Those Wild Pot Tax Revenue Guesses
by Mark Scaramella, July 23, 2010
"There is an estimated $15 billion in illegal cannabis transactions in California each year. Taxing and regulating cannabis, like we do with alcohol and cigarettes, will generate billions of dollars in annual revenues for California to fund what matters most to Californians: jobs, health care, schools and libraries, roads, and more."
— text of Proposition 19
"…marijuana legalization would yield tax revenue [for the entire United States] of $2.4 billion annually if marijuana were taxed like all other goods and $6.2 billion annually if marijuana were taxed at rates comparable to those on alcohol and tobacco."
— Libertarian Harvard Economic Professor Jeffrey Miron (the most-often cited authority on pot economics):
"Will big business and corporate interests — specifically, Fortune 500 alcohol and tobacco companies — now put small growers out of business?"
— John Sakowicz
"…pot billionaires and hemp empires are expected to be forged after legalization. There will likely emerge a Robert Mondavi of the marijuana business. Agriculture companies will race to build marijuana harvesters, tractors and seeders. New pot-specific fertilizers and pesticides will be sought. Commercial development catering to hemp outfitters and smoke shops, like those in Amsterdam, will break ground and revitalize infrastructure. Counties will immediately see the benefits of increased tourism, which industry experts expect to surge in the region.
— Zoltan Istvan, "Marijuana crop could bring cash to California’s next Napa"
“To put the icing on the cake, just imagine what could happen if the public votes to legalize recreational marijuana—a measure, sponsored by one of Oakland's own, that will appear on the November ballot. Harvard economist Jeffrey Miron has estimated that cannabis prohibition costs the nation $7 billion in potential tax revenue; Oakland City Council member Rebecca Kaplan has said the revenue already being generated by the current tax will help save libraries, parks, and other public services. If that's the case, advocates contend, doesn't a taxation measure make simple economic sense? "People are no longer outraged by the idea of legalization," former San Francisco mayor Willie Brown told San Francisco Chronicle last year. "And truth be told, there is just too much money to be made both by the people who grow marijuana and the cities and counties that would be able to tax it." If Oakland has anything to do with it, it's high time the rest of California sees just that.”
— Newsweek Magazine
"To the extent that a commercial marijuana industry developed in the state, however, we estimate that the state and local governments could eventually collect hundreds of millions of dollars annually in additional revenues."
— California Legislative Analyst on Proposition 19
* * *
It's been almost 30 years since Mendocino County's then-Ag Commissioner Ted Erickson was fired for writing the obvious in the County's annual crop report — that marijuana was Mendocino County's number one cash export crop.
Nowadays, Mendo Mellow is growing nearly everywhere in the County from residential neighborhoods to remote mountaintops.
Every so often a local official suggests that the Ag Commissioner try to estimate the value of Mendocino County's pot crop; the last time was in late 2007. But since Erickson, it has never gone past the suggestion stage so nobody in an official position has tried. Perhaps the memory of what happened to Ted Erickson still lingers.
But how would you estimate the commercial value of Mendo Mellow? What do you count? Plants? Processed bud? It's a bit like counting grains of sand on the beach.
Back in 2007, before he retired, Dave Bengston, the long-serving Ag Commissioner who took office after Erickson was fired, nevertheless gave some thought to the question on the off chance that the Board of Supervisors would officially direct him to begin assaying weed, so to speak. Besides contacting local, state and federal law enforcement agencies for their input, Bengston said he would talk to what he calls "the marijuana support industry" — the local suppliers of fertilizers, plastic baggies, large generators or diesel pumps. Bengston said he knew a retired forester who was "very good at estimating acreage from the air" who could take the Commissioner aloft for a fly-over or "pot-cruise."
With conventional ag crops simple grower surveys are used. But an (anonymous) pot survey might not get much response, much less be even remotely accurate. Even a partial response from pot growers would be difficult to base an reasonable estimate on since there's no way to know how representative it would be. Surveys would also have to be bi-lingual given the many, large illegal grows by, well, illegals.
Over the years attempts have been made to guesstimate Mendo's pot crop value, but they all rely on speculative assumptions, beginning with the law enforcement's plant seizure reports. But those numbers are never explained. How many were mature plants? How much had already been harvested when the garden was raided? How much bud did the plants produce? How big were the plants? How much would have been lost due to animals, weather, and so on. The variables are numerous.
Pot value guessers assume a certain amount of processed bud per plant. Multiply that dubious figure by the number of plants seized, jack that up by a factor of 10, or 20 or more (to represent the uncounted and unseized), apply the assumed wholesale price and like magic you've got a wholesale pot crop value estimate — usually in the billions.
Yeah, sure, dude.
Since Mendo's seizure numbers are so large these days, any assumption about processed bud per plant or cost per pound can produce wildly varying results. We've seen estimates as low as several hundred million dollars to well into the billions, just for Mendocino County alone.
Mendocino Supervisor John Pinches said a couple of years ago that a "consultant" hired by the County had estimated that the marijuana industry in Mendocino County represented two-thirds of the county's economy. Since the County's total conventional ag crop value is typically in the range of $225 million, that would translate to around $450 million worth of pot — large, but much less than the inflated estimates derived from seizures.
Seizures have gone up dramatically in recent years, probably because so much more pot is being grown, and grown in boldly large gardens, some of which number in the thousands of plants. Obviously illegal, therefore not voluntarily surveyable, assessable or taxable.
Depending on what source you use (state numbers or County Eradication Team numbers) seizures have gone up by two or three or four times just in the last few years.
The County's pot team says they eradicated almost 450,000 plants in 2009. They claimed to have ripped out about 320,000 plants in 2007. In 2004 they said they eradicated 92,000.
Already this year, still early in the season, the pot eradication people say they've snagged almost 100,000 plants.
Could the total number of pot plants have gone up as much as these seizure numbers indicate?
The only reasonable way we know of to approach a pot crop estimate would be to try to break it down by category and geography and build from there.
The pot crop breaks down to registered Prop 215 medical personal use growers, unregistered Prop 215 personal use growers, Prop 215 caregivers (registered and unregistered, some of them "dispensaries"), non-medical personal use growers — which, taken together probably don't represent much by volume or price. Then add large "medical" and non-medical (illegal) commercial growers, plus Mexican or drug trafficking organization cartel growers.
There's also the additional problem of how much is grown indoors.
You'd have to apply different prices to different categories of pot depending on how processed it is and whether it's sold retail or wholesale.
Since the cops focus primarily on large commercial trespass grows and illegal public land grows, they probably seize a higher percentage of those crops since they tend to be visible from the air. For the other categories, you might try to get the number of Prop 215 cards and the number of patrol deputy or police seizures by supervisorial district and you'd probably start to get a rough handle on the crop size and perhaps some estimate of value.
Factor in that fact that most large grows and many of the smaller grows in Mendocino County are not sold in the County nor are they sold by County residents and therefore don't contribute to the local economy at all. Then factor in that in some areas of the County pot is a form of currency used for barter and is not converted to cash. ("Hey dude, I'll give you this bag of bud for that old motorbike over there.")
"I'm not going to do a marijuana crop estimate on my own, arbitrarily," Bengston told me a few months before he retired last year. "It's a can of worms and it can become very politically charged. Some people might think that estimating it is adding legitimacy to it. Others might say it's so pervasive that it should be legalized."
Looking at marijuana growing from a purely agricultural perspective, Bengston also points out a significant likely outcome of legalization that is frequently overlooked: If you legalize it, above-ground companies will start growing it in the central valley or the midwest where they can grow high volumes in row crops causing a dramatic price drop. If that happened — and it might soon, given that there's a legalization initiative on the November state ballot — a year or two later there could be a dramatic reduction in marijuana growing of any kind in Mendocino County. Some people say the pot industry would adapt by emulating the wine industry and that small, boutique pot farms would spring up, selling specialty marijuana out of tasting rooms — a nightmare scenario on several levels.
In other words, pot could go the way of wine and all that goes with it: Proposition 19 (on the November ballot) says that pot would be taxed and regulated like alcohol (while simultaneously saying that each city or county would develop its own taxes and regulations — an obvious contradiction.)
So if you like the wine industry is taxed and regulated, you'll love this the November pot initiative.
There's also some serious speculation in the real estate world about what would happen to local land values if pot is legalized. Put marijuana and/or hemp on the list of possible legal ag crops and what would happen to land values? Would it become like vineyards? Probably not, because while pot requires less development cost per acre, the water demand and availability could put a limit on it.
"There's no reliable or accurate way to estimate the value of the pot crop," said Bengston. "What good is a number if it's just somebody's wild guess?"
And if there's no reliable way to estimate the value of marijuana crop when it's illegal, think how much harder it would be to estimate the value after legalization. Would it include the additional taxes on property of pot-growing raised assessed property values?
A whole new range of guesses would be have to be made.
But that hasn't stopped some "economists" from trying.
Libertarian (and pro-legalization) Harvard-based Jeffrey Miron is an oft-cited economist because a in 2005 he issued a "report" entitled "Budgetary Implications of Marijuana Prohibition in the United States."
"The first step in determining the tax revenue under legalization is to estimate current expenditure on marijuana," says Mr. Miron who then goes on to cite the 2000 $10.5 billion estimate by the Office of National Drug Control Policy. "This estimate relies on a range of assumptions about the marijuana market, and modification of these assumptions might produce a higher or lower estimate," admits Miron. "There is no obvious reason, however, why alternative assumptions would imply a dramatically different estimate of current expenditure on marijuana. This report therefore uses the $10.5 billion figure as the starting point for the revenue estimates."
There you go. Take a dubious — but official — number and assume it to be true. Then extrapolate and apply academic factors to your heart's content.
Nobody really knows how a legal marijuana marketplace would operate. What percentage of total marijuana transactions would continue in the black market and involve people who grow, purchase or barter cannabis rather than buying it in stores? What percentage of transactions would involve extra excise taxes like cigarettes or alcohol? How many marijuana transactions would be subject to taxation and regulation at all? What unpredictable fiscal impacts would legalization lead to?
Oh, and did we mention this additional factor: "The Marijuana Policy Project provided funding for the research discussed in [Miron’s] report."
In other words, give me some funding and I'll produce a report supporting your position.
Most of the "reports" on the value and possible tax revenue of marijuana are similarly funded with conclusions tending to support the political position of the funder.
We've seen estimates of the value of just Mendocino's pot crop as high as $20 billion. (500,000 plants seized x 1 pound per plant x $2,000 per pound x 20 unseized plants).
Or perhaps $5 billion (500,000 plants seized x 1 pound per plant x $1,000 per pound x 10 unseized plants.)
Mr. Miron nevertheless ends up with a $7 billion pot value estimate for the entire US (presumably the retail value, but even that's not clear.)
If California represents one third of that then there would be maybe $2.3 billion in California. And if Mendo represents maybe one-fifth of that, then Mendo's crop could be upwards $500 million, roughly comparable to the questionable Mendo estimate.
Then you can guess how much of that might be taxable in Mendocino County (retail only?), and how much of that taxable amount could actually be collected. We doubt that much of those Mendo Mellow Millions would produce real tax revenue for the County or the state.
These vagaries will never stop people from making self-serving guesses about the value of marijuana and the potential tax windfall that might result.
As a general rule however, and as hinted at here, the lower the guess, the better.
Before anyone votes for a measure that presumes to solve local or state tax budget problems by taxing marijuana, they should at least realize that all the revenue numbers being tossed around are just wild guesses and that local and state budgets ills will not be cured by marijuana taxes any more than marijuana will cure my headache at trying to examine all of this.