Drugs, Prohibition, and Taxation

My view on the Drug War is somewhat schizophrenic. In my personal life, I’m basically a social conservative. I don’t like drugs, I’ve never tried drugs, and I urge others to behave the same way.

But I know that prohibition is a costly failure that leads to abusive government (such as intrusive money-laundering laws and Orwellian asset-forfeiture laws).

And even if one doesn’t care about individual rights, the Drug War is an irrational misallocation of law enforcement resources.

So does this make a libertarian on the issue? The answer is yes, of course, but I confess that legalization has a downside. And I’m not talking about more people wrecking their lives with drug abuse (indeed, evidence from Portugal suggests drug use may go down).

Instead, I don’t like the fact that politicians see legalization mostly as an opportunity to generate additional tax revenue.

My fears have materialized. sort of.

According to a CNN report, politicians in California want to be the biggest profiteers from legal pot.

Between customers, retailers and growers, taxes on cannabis may reach as high as 45% in parts of the state, according to a Fitch Ratings report. …Consumers will pay a sales tax ranging from 22.25% to 24.25%, which includes the state excise tax of 15%, and additional state and local sales taxes ranging from 7.25% to 9.25%. Local businesses will have to pay a tax ranging from 1% to 20% of gross receipts, or $1 to $50 per square foot of marijuana plants, according to the Fitch report. In addition, farmers will be taxed $9.25 per ounce for flower, and $2.75 per ounce for leaves. …Van Bustic, a specialist in the environmental impact of cannabis cultivation for Berkeley’s College of Natural Resources, said that registering with the state and becoming compliant will cost about $100,000.

Geesh, greedy governments can take the fun out of anything!

But not so fast. It seems that politicians are being so greedy that the geese with the golden eggs (or, in this case, drug-addled geese with golden buds) will stay in the shadow economy.

Not that we should be surprised. There is a wealth of evidence showing that high tax burdens lead to evasion and avoidance.

The Wall Street Journal looks at this issue and hits the nail on the head, editorializing that high tax rates on pot are a recipe for non-compliance.

…in California, where recreational pot was legalized last year, citizens now have a much clearer view of the unintended consequences that come from high tax rates. A new report from the global credit-rating firm Fitch Ratings highlights the effect of California’s high taxes on the marijuana market. The combined local and state rate on non-medical cannabis may be as high as 45% in some places, and Fitch says this acts as an incentive for Californians to shun legal pot dealers who pay the tax in favor of black-market sellers who don’t and can charge lower prices. …The irony is that one argument for legalizing pot has been to reduce illegal trafficking. But by imposing taxes that are too high on legal weed, politicians give pot heads an incentive to go back on the illegal market. This will come as no surprise to anyone who has followed the boon to illegal smokes from high cigarette taxes in places like New York City.

The CNN story cited above also addressed this issue.

Among the eight states where recreational marijuana is legal, only Washington has a higher tax rate at about 50%. Colorado and Nevada both follow with rates of 36%. Oregon has a tax rate of 20% and Alaska has a rate of up to 20%. …If taxes increase the price of cannabis beyond a certain point, the legal market becomes less competitive than the illicit market and then consumers become less likely to make the transition from the illicit market to the legal market,” said John Kagia, analyst for New Frontier Data, which tracks the cannabis industry. The Fitch report says this dynamic has already prompted Colorado, Washington and Oregon to lower their “initially uncompetitive” tax rates.

Indeed. I wrote about Colorado’s experience with pot taxation back in 2015.

A story in the Washington Post confirms that the buzzed version of supply-side economics is alive and well.

High taxes on legal marijuana in California could have the potential to turn many consumers away from the state’s cannabis shops and toward the black market, according to a report from Fitch Ratings. …“The existing black market for cannabis may prove a formidable competitor to legal markets if new taxes lead to higher prices than available from illicit sources,” the report says. …These high tax rates have the potential to drive customers toward the black market. …Colorado, Oregon and Washington all reduced tax rates after the commencement of legalization to shift customers back toward the legal market.

That last sentence warms my heart. Isn’t it nice when politicians are forced to lower tax burdens even when they don’t want to?

P.S. Government is a buzz-kill in other ways. Deregulation helped unleash the craft beer industry, but also created a new source of tax revenue.

P.P.S. Since I’m a fiscal wonk, legalizing drugs has never been high (no pun intended) on my list of priorities. But when U.N. bureaucrats try to tell American states that they’re not allowed to end prohibition, I’m almost tempted to become a user.

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Great Moments in Prohibition and the Drug War

Even though I’m personally a prude on the issue of drugs, that doesn’t stop me from opposing the Drug War, both for moral and practical reasons.

After all, how can any sensible and decent person want laws that produce these outrageous results?

The DEA trying to confiscate a commercial building because a tenant sold some marijuana.

The government seeking to steal a hotel because some guests sold some marijuana.

Cops raiding an organic nursery and seizing blackberry bushes.

The feds grabbing cash from innocent bystanders in legal cases.

The government arresting a grandmother for buying cold medicine.

Cops entrapping an autistic teen to boost their arrest numbers.

And don’t forget the misguided War on Drugs is also why we have costly, intrusive, and ineffective anti-money laundering laws, which result in other outrages, such as the government arbitrarily stealing money from small business owners.

Though not every enforcement action leads to grotesque abuse of human rights. Sometimes the Drug War merely exposes the stupidity of government.

Let’s add another horror story to our list.

Jacob Sullum of Reason has a very disturbing example of how the Drug War leads to very bad outcomes.

Why did a SWAT team raid Bob and Addie Harte’s house in Leawood, Kansas, two years ago, then force the couple and their two children to sit on a couch for two hours while officers rifled their belongings, searching for “narcotics” that were not there?

Sullum conveniently provides the answer, though it’s not one that should satisfy any normal person.

…the Hartes made two mistakes: Bob went to a hydroponics store in Kansas City, Missouri, with his son to buy supplies for a school science project, and Addie drank tea. It cost them $25,000 to discover that these innocent actions earned them an early-morning visit by screaming, rifle-waving men with a battering ram.

Here are the odious details of local government run amok.

…the Hartes hired a lawyer to help them obtain the relevant records… Eventually the Hartes learned that a Missouri Highway Patrol trooper saw Bob at the hydroponics store on August 9, 2011. Seven months later, state police passed on this hot tip to the sheriff’s office, which sprang into action (after a few weeks), rummaging through the Hartes’ garbage three times in April 2012. On all three occasions, they found “wet plant material” that a field test supposedly identified as marijuana.

Does that sound like probable cause for an assault on their home?

…the cops did not bother to confirm their field results with a more reliable lab test before charging into the Hartes’ home, three days after their third surreptitious trash inspection. When the Hartes starting asking questions about the raid, the sheriff’s office suddenly decided to test that wet plant material, which it turned out was not marijuana after all. The Hartes figure it must have been the loose tea that Addie favors, which she tends to toss into the trash after brewing.

So what’s the bottom line? The Hartes want to make it easier to obtain records.

…the Hartes think Kansas cops would be more careful if obtaining police records were easier. “You shouldn’t have to have $25,000, even $5,000,” Addie Harte tells KSHB. “You shouldn’t have to have that kind of money to find out why people came raiding your house like some sort of police state.”

I obviously agree, but an even more important lesson is that we should re-think America’s foolish Drug War.

I happen to think drugs are bad and that people shouldn’t use them. Heck, I also think people shouldn’t overeat, that gambling is dumb, and that alcohol abuse is terrible.

But I know that government prohibition won’t solve these problems and almost surely will make matters worse.

Besides, I don’t like being on the same side of an issue as certain people.

I’d rather side with folks such as John Stossel, Gary Johnson, John McCain, Mona Charen, Pat Robertson, Cory Booker, Rick Perry, and Richard Branson.

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The Strangest Tax Loophole Award

I have a love-hate relationship with tax loopholes.

I’m a big fan of the flat tax, in part because I hate when powerful interest groups use their insider connections to get special treatment. This corrupt process helps explain why the tax code is now a 74,000-page monstrosity.

I want to get rid of all preferences, deductions, credits, deductions, exclusions, and shelters, including one that benefit me such as the home mortgage interest deduction, the charitable contributions deduction, and the state and local tax deduction.

On the other hand, I favor just about anything that lets people keep more of their money. Loopholes are escape hatches that people can use to protect themselves from the grasping claws of the IRS.

The bottom line is that we should only get rid of loopholes if every penny of potential new revenue is used to finance lower tax rates.*

Now that we’ve covered some basics, let’s stop being serious and boring and look at what has to be the strangest tax loophole in the United States.

And it wasn’t even concocted by the crowd in Washington. The award for strangest tax loophole goes to the politicians of Nevada, who decided at some point not to apply the sales tax to prostitution.

Here are some of the details from the New York Daily News.

The tax man may soon be visiting a few Nevada brothels. …Assembly Speaker Marilyn Kirkpatrick (D-North Las Vegas) says the bill would target events and businesses that have either been deemed exempt from state sales taxes or have simply been overlooked. Those operations include brothels, which Nevada lawmakers have been hesitant to tax out of fear that doing so would further legitimize the stigmatized, but legal trade. …George Flint, the director of the Nevada Brothel Association, fears that so-called houses of ill repute could not handle an 8% tax on money spent at brothels, and has proposed a $5 entrance fee instead.

As a libertarian, I suppose I should be impressed. Not only is this “victimless crime” legal, but it isn’t taxed!

But as an observer of politics, I’m completely perplexed. Normally, politicians love to impose “sin taxes” on behaviors that are seen as unseemly. It’s sort of a win-win situation for them. They get to collect more revenue while telling us that it’s for our own good.

This helps explain why there are high taxes on things such as booze, cigarettes, energy, and fast food.

So why have Nevada politicians overlooked (at least up to now) the chance to tax prostitution?

I suppose I could make a joke that they didn’t want to tax the things that they consume, but I’m being serious.

Are the lobbyists for brothels super effective? Well, they probably do have the best holiday parties, but is that why prostitution isn’t taxed?

Beats me. Sounds like a good opportunity for public policy research.

*Another concern is that many politicians don’t understand the difference between a tax loophole such as ethanol and a tax penalty such as double taxation, so their version of tax reform could make bad policies even worse.

P.S. Since this post is about taxes and prostitution, I can’t resist sharing this bit of humor.

P.P.S. Speaking of prostitution, did you know that British taxpayers finance sex trips to Amsterdam?

P.P.P.S. You won’t be surprised to learn that climate-change ideologues claim that global warming causes prostitution.

P.P.P.P.S. You also won’t be surprised to learn that the Germans have figured out very creative ways of taxing prostitution.

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Raise Your Glass and Give a Toast to Celebrate the Real-World Benefits of Lower Taxes and Economic Freedom

I share a lot of economic theory and empirical evidence in favor of lower tax rates. And I’m constantly extolling the virtues of overall economic freedom.

But sometimes it helps to have a real-world example of how a specific industry responds when it is freed from onerous taxation and pointless regulation.

Tom Acitelli explains in the Wall Street Journal how the American beer industry was rejuvenated by deregulation and tax cuts. Here are some excerpts from his column.

As recently as 35 years ago, there were fewer than 50 breweries in the whole country… The story of the U.S. ascent to the top tier of world beer began in the late 1970s, when brewing was liberated from government taxation and regulation that had held it back since Prohibition. …The brewing industry had been trying unsuccessfully for years to get Washington to lower excise taxes on beer produced by smaller brewers. …H.R. 3605 cut the federal excise tax on beer to $7 from $9 per barrel on the first 60,000 barrels produced, so long as a brewery produced no more than two million barrels annually.  …The tax cut unleashed a revolution in American brewing. Hundreds of smaller breweries began to open across the country selling what came to be called craft beer.

But the industry wasn’t held back just by taxation.

Some of the stars of American craft beer, such as Ken Grossman of Sierra Nevada and Sam Calagione at Dogfish Head, got their start with home brewing—an activity that until the late 1970s was illegal in the U.S. …the government did little to enforce the anti-home-brewing law. Still, the air of illegality discouraged many who might have taken up home-brewing… Enthusiasts in the U.S. kept their interests underground, usually sharing information only with a small circle of other home brewers. Who knew when the government might start enforcing the home-brewing prohibition? Gradually, though, the secretive home brewers grew bolder. …They lobbied…to introduce legislation legalizing home-brewing at the federal level. …legislation…was reconciled with a House bill in August 1978. President Carter signed the law that October, and it took effect the following February. Home-brewing of up to 200 gallons a year per household was suddenly permitted.

So what happened when economic liberty was legalized?

The result: Home-brewing took off, helping to spur the movement toward craft beer that had been touched off by the beer tax reduction. The beer industry swelled in the 1980s and 1990s, producing thousands of jobs and tens of millions of dollars in annual tax revenue. The rise of American beer wasn’t an accident. It was spurred by efforts to cut taxes and regulation that unleashed entrepreneurship. Too bad Washington doesn’t raise a toast to that idea more often.

The part about “millions of dollars in annual tax revenue” rubs me the wrong way, as I explained in a recent post about marijuana legalization in Colorado, but even an anti-taxer like myself recognizes that ending a form of prohibition is a net plus for freedom.

And I definitely like what Acitelli writes about applying more broadly the lessons of lower taxes and deregulation. Heck, if we’re good students and study hard, maybe some day we can be Hong Kong instead of France.

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Amen to Pat Robertson on Marijuana Legalization

Even though I’m a dull and straight-laced guy, that doesn’t mean I want the government to pester, harass, and persecute people for engaging in victimless crimes that I find distasteful.

Especially when interventionism and prohibition doesn’t work. To be blunt, the War on Drugs has been a costly failure (much like the War on Poverty).

Fortunately, it appears that more and more people are coming to the same conclusion – and many of them aren’t libertarians. For instance, I recently cited Mona Charen’s wise comments about the issue.

Even more remarkable are the statements from one of America’s leading evangelicals, Pat Robertson.

Here’s the key sections from an Associated Press report.

Religious broadcaster Pat Robertson says marijuana should be legalized and treated like alcohol because the government’s war on drugs has failed. The outspoken evangelical Christian and host of “The 700 Club” on the Virginia Beach-based Christian Broadcasting Network he founded said the war on drugs is costing taxpayers billions of dollars. He said people should not be sent to prison for marijuana possession. The 81-year-old first became a self-proclaimed “hero of the hippie culture” in 2010 when he called for ending mandatory prison sentences for marijuana possession convictions. “I just think it’s shocking how many of these young people wind up in prison and they get turned into hardcore criminals because they had a possession of a very small amount of a controlled substance,” Robertson said on his show March 1. “The whole thing is crazy. We’ve said, ‘Well, we’re conservatives, we’re tough on crime.’ That’s baloney.” …Robertson said he “absolutely” supports ballot measures in Colorado and Washington state that would allow people older than 21 to possess a small amount of marijuana and allow for commercial pot sales. Both measures, if passed by voters, would place the states at odds with federal law, which bans marijuana use of all kinds. While he supports the measures, Robertson said he would not campaign for them and was “not encouraging people to use narcotics in any way, shape or form.” “I’m not a crusader,” he said. “I’ve never used marijuana and I don’t intend to, but it’s just one of those things that I think: this war on drugs just hasn’t succeeded.”

Wow, not only for legalization, but “absolutely” supports ballot initiatives in Colorado and Washington. Kudos to Rev. Robertson for recognizing the human cost of the Drug War. As the old saying goes, not everything immoral should be illegal.

Here’s five minutes from Gov. Gary Johnson on the issue.

Very well stated. Legalization is common-sense conservatism. Too bad Gary Johnson didn’t get more attention early in the GOP race.

The Drug War doesn’t work, and it is the ultimate example of Mitchell’s Law since it has spawned bad policies such as asset forfeiture and anti-money laundering rules.

Time to “just say no” to big government.

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What’s Worse, Hillary Clinton’s Economic Illiteracy or Her Support for Prohibition?

We have another great video from Reason TV, which mocks Secretary of State Hillary Clinton for stating that drug legalization is a bad idea because “there is just too much money in it.”

The video explains that government-imposed prohibition is what makes the drug market so lucrative, just as alcohol prohibition lined the pockets of people like Al Capone in the 1920s.

The Secretary of State’s statement is absurd, but perhaps not too surprising since people from this Administration routinely say preposterous things (such as claiming that a giant new entitlement program will reduce red ink and asserting that nobody’s taxes have been increased).

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Governor Gary Johnson Explains the Stupidity of the War on Drugs

The former governor of New Mexico explains why prohibition is a foolish idea. I couldn’t say it better myself.

I’m a bit of  a stick-in-the-mud. I’ve never used drugs. I am very strict with my kids on the issue. But I’m not dumb enough to think that giving massive power to the government is a solution to anything – especially the non-problem of people wanting to do potentially dumb things to their own bodies. It didn’t work for booze in the 1920s, and it doesn’t work for drugs today.

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Giving Cops Bad Incentives to Harass Victimless Behavior

The Washington Post has an interesting report about the huge amount of money that Fairfax County spends to go after gambling. The story cites critics who ask “why law enforcement spends valuable time and money on combating sports gambling. The answer is obvious – and explicit in the story: “…police in Virginia are allowed to keep 100 percent of the assets they seize in state gambling cases.” In other words, harassing the gambling business is a profit-making endeavor for police. And it also can be deadly since cops killed an optometrist during a SWAT arrest. The Institute for Justice has a powerful video on the dangers of “policing for profit,” and Fairfax County is just one bad example of how this lures cops into misallocating resources to fight behaviors that shouldn’t even be illegal.

It’s football season, and for millions of Americans that means betting season. …It’s a crime that Fairfax County police take seriously. So seriously that in one recent gambling investigation, they spent — and lost — more than $300,000 in cash to take down a Las Vegas-based online bookie and his group of Fairfax-based associates. …Police critics have long wondered why law enforcement spends valuable time and money on combating sports gambling. In Fairfax, the police rarely publicize their arrests, and the details of their investigations are little known outside the small corps of detectives in the money laundering unit. Unlike drug cases, police in Virginia are allowed to keep 100 percent of the assets they seize in state gambling cases, so other agencies or divisions receive no benefit. And the vast majority of those arrested are placed on probation. “What a waste,” said Nicholas Beltrante, founder of the Virginia Citizens Coalition for Police Accountability, a group formed earlier this year in part to combat unnecessary police spending. “The police should be utilizing their resources for more serious crimes.” Fairfax’s most notorious gambling investigation ended in disaster. In 2006, an undercover detective lost more than $5,000 while betting on NFL games with optometrist Salvatore J. Culosi — and when the detective called in a SWAT team to make the arrest, an officer shot Culosi once in the heart and killed him. …Since 2004, the squad has seized about $1 million in cash and assets annually, but some of those cases landed in federal court, where money is divided among various agencies, Schaible said. …One case from 2006, that of admitted bookmaker Kyle Peters, resulted in police seizing and keeping $566,940 from his bank accounts. Schaible said such funds are recycled “back into investigating cases. It’s helping us resolve these and fight further crime.”

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Should Drugs Be Legalized?

 This isn’t really a debate, as much as a skeptical-but-friendly interview with Jacob Sullum of Reason. As you might expect, I want drugs legalized because I don’t like crime, corruption, and violence – all of which are exacerbated by prohibition.

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California May Do the Right Thing on Drugs for the Wrong Reason

There’s going to be a referendum on marijuana prohibition this November in the (not so) Golden State. The good news is that it is ahead in the polls. But the bad news is that this is not a reflection of libertarian sentiment. Instead, voters are sympathetic to the notion that pot could be a new source of tax revenue (which presumably means a smaller risk of other tax increases). The AP reports:

When California voters head to the polls in November, they will decide whether the state will make history again – this time by legalizing the recreational use of marijuana for adults. The state was the first to legalize medicinal marijuana use, with voters passing it in 1996. Since then, 14 states have followed California’s lead, even though marijuana remains illegal under federal law. “This is a watershed moment in the decades-long struggle to end failed marijuana prohibition in this country,” said Stephen Gutwillig, California director for the Drug Policy Alliance. “We really can’t overstate the significance of Californians being the first to have the opportunity to end this public policy disaster.” …The California secretary of state’s office certified the initiative for the general election ballot Wednesday after it was determined that supporters had gathered enough valid signatures. The initiative would allow those 21 years and older to possess up to one ounce of marijuana, enough to roll dozens of marijuana cigarettes. Residents also could grow their own crop of the plant in gardens measuring up to 25 square feet. The proposal would ban users from ingesting marijuana in public or smoking it while minors are present. It also would make it illegal to possess the drug on school grounds or drive while under its influence. Local governments would decide whether to permit and tax marijuana sales. Proponents of the measure say legalizing marijuana could save the state $200 million a year by reducing public safety costs. At the same time, it could generate tax revenue for local governments. A Field Poll taken in April found a slim majority of California voters supported legalizing and taxing marijuana to help bridge the state budget deficit.

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Does Prohibition Reduce Drug Use?

The war against drugs certainly has been good for government, with bigger budgets, more bureaucracy, and new powers.

But does it have any positive impact, even from the perspective of people (like me) who think drug use has a net negative impact on both users and society?

The answer, almost surely, is no. A recent article from The Economist finds that marijuana use is very low in Portugal, even though most drugs – including heroin and cocaine – were decriminalized in 2001.

So if the Drug War has lots of bad consequences and no good consequences, isn’t it time to stop? After all, if you’re in a hole, doesn’t it make sense to stop digging?

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