Marijuana legalization initiatives at the state level - Prop. 19 in California in 2010, the proposals likely to be on the ballot in Colorado and Washington State this fall - run into a tricky set of problems. Marijuana, if legalized, ought to be regulated and taxed. But how can you tax and regulate, at the state level, something that remains a Federal felony? It might seem that all a state can do is what New York did with alcohol in 1923: repeal its state law entirely, leaving the business unregulated by the state and allowing the federal government to enforce its prohibition, or not.
In fact, it did seem that way to me when I proposed the design problem as an assignment to UCLA first-year public policy students as part of their introduction to policy analysis. I thought I was giving them a problem with no good solution; discovering that such problems exist is an important part of policy education, and the class was so extraordinarily strong I thought they were ready to absorb that rather daunting lesson early in their educations.
Well, it turns out I was right about the students, but wrong about the problem. Much to my surprise, one of the groups came up with a workable regulatory scheme (based on liquor stores) and another with a workable tax scheme (physical tax stamps). (A third group had the idea for a sunset provision, with a commission to propose revisions to whatever the new law was in light of experience.)
I wrote up the students’ ideas in a short memo and sent it around to some of the activists I know, with no perceptible result; the Washington and Colorado proposals don’t incorporate these ideas, and California is going nowhere.
At a reader’s request, I’m now posting the memo. Comments welcome.
Update Link fixed.
Footnote Since this was a class exercise, I can’t post the names of the brilliant people who did the actual work without their consent. If you were part of the class, and want your name on the document, please let me know. If you’re an employer looking to hire some of the smartest MPPs ever, I know where to find them.
Link doesn’t work.
Fixed now.
Unless the link was supposed to go to the original post, I don’t think it is working either.
Marijuana tax stamps actually exist already-many states have them, apparently with the primary intent of slapping extra fines/jail time on users/dealers, and perhaps in some cases of using tax data to find dealers. The latter use appears to have been found unconstitutional (as requiring self-incrimination) in some areas. http://norml.org/legal/tax-stamps
You might want to send the writeup to David Englin in the Virginia House. He’s sponsoring a measure to study having the State-owned liquor stores sell marijuana. The House is Republican-controlled, so the measure faces probably lethal opposition.
Yes, Thanks, I have sent this discussion to Delegate Englin. His legislation will likely be heard in the House Rules Committee in Virginia next Thursday.
http://lis.virginia.gov/cgi-bin/legp604.exe?121+ful+HJ140
HOUSE JOINT RESOLUTION NO. 140
Establishing a joint subcommittee to study the potential revenue impact on the Commonwealth of legalizing the sale and use of marijuana, with certain restrictions and conditions, and selling it through Virginia’s ABC stores.
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Patron- Englin
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Sometime in the mid-80s, the state of Kansas enacted a tax-stamp requirement on illegal drugs. It hasn’t been a big money-maker for the state. According to the Topeka Capital-Journal, sales of stamps peaked in 1994 at around $10,000. Drugs seized without valid stamps (the stamps are good for 90 days from issue) are subject to the amount of the unpaid tax plus a 100% penalty.
A pretty obvious way around all of the problems would be to just have the state produce and sell the marijuana itself. There would be both legal and practical problems with the federal government trying to stop this- legally, it’s not clear under New York v. United States and the Printz case whether the federal government has any power to stop a state from selling its citizens a product, and practically, if the state wanted to utilize its law enforcement resources to ensure the distribution occurred, there’s nothing the federal government could do unless it wanted to start a shooting war with state police.
1. Drug tax stamps have been around for a long time, but as an enforcement tool rather than a revenue-collection device. This is a new idea.
2. Cannabis is contraband under federal law. Distributing it is a crime. State officials operating state marijuana stores would be vulnerable to federal charges. I like the state-store idea as a way of allowing legal access without commercial promotion, but it’s a non-starter while the federal law is in place.
Prof. Kleiman:
You missed the import of my “practical” point. Sure, state officials would be vulnerable to federal charges (unless Printz and New York v. United States apply). But if a state were determined to do this, how, exactly, would you propose to arrest them? Do you think a President would risk a Little Rock-style confrontation with state officials (including armed state law enforcement) over ensuring that a state could not distribute marijuana to its own citizens? There’s a reason why those events are the exception rather than the rule in American history.
In reality, if a state did this, there would be no federal arrests. The federal government might very well do things like try to get court orders shutting the operation down and the like, and there would probably be attempts to cut off funding to the state as well. All sorts of pressure tactics. And perhaps they would work. But there would never be an arrest.
In the Kansas law, the stamps are sold anonymously (I’m not sure how this is operationalized), to avoid their use as an enforcement tool.
The basic effect is to raise revenue. Either dealers buy the stamps, or when caught, they pay double the taxes that were due. The law puts 25% of the proceeds from seizures into the state general fund, and the remainder goes to the police agencies that made the bust, split equally among them. Revenues from the sales of the stamps go directly into the general fund.
I was a resident of Kansas when the law was enacted, and it was played to the public as strictly a revenue-generation mechanism. Dealers can pay up front, or they can pay later. What is your take on that, Mark? Is it an enforcement tool or a revenue tool? Clearly, as a revenue tool the taxes are ineffective ($10K in the best year??). But it does provide substantial funding to police agencies.
Those are simply punishment tools. Hysterical lawmakers have always followed a consistent pattern. The last laws they passed didn’t work, so they figure tougher ones will do it. Besides, who doesn’t get a little personal glee from taking money from drug dealers? As near as I can tell, the revenue they generate is negligible. Lawmakers rarely do any rational analysis of desired end results on drug laws.
The original Marihuana Tax Act was a tax stamp idea. It was declared unconstitutional on Fifth Amendment grounds.
There is the potential for a legal challenge to both the licensing and tax collection components might be subject to federal preemption. In Pack case, a California appellate court held a local medical marijuana permitting system to be preempted by federal law. The California Supreme Court recently took the case up on review and I think there is a good chance it will be overturned. But, if the appellate decision in Pack were upheld, I think the licensing system described in the memo would be subject to a similar preemption challenge. (More on Pack, with a link to the decision at: http://safeaccessnow.org/blog/?p=2174). The enforcement mechanism for the tax stamps may also be preempted: the officers purchasing marijuana undercover would be committing a federal offense (attempted possession and, possibly, possession). There is a federal immunity statute that may protect this sort of undercover enforcement purchase, but the issue has not been resolved in the courts. (See, for example, the Rosenthal case, discussing the immunity statute: http://www.ca9.uscourts.gov/datastore/opinions/2006/04/25/0310307.pdf). If the conduct was not immunized, then the state tax enforcement officials could be federally prosecuted for making purchases. Still, the sort of system outlined in the memo is on much surer legal footing than state-run distribution would be.
On another note, cities and states have raised tax revenue from medical marijuana through standard sales taxes. (http://www.denverpost.com/news/marijuana/ci_16688199 ; http://www.prweb.com/releases/oakland_medical/cannabis_marijuana_laws/prweb8845291.htm ) Would the taxation and regulatory concerns related to federalism play out substantially differently in the legalization context than they have in the medical marijuana context? Strictly in terms of the legal arguments, I think that the federalism-related issues would be virtually identical.
This misses what seems to me the brilliant insight of the UCLA students. The Supremacy Clause makes it impossible for a state to issue a license to violate a federal law. But the proposed scheme is entirely negative: the California law would simply make it a felony to sell marijuana without a liquor license. Clearly the state can issue liquor licenses; equally clearly, it can carve out an exemption to its own felony statutes. Since no California official would be giving anyone permission to do anything against the federal law, there would be nothing for the courts to enjoin.
By the same token, California can sell excise-tax stamps, and California businesses can buy them, without breaking any law. If the Alcoholic Beverage Control Commission makes it a violation of the terms of one’s liquor license to sell marijuana without a tax stamp affixed, again that rule doesn’t permit anything. If it suspends or revokes a liquor license to punish the licensee for selling pot without a tax stamp (or to a minor, or after hours, or over the prescribed THC limit, or in any other way in violation of ABC rules), that’s just the exercise of its authority under the liquor laws.
Now, I’m not a lawyer. But I know a couple. And no one I’ve talked to has come up with a way for the Feds to interfere with this, other than by sending agents to the stores to make undercover buys.
The bigger problem, I think, ends up being the IRS. If expenses involved in production and sale of marijuana are not tax deductible — I hear that this is the case, but haven’t looked at the question myself — then you end up with a bunch of people getting taxed on gross rather than net. Which isn’t sustainable, apparently. And so you get widespread evasion, and the FBI comes to visit.
We had quite the thing going here in Montana last year — storefronts, radio ads, marijuana stores that delivered — but the feds more or less shut it down with a series of raids in March.
This, again, is why the solution is state sales (with, again, nice big burly armed state police officers at the facilities to ensure that the federal government doesn’t try to shut them down). States are constitutionally exempt from taxation.
Big burly armed state policemen obstructing a federal investigation? Not likely. If the feds want to shut the operation down, they can and will. Here in Montana, they did so.
In 1932, California passed two initiatives simply opting out of alcohol prohibition. Prohibition fell at the national level in 1933.
If California simply opts out of marijuana prohibition, by whatever means, it will be obvious to everyone that the game is up. California is the world’s eighth largest economy. What are the Feds realistically going to do in the face of that? The IRS may give it their best effort but the political game is lost, and the IRS could never manage to chase that many people, anyway. It may take Congress a while to catch up to reality and adjust the tax laws, but reality will win in the end.
The bigger thing to contemplate, from a California standpoint, is that when it is legalized, the farmers in the Central Valley of California will instantly own that market. Where is the best place in the world to grow anything? California’s current farm income is about 36 billion per year. If the marijuana crop is worth as much as the CAMP program estimates for their seizures, it will boost California farm income by about fifty percent. It could be a bigger bonanza than the Gold Rush.
What about the other restrictions on liquor licenses? Iirc in many jurisdictions criminal convictions, connections to criminal enterprises, failure to walk on the right side of the street during a full moon etc are grounds for non-issuance or revocation of a license. So you might end up with very small pool of people who have the potential to be dealers without violating the state law.
The rules on the liquor licenses would remain the same. The license would simply get someone out of a marijuana sales conviction. Marijuana sales while holding the license wouldn’t be grounds for revocation.
The idea is to give sellers an incentive to comply with legal rules and pay their taxes without actually issuing permits - which are forbidden by the Feds. The liquor laws already include all the rules, and the incentive to abide by the rules. So just adjust the laws so that marijuana works the same as liquor. Put the bud beside the Budweiser, with the same set of rules.
What happens when a non-participating bar owner turns in a neighborhood competitor in a hostile jurisdiction to the ABC for violation of 24200.5?
Provided the seller has a liquor license and has abided by its terms, then the maximum penalties for all such offenses would be reduced to what the cost of an annual license would have been.
The policy scheme includes the repeal of California laws prohibiting marijuana sales. Would marijuana still be a “controlled substance” subject to 24200.5?
I agree completely with the memo that the UCLA students’ proposal regarding liquor licenses would make it more difficult for federal officials to sue to enjoin (or to prosecute) stores. But I think that the preemption issues would be very similar for this sort of licensing as it would be for marijuana-specific-licensing (e.g., of the sort in the Pack decision.) Regardless of how it is constructed-whether as an add-on the liquor licenses or a marijuana-specific license-the scheme would amount to a permit/license to sell marijuana under state law (neither system would purport to grant a license with respect to federal law.) I’m personally skeptical of the Pack decision and I think it is likely that the California Supreme Court will overturn it. But, if the Pack decision’s “authorization” theory stands, I think it would put any state licensing scheme in jeopardy of being preempted regardless of how it was constructed. Of course, preemption of a state law and direct prosecution or (or suits to enjoin) sellers are two different things. If the law were not preempted, then direct prosecution may be more difficult under the liquor license-scheme because it would be tougher to target entities. That said, the medical marijuana system operates via direct licenses/permits (e.g., as in Pack, Oakland, SF and many other cities) and the federal government has not sued to enjoin all of those licensees. I suspect that things would play out similarly if a state were to pass a legalization measure.
I agree completely on your points re: the tax stamps. My only issue is the portion of the memo that says the scheme would be enforced via “mystery shoppers” sent out by the state. These individuals would be committing a federal offense (attempted possession and possibly possession) by purchasing marijuana. There is a more than colorable argument, I think, that they would fall under 21 USC 885(d)’s immunity provision. But, it would not be a slam dunk.
All of this said, I do think this a unique and interesting proposal and may be on a better legal footing in some respects than other proposals. Still, I think that there would be legal vulnerabilities, particularly if Pack were upheld. I also think that other regulatory schemes-e.g., the types of systems states have used for medical marijuana regulation-would be likely to work much the same way under a legalization scheme. In California, for example, storefront dispensaries continue to operate and pay taxes where they are permitted locally (via standard sales taxes and medical marijuana-specific permits.) I imagine that if a state were to enact a similarly structured marijuana legalization system, things would be likely to play out similarly.
As the original author of the scheme — the scheme does not have to “permit” anything. It can simply say that if certain conditions are met, then the normal sentencing is mitigate. Sales of marijuana can still be a “crime” but if you have an alcohol license then the maximum penalty is less. Sellers still have a big incentive to pay their taxes and comply with the law, but nothing is “permitted”. It is just “less illegal.”
As for the Pack case, there is another case coming down the pike that will probably turn the whole medical marijuana thing on its head. Medical marijuana is now legal in Washington, DC. Since Congress has allowed it in WDC, then they can’t forbid it elsewhere. The case is in the works right now.
May you live in interesting times.
We’ll be voting on repealing the legislature’s messing with our medical marijuana initiative (passed in 2004) in Montana this fall.
The feds cracked down on marijuana growers and distributors — suspicious timing seemed to be aimed at the lege — and some fools who don’t understand the Constitution brought suit in federal court. Shocker: it didn’t work. http://missoulian.com/news/local/molloy-says-federal-law-trumps-montana-s-medical-marijuana-law/article_84a4a4b8-45f6-11e1-b755-0019bb2963f4.html
The tax stamp idea could be extended to cover the supply problem. An annual tax stamp (or pre-paid fine, leave it to the lawyers) to allow a certain amount of cultivation. Even without the rest of the scheme this would give the home-growers a good leaving alone and thus be a useful action in itself.
[...] Distributors Sell MarijuanaShare With Friends Tweet Posted on January 26, 2012 by Jon #Mark Kleiman’s students at UCLA have devised an ingenious plan for taxing and regulating marijuana at the state level that [...]
[...] Mark Kleiman’s students at UCLA have devised an ingenious plan for taxing and regulating marijuana at the state level that won’t provoke a massive federal crackdown. [...]
Mark, this wouldn’t be ideal, but if you get it on the ballot, I’ll vote for it!
This is apparently the same memo, if you don’t want to download it:
http://www.keystonepolitics.com/2012/01/why-not-let-beer-distributors-sell-marijuana/
Hi Mark, Is there a version of this memo in Spanish? Just shared it with thousands of FB followers but most do not speak English.
Maybe the reason you didn’t get much of a reaction is because those proposals were already out there. I posted very similar ideas to the reform e-mail lists about a year ago. They have been under discussion for a while and I have even discussed the ideas with legislatures from other states. One of the ideas, in short, was to simply copy the alcohol laws and let the existing alcohol license function as a de facto marijuana license. That is, if you hold the alcohol license and abide by its rules then you don’t get prosecuted.
There are also other ways to do it, without using the alcohol license.
BTW, Mark, nothing is perfect, and these proposals aren’t entirely perfect, either. Since I came up with the ideas some time back, I have done some thinking and discussion on the benefits and drawbacks. So I think I am still ahead of the class. Why don’t you ask your students if any of them is on the DPFCA e-mail list. I posted the ideas there long ago.
Another method of doing the same thing and licensing without licensing is to simply do sentence mitigation.
That is, leave the current criminal laws for marijuana in place. However, if you can show that you didn’t sell to kids, paid your taxes, were generally a good person, etc., etc. then the maximum penalty is reduced to a once-a-year thousand dollar fine. If you are a really honest person, you can come in and pay the fine in advance.
The Feds may bar issuing of licenses but they can’t tell a state what minimum penalties to enforce, or what the state can consider as mitigation in sentencing.
And, BTW, Mark, you will want to take a look at what California did in 1932. They passed two initiatives. One established the Alcoholic Beverage Commission. The other simply repealed the California alcohol prohibition laws. With California out of the game, national prohibition fell the following year.
And thanks for saying I had some brilliant ideas there. These ideas were discussed during the recent round of arguments for the various initiatives that might come to the ballot in California in 2012.
Dear Professor Kleiman,
Thanks for your perseverance on this issue over the years.
There are a couple of things that haven’t been mentioned here. Elephants in the room as it were. One is that while we were successfully fighting, years ago, to keep Virginia from enacting punitive “tax stamp” legislation from passing we found in our research that more tax stamps were actually sold to stamp collectors than to anyone else. The drug dealers never actually see the stamps if they get caught with drugs and have to buy the stamps at a higher rate in court. That would be likely true with enforcement under the model your student describes as well although the tax not being designed to be punitive makes it more palatable to my Constitutional tastes.
The second thing is that the alcohol industry probably won’t stand for this. Permit holders won’t likely be willing to risk their license in such experimentation with cannabis distribution and will fight hard against such a measure. Have you talked with any representatives of California’s liquor industry or representative of the liquor stores lobby?
And while I have your attention, The Dutch model, that you allude to, is designed to separate hard drugs like alcohol from soft drugs like cannabis for many health based reasons. There are only a few coffee-shops in all of NL that even sell beer. You don’t seem to address this point either..
All the best, Michael