothing raises the price of a drug like making the industry that produces it illegal, and nothing causes those prices to collapse like legalization. However, transitory price spikes in the early days of legalization are common because the supply chain and the regulatory structure are immature and disorganized.

The experience of Colorado, now four years into its recreational marijuana legalization, is illustrative. Supply shortages caused a price spike in the industry’s stumbling first year, driving wholesale marijuana flower to $2,865 per pound. But as the industry matured, prices tumbled 56 percent and have not hit bottom yet. A virtually identical price change pattern occurred in Washington state’s legal market.

Because most states tax marijuana based on a percentage of price, the amount of tax collected per sale drops as marijuana’s price falls. In California, this economic effect will be tempered by the state’s wise decision to make its tax structure include a flat charge on harvested flower that does not vary with price. But the bulk of California state and local taxes are price-linked, and will therefore fall in tandem with the cost of the marijuana plant.

California’s policymakers should resist any effort to cut taxes based on a transitory price spike. Consumers will be appeased without tax cuts as prices tumble in the years ahead. And restoring taxes to a healthy level once prices fall would be politically challenging because a deep-pocketed, mature industry will be ready to oppose it.