Legalization Could Cut Costs, Increase Consumption of Marijuana: RAND Study

A new study shows legalization and distribution of marijuana in California could cut the price of cannabis by up to 80 percent and increase consumption.

Findings by the RAND Corp. also show revenues from taxing legal pot could be significantly higher or lower than the $1 billion estimated by the state Board of Equalization. (Way to hedge your bets, guys!)

Santa Monica-based RAND's release on the study follows after the jump . . .
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FOR RELEASE
Wednesday
July 7, 2010

Legalizing the production and distribution of marijuana in California
could cut the price of the drug by as much as 80 percent and increase
consumption, according to a new study by
the nonprofit RAND Corporation that examines many issues raised by
proposals to legalize marijuana in the state.

While the state Board of Equalization has estimated taxing legal
marijuana could raise more than $1 billion in revenue, the RAND study
cautions that any potential revenue could be dramatically higher or
lower based on a number of factors, including the level of taxation, the
amount of tax evasion and the response by the federal government.

Past research provides solid evidence that marijuana consumption goes up
when prices go down, but the magnitude of the consumption increase
cannot be predicted because prices will fall to levels below those ever
studied, researchers say. Consumption also might rise because of
non-price effects such as advertising or a reduction in stigma,
researchers say.

In addition to uncertainty about the taxes levied and evaded,
researchers do not know how users will respond to such a large drop in
price. Even under a scenario with high taxes ($50 per ounce) and a
moderate rate of tax evasion (25 percent), researchers cannot rule out
consumption increases of 50 percent to 100 percent, and possibly even
larger. If prevalence increased by 100 percent, marijuana use in
California would be close to the prevalence levels recorded in the late
1970s.

The analysis, prepared by the RAND
Drug Policy Research Center, was conducted in an effort to
objectively outline the key issues that voters and legislators should
consider as California weighs marijuana legalization.

“There is considerable uncertainty about the impact that legalizing
marijuana in California will have on consumption and public budgets,”
said Beau
Kilmer, the study's lead author and a policy researcher at RAND. “No
government has legalized the production and distribution of marijuana
for general use, so there is little evidence on which to base any
predictions about how this might work in California,”

The analysis also suggests that the annual cost of enforcing current
marijuana laws is smaller than suggested by others. The RAND study
estimates that the cost of enforcing the current laws probably totals
less than $300 million.

“It is critical that legislators and the public understand what is known
and unknown as the state weighs this unprecedented step,” said Rosalie
Liccardo Pacula, a study co-author and co-director with Kilmer of
the RAND Drug Policy Research Center.

Two proposals are pending that would legalize the production and sale of
marijuana in California. Assembly Bill 2254 authored by Assemblyman Tom
Ammiano (D-San Francisco) would legalize marijuana for those aged 21
and older and task the state Department of Alcoholic Beverage Control
with regulating its possession, sale and cultivation. The bill would
create a $50 per ounce excise tax and these funds would be used to fund
drug education, awareness, and rehabilitation programs under the
jurisdiction of the State Department of Alcohol and Drug Programs.

In November, California voters will consider a ballot measure titled the
Regulate, Control and Tax Cannabis Act of 2010 that would make it legal
for those aged 21 and older to cultivate marijuana on a
5-foot-by-5-foot plot, and possess, process, share or transport up to
one ounce of marijuana. In addition, the initiative would authorize
cities or counties to allow, regulate and tax the commercial cultivation
and sales of marijuana. Such activities would remain illegal in
jurisdictions that do not opt in.

In only two countries have there been changes in the criminal status of
supplying marijuana. The Netherlands allows for sale of small amounts of
marijuana (5 grams) in licensed coffee shops and in Australia four
jurisdictions have reduced the penalties for cultivation of a small
number of marijuana plants to confiscation and a fine. Neither has
legalized larger-scale commercial cultivation of the sort California is
considering.

In 1975, California was one of the first states to reduce the maximum
penalty for possessing less than an ounce of marijuana from
incarceration to a misdemeanor with a $100 fine. In 1996, California
became the first state to allow marijuana to be grown and consumed for
medical purposes.

RAND researchers say one effect of legalizing marijuana would be to
dramatically drop the price as growers move from clandestine operations
to legal production. Based on an analysis of known production costs and
surveys of the current price of marijuana, researchers suggest the
untaxed retail price of high-quality marijuana could drop to as low as
$38 per ounce compared to about $375 per ounce today.

RAND researchers caution there are many factors that make it difficult
to accurately estimate revenue that might be generated by any tax on
legal marijuana. The higher the tax, the greater the incentives would be
for a gray market in marijuana to develop, researchers say.

“A fixed excise tax per ounce may give producers and users an incentive
to shift to smaller quantities of higher-potency forms of marijuana,”
said study co-author Jonathan P. Caulkins, the H. Guyford Stever
Professor of Operations Research at Carnegie Mellon University's Heinz
College and Qatar campus. Such a shift is another factor that could
lower revenues collected from marijuana taxes.

In addition, since the November ballot initiative leaves it to local
governments to set tax rates, the size of any levy could vary broadly. A
jurisdiction with a low tax rate might attract marijuana buyers from
elsewhere in the state or even other states, further complicating
efforts to predict government revenues from the sale of legal marijuana,
according to researchers.

The RAND report also investigates some of the costs to the state and
society in general, such as drug treatment and other health expenses,
that may change if marijuana is legalized in California.

It's unclear whether legalizing marijuana may increase or decrease drug
treatment costs, according to the study. More than half of the 32,000
admissions for treatment of marijuana abuse in California during in 2009
resulted from criminal justice referrals, which could drop if
legalization is approved. However, an increase in marijuana use could
cause a spike in those who voluntarily seek treatment for marijuana
abuse, researchers say.

The report, “Altered
State? Assessing How Marijuana Legalization in California Could
Influence Marijuana Consumption and Public Budgets,” can be found at
www.rand.org. Funding for this study was provided by RAND's Investment
in People and Ideas program, which combines philanthropic contributions
from individuals, foundations, and private-sector firms with earnings
from RAND's endowment and operations to support research on issues that
reach beyond the scope of traditional client sponsorship.

Other authors of the study are Robert J. MacCoun of the University of
California, Berkeley, and Peter H. Reuter of the University of Maryland.

The RAND Drug Policy Research Center is a joint project of RAND Health and the RAND Safety and Justice
program within RAND Infrastructure,
Safety, and Environment. The goal of the RAND Drug Policy Research
Center is to provide a firm, empirical foundation upon which sound drug
policies can be built.