Management & Labor

What If States Just Sold Marijuana Themselves?

Voters legalized pot in three more places Tuesday, and now they have to decide how to regulate it. Some favor the government selling the drug directly to consumers over creating a for-profit pot industry.
by | November 2014
Legal marijuana packaged for sale in Washington state AP/Ted S. Warren

For a growing number of states, the notion of marijuana legalization isn’t a question of if, but when. Since 1996, some 23 states have legalized medical marijuana. In 2012, voters in Colorado and Washington went even further, passing ballot initiatives that made their states the first in the country to legalize the cultivation, sale and possession of small amounts of marijuana for recreational use. Alaska, Oregon and Washington, D.C., followed suit this month. The Vermont Legislature is expected to take up the question of marijuana legalization next year; voters in California will almost certainly consider a legalization ballot measure in 2016. In short, the question of how states should regulate marijuana is already at hand.

Regulating marijuana is hard. No country in the world (including the Netherlands) has ever created a working, legal market for the production, sale and use of recreational marijuana. Forced to develop something new, regulators in this country have generally turned to something old -- the licensing model used to regulate the alcohol industry.

That’s a problem, say many observers.

“It is amazing to me as a scientist to watch the marijuana policy debate evolve,” says Alexander Wagenaar, an epidemiologist at the University of Florida College of Medicine and one of the nation’s leading experts on post-Prohibition alcohol regulation. “We have 50 years of research on the regulation of alcohol, and we have all the research and experience of regulating tobacco as well.” And all of it, says Wagenaar, suggests that creating a commercial marijuana industry whose profits depend on expanding consumption is a bad idea.

Among experts, two fears in particular stand out. The first has to do with how a for-profit cannabis industry will market marijuana. The second revolves around the fear that profits will lead to political power -- power that will lead to weaker regulations and expanded consumption. “We are going to have a shift of power from the cannabis movement to the cannabis lobby,” predicts University of California, Los Angeles’ Mark Kleiman, one of the nation’s foremost drug policy experts and the architect of Washington state’s regulatory system. “I am not hopeful about the political economy of this.”

It might seem premature to talk about problems with regulatory structures that are practically newborns. Washington state didn’t open its first legal retail store until July, largely because it was building an entirely new regulatory system from scratch. Colorado, which permitted existing medical marijuana dispensaries to convert, moved more quickly. Sales there got under way at the beginning of the year.

Customers crowd the front desk at a store in Colorado on the first day of legal sales of recreational marijuana. (AP/Brennan Linsley)

But concerns like Kleiman’s, about the ways a legal marijuana industry might evolve over time, are not hypothetical. They reflect state experiences regulating another decriminalized drug -- alcohol -- in the years following Prohibition. States enacted a patchwork of regulations on alcohol sales, with wildly different approaches from state to state and even from one county to the next. Eventually most states settled on a licensing system whereby a state liquor control board regulated a for-profit alcohol industry divided between suppliers, wholesalers, distributors and retailers, an industry taxed at the state and federal level. This worked well -- at first. Over time, however, the alcohol lobby found ways to aggressively market its product while reducing taxes. Today, public health experts say that state and federal taxes offset only a small fraction of the damages caused by alcohol-related injuries, deaths and illnesses.

But what if there were another way? What if states that choose to legalize marijuana didn’t set up a commercial marketplace for it? What if, instead, they adopted another model, one that was developed by associates of John D. Rockefeller and the National Municipal League in 1933 and adopted by some 15 states after Prohibition’s repeal, and one that’s regarded by public health experts as the gold standard for substance abuse control?

What if states sold pot themselves?

If the idea of governments selling cannabis directly to consumers seems outlandish, consider the model of the state ABC store. After the 21st Amendment ended Prohibition, some states, such as Pennsylvania, Utah and Washington, monopolized sales of all types of alcohol. Other states, such as Alabama, New Hampshire, North Carolina and Virginia, monopolized only the sale of spirits. Countries with the most serious alcoholism problems, such as Sweden, Finland and Russia, have taken a similar approach in an effort to curb consumption. Public health experts say it works. “To have the market for marijuana be totally controlled by a state agency that has a mandate to protect public health and safety -- basically, a system that would be run by the health department and not the revenue department -- that would really change the dynamics and incentives,” says Florida’s Wagenaar. “We have the tools and experience. We need to do this better.”

With the election of Franklin Delano Roosevelt in 1932, it was clear that Prohibition would end. The question was what would replace it.

Policymakers did not want to return to the status quo ante, when brewer-controlled saloons promoted excessive drinking. Prior to Prohibition, the average American consumed 2.6 gallons of pure alcohol a year -- the equivalent of 520 bottles of beer. That number fell by 70 percent in the first years of

Prohibition (before rebounding somewhat in the 1920s). But how to avoid it? On this, the 21st Amendment repealing Prohibition was silent. It simply repealed Prohibition at the national level and, by prohibiting the import of alcohol into states in violation of state law, recognized states’ power to regulate alcohol as they saw fit. So states developed their own solutions.

The most common response was to set up a structured market with separate retailers, wholesalers, brewers and distillers who in turn were licensed and regulated by a state alcohol control board. This was a successful strategy initially. When the 21st Amendment was ratified, states imposed a whole raft of regulations on what had previously been an underground, unregulated industry. Age limits, Sunday “blue laws,” rules governing location (not near schools, churches or hospitals), and a whole host of other regulations were enacted. The other ingredient was excise taxes. As the country plunged into the Great Depression, both the federal and state governments craved the revenues that would come from legalizing and taxing alcohol.

This is basically the approach Colorado and Washington have taken with marijuana as well. In Washington, the state liquor control board has responsibility for licensing and regulating marijuana. In Colorado, that job falls to a special division of the state revenue department. Both states have created extensive licensing and regulatory requirements for growers, distributors and retail sales outlets. Both have also sought to raise revenue while limiting consumption by imposing high excise taxes. According to the Tax Foundation, Colorado collects a 15 percent tax based on the average wholesale market price of marijuana; a 10 percent state tax on retail marijuana sales; and a state sales tax of 2.9 percent. Localities can also impose their own taxes. Denver, for instance, tacks on its own 3.5 percent sales tax. As a result, the effective tax rate on marijuana in Denver is around 28 percent -- less than the 31 percent tax on cigarettes, more than the 8 percent excise tax on alcohol. Washington has an even higher tax rate on legal marijuana -- around 44 percent.

But there’s an inherent problem with for-profit systems: the desire for profits. Consumption patterns for alcohol and marijuana share some notable similarities. One is that the heaviest users consume the most product. The top 20 percent of drinkers account for 85 percent of total alcohol consumption. Likewise, a small percentage of heavy smokers account for most marijuana consumption. A study conducted by the Colorado Department of Revenue’s Marijuana Policy Group found that people who smoke or ingest marijuana 21 times a month or more account for 87 percent of the state’s total legal marijuana consumption. Say what they will about responsible or moderate use, both the alcohol industry and the emerging marijuana industry depend on excessive, immoderate use for their profits. And the experience of states licensing the alcohol industry suggests two things. The first is that businesses are good at increasing their profits. That means aggressively advertising and marketing their products. The second is that growing profits bring political power.

One Colorado study found that people who smoke marijuana 21 times a month or more account for 87 percent of the state’s total legal marijuana consumption. (AP/Ed Andrieski)

Since the end of Prohibition, the American liquor industry has become ever more concentrated. Today, just two companies -- Anheuser-Busch InBev and MillerCoors -- control 80 percent of the beer market. With large profits come political power. It’s not just the brewers. The National Beer Wholesalers Association has long been a major donor, and the Wine and Spirits Wholesalers of America is quickly catching up. At the state level, beer distributors, retailers and wholesalers are perhaps even more politically important. Over the long run, these forces have been effective in gradually reducing the legal burdens imposed on them. Since 1950, the effective tax rate on beer has fallen by half; the tax on liquor has fallen even more dramatically. The federal excise tax hasn’t risen since 1991. The result is a level of taxation that does not remotely cover the cost alcohol imposes on society. In 2006, researchers calculated that the total cost of alcohol abuse was about $130 billion. Yet in 2012, the federal excise tax brought less than $10 billion into the federal treasury.

Of course the legal and medical marijuana market is a minnow compared to the whale that is the alcohol industry. Is it really reasonable to worry that the political clout of “Big Pot” could undermine reasonable state regulations? In the short term, no. Regulators in Washington state say they expect considerable turnover in the industry during its fledgling years.

“Colorado, when they first established their medical marijuana system several years ago, they saw a 50 percent failure rate,” says Washington State Liquor Control Board spokesman Brian Smith. “We expect that same sort of dynamic as things play out in the market here.”

Once winners emerge, however, the market will mature and the dynamics will change. “Over time, if you have private companies involved, they will try to create brand loyalty,” says Beau Kilmer, a senior policy researcher at the Rand Corporation who is part of a group developing marijuana legalization options for lawmakers in Vermont to consider. “Advertising and marketing are really going to matter at that point.”

All of which comes back to the idea of direct state sales of marijuana. A system of state-run cannabis stores would enjoy significant advantages over the commercial systems that state ballot initiatives have been creating. States would be able to directly control prices and, by extension, consumption and revenue. Governments would also be able to better control advertising. States such as Washington have tried to do that, promulgating regulations on signage and cannabis edibles (which can be particularly dangerous due to the potential to ingest large amounts of THC quickly) and banning marketing to children. But thanks to the U.S. Supreme Court’s expansive view of corporate free speech, there’s only so much state regulators can do. They can’t, for example, do what Uruguay is doing. The Latin American country is currently in the process of establishing a largely noncommercial legal marijuana market. “Uruguay is just going to ban advertising,” says Kilmer. “In the United States, it’s much more difficult. That’s not to say the folks in Washington and Colorado aren’t working hard to put limits on advertising. They are. But with the commercial free speech doctrine, they are not going to be able to ban that. That very much is an issue, especially in states that allow for-profit companies, especially over time.”

To be sure, state monopolies aren’t perfect. They can be hard to set up. They can be unpopular with consumers. They’re also unpopular with their private-sector counterparts. That makes them vulnerable to privatization efforts. States such as Alabama, Idaho, Iowa, Maine and Montana have chosen to privatize state-owned liquor stores. In every case, the net results of such transitions have been bad from a public health standpoint. According to a review published in The American Journal of Preventive Medicine in 2012, the privatization of state-owned monopolies “lead to more outlets, longer hours of operation, increased promotions, and, importantly, increased sales and use.”

(AP/Elaine Thompson)

There’s another problem with the state-store approach -- selling marijuana is a felony under federal law. Back in 2010, when Colorado was considering legalization, the federal government intimated that state officials could be considered participants in a criminal project. Since then, the Justice Department has clarified that it will not pursue operators in states that have chosen to legalize marijuana and have put “strong and effective regulatory and enforcement systems” in place. For states to sell marijuana directly, however, there would certainly need to be changes. The most straightforward way to accommodate state monopolies would be to change the federal Controlled Substances Act. However, UCLA’s Kleiman has also suggested that states could enter into a contractual arrangement with the U.S. Department of Justice that might provide for a tightly controlled state system.

Establishing state-operated cannabis outlets probably isn’t going to happen anytime soon. Public support for legal marijuana, which has risen steadily since the 1960s, could decline. The federal government’s tolerance of legalization experiments could change too. But the point is that states have myriad options between marijuana bans and a legal retail marketplace. “There is a tremendous amount of policy space between Prohibition and the standard, commercial model that has been adopted in Colorado and Washington,” says Kilmer. Washington, D.C.’s legalization proposal, which permits small-scale home cultivation for personal use, is one such alternative. Uruguay’s proposed system of home cultivation, co-ops and pharmacy sales could be another. But instead of exploring those alternatives, says Kilmer, “it’s kind of like we’ve gone from one extreme to another.”

*This story has been updated to reflect the result of ballot measures in Alaska, Oregon and Washington, D.C. 

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