The nation is moving, in fits and starts, baby steps and backslides, towards legalizing marijuana. Why pot became illegal and has remained so for 75 years is a head-shaking and toe-curling story that few are aware of, a story full of lies, hysteria, ignorance and sheer idiocy.
The nation is finally coming to its senses (more likely, generational changes – older people dying, younger people maturing) regarding the criminalization of pot, with several states passing medical marijuana legislation and a couple decriminalizing it entirely. 58% of the population in a recent poll think that pot should be legal, and a recent study suggests its legalization might actually benefit the nation’s health as a whole because evidence suggests people use pot as a substitute for alcohol.
A commonly echoed notion associated with legalization is, unfortunately, that it should be heavily taxed (Colorado overwhelmingly approved an excise tax on marijuana this past Election day). The motives for calling for this vary widely, I suspect, and probably include revenue generation and deterrence. Both seem like nice ideas, though neither is particularly libertarian. After all, cigarettes are heavily taxed in some states, both as a deterrent and as a revenue source. Consider, however, one of the unintended negative consequences of those heavy cigarette taxes, the creation of a black market. In NY City, a pack of cigarettes is burdened with a $4.35 state excise tax and an additional $1.50 city tax. In Virginia, it’s 30 cents. In the language of economics and finance, what we have is a golden opportunity for arbitrage. Someone with a bit of enterprise in his soul and a tolerance for risk can hop in a car, drive down to Virginia, put a hundred cartons (or more) of cigarettes in his trunk and bring them back to NYC to sell to bodegas in lower income neighborhoods. Even if he only takes $2 of the $5.55 tax differential, he’s pocketed $2000 less gas and tolls. One trip a week and you’re talking the equivalent of a six-figure annual income.
Cigarette bootlegging isn’t anything new. In the movie Goodfellas, a young Henry Hill got pinched for selling cartons out of the back of a car. It’s likely, though, that those were stolen goods. With the sort of arbitrage created by differential tax rates, though, there isn’t a private citizen who has suffered a loss, and thus there isn’t someone to run to the police and report the theft. All the players here have every reason to keep quiet. The sellers in Virginia do big volume, the bootleggers naturally want to stay under the radar, the NYC sellers and buyers are both getting a better deal so they keep quiet as well.
So what’s the big deal? The government loses out, but everyone else involved comes out ahead – why complain about it? Just as the enterprising young bootlegger seizes his opportunity, other people who are not averse to breaking the law will seize theirs. With this sort of easy money available, organized crime steps in and takes control of or crowds out the fly-by-nighters. With organized crime comes brutality and violence, territorial conflicts, corruption and exploitation. The ability to profit not just from buying legally and smuggling across state lines, but from forging tax stamps and outright theft of product becomes significant. How significant? Over 60% of cigarettes sold in NY are smuggled or counterfeit.
One of the myriad reasons for legalizing pot is to cut the legs out from organized crime, gangs and drug cartels. However, if legalization happens in a fashion that will still provide a pathway to profit for criminals, one big benefit of legalization is lost, and an important lesson for society – that restrictions on behavior harm rather than help, will be lost.
So, next time someone says “Lets legalize pot and tax the $#% out of it,” first ask them why, then suggest that maybe taxing it isn’t such a great idea.
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