The legal pot industry shows how regulation destroys wealth

I happen to believe that pot is a vile drug.  For some, it’s a gateway drug to worse addictions or even to madness.  For most, it’s the true opiate of the people, leaving them inert, without ambition or even interest in the world.  Legalizing it — thereby making it more prevalent — is a great way to keep a population passive as you destroy the country.  But here’s the upside to legalizing it: the government regulates it to death.  According to a Daily Mail article, that’s exactly what’s happening to the legal marijuana industry across America.

Here’s how the Daily Mail describes the issue:

Across the US, the legalized marijuana industry is buckling under the strain of plunging prices, patchwork state regulation, and burdensome taxes, analysts and industry groups say.

[snip]

Currently, the recreational use of cannabis is legal in 23 states, and last year state-regulated medical and recreational pot sales topped $26 billion nationwide, according to Vangst.

But even while sales soar, dispensaries say eking out a profit is growing harder, as a glut of weed production pushes prices lower — a boon for blissed-out pot consumers, but a bane for growers and retailers.

[snip]

Because the marijuana industry is regulated independently in each state where it is legal, the specific issues the industry faces vary from state to state.

But the industry’s fractured nature may be part of the problem, says Whitney, because any excess supply is officially trapped within the state it was grown, due to a federal ban on interstate sales of marijuana.

[snip]

Whitney told DailyMail.com that in addition to pricing pressures, cannabis businesses are struggling under tax burdens, because federal law prohibits them from deducting business expenses from income taxes like a normal business would.

As a result, he said, companies in the pot trade are often paying an effective federal tax rate of up to 70 percent — on top of the state and local excise taxes levied on sales.

The article also discusses the competition from illegal pot-growers.

What’s happening in the industry is a microcosm of how the free market works and how the government consistently kills the goose that lays the golden egg.

From the beginning, both growers and the government thought of pot like tobacco: you’d have a few big growers because it’s not the 19th century, and there’s no such thing as a small tobacco farmer.  Then you’d impose a high sin tax on the product.  People dependent on the stuff would buy it regardless of the sin tax, leaving both growers and government happy.

But pot is not like tobacco because anyone can grow pot.  If you live in the right climate, you can have a few plants in your garden or in your home.  Once it’s legal, you’re no longer dependent on a major supplier who packages it in nice boxes and spends millions annually on advertising (a cost that’s inevitably passed on to the consumer).

Because pot is not like tobacco, grotesquely high taxes mean that consumers who can’t grow their own will always head straight for the black market.  Sure, their old supplier is operating outside the law, but he’ll come to your house and drop off a little bag.  The cops aren’t going to do anything about your possessing it because there’s no way for them to determine if you came by it legally or not.

At the growing end, if you put aside the tax problem, you see how an unregulated free market should work: there’s consumer demand, so more businesses pop up to create the product.  Those that do a better job thrive; those that don’t fall by the wayside.  And most importantly for consumers, prices drop.  (I always like to point out that flash drives, now handed out like candy for free at trade shows, cost around $500 each when they first came along.  Fuji apples, my favorite, also became affordable when competition kicked in.)

But because the government cannot bear to let even a single penny slip by it, most states decided to tax the pot producers to death.  (I don’t know what the situation is now, but when California first legalized pot, it imposed a 25% sales tax on the product, ensuring that consumers with a reliable illicit supply would never buy the legal stuff.)  That kind of thing instantly kills the little guy, and in this case, it’s killing the big guy, too.  The government, given the chance, will always kill the goose that lays the golden eggs.  Instead of getting a good stream of revenue from viable businesses, it gets nothing from dead ones.

Again, I’m not sad to see the cannabis industry in disarray because, like Alex Berenson, I think it’s a dreadful product.  But I still find it useful to see how the government killed the cannabis industry when market forces were in place to make it a viable source of tax revenue across America.

Image by Pixlr AI.