Cannabis Commerce in the USA

Part 5: What We’ve Learned So Far — And Who Can Tell Us More

So far, we’ve heard from perhaps the world’s most cautious economist, a poteconomist who plows the middle ground, and a phenom bullish about marijuana futures. In this section, we’ll sum up their commonalities and differences. We’ll identify sources we haven’t heard from — that could fill in the blanks. Then we’ll start the ball rolling with a core estimate of cannatax … sure to whet your appetite … for more.

All three poteconomists agree:

• Marijuana/pot/cannabis should be legalized.
• They have to make way more assumptions than they’d like.

Odd man out

• Neither Miron or Gettman endorse Chaiken’s exclusive reliance on supply-side data.
• Gettman and Chaiken wonder why Miron only mines demand-side data.
• Chaiken and Miron write “there will be no increase in demand under legalization.”
• Chaiken and Gettman feel the economic argument [“the revenue issue] for legalization is certainly not trivial, while Miron says it is “sixth, seventh, or eighth” on his list of reasons to legalize.
• Chaiken and Gettman muster enthusiasm for growing and the dispensary phenomenon, while Miron remains completely detached.

What else do all three analysts profiled have in common?

• At least two of them don’t smoke marijuana.
• None of them has a medical marijuana card or spends time in dispensaries.
• None of them live anywhere near a retail medical marijuana hotbed.
• None of them travel in circles of people who actual buy and sell marijuana … that we know of.
• None of them has made a dime selling marijuana … that we know of …
• None of them grows marijuana … that we know of …

Whose figure represents a solid “core estimate?”

And, oh by the way … which one is most believable? Whose work can support a “core estimate” of cannatax — an amount of cannatax consisting of income taxes, sin taxes, and local and state sales taxes paid mostly by individuals? We’ll get to corporate “contributions” next chapter.

The gold cannabis leaf for “Best Prediction For Use As A Core Estimate” is hereby awarded to Jon Gettman.

Why?

• Why not give it to the only guy who accounted for both demand-side and supply-side data?
• In 2007, Gettman’s $31 billion Lost Taxes estimate didn’t consider sin taxes; his 2010 “at least $40 billion” estimate takes these into consideration. That’s a sensible adjustment.
• Jeff Miron can only criticize him so much.
• Gettman draws from multiple sources to Miron’s one.
• Gettman travels in more marijuana circles than Max Chaiken, and focuses more on marijuana than Chaiken.

Does that mean Gettman’s “at least $40 billion” in lost taxes [for the purposes of this paper, the terms “lost taxes” and “cannatax ” are basically the same thing] is a magic number? Can politicians on the fence sell it to their constituencies as a value proposition to support legalization?

Hmm … not quite. But it’s a great starting point.

The Chaiken Factor

Despite lacking endorsement from either Miron or Gettman, Chaiken’s The Other Green Economy cannot be summarily dismissed. Chaiken had two more years in pot time, the booming, though not peaking, years of 2008 and 2009, to hone his estimates. In his 2010 interview, Chaiken conceded his best-case scenario was difficult to support; but there was no wavering over his $71 billion minimum forecast.

I’m not completely enraptured with that number. Every red cent is derived from collecting an unspecified percentage of sin tax. On the other hand, that’s what makes it compelling — Chaiken didn’t forecast sales taxes or income taxes. What if he had?

Chaiken pushed the envelope hard. Latest government statistics suggest his current guesstimate about the amount of metric tons consumed annually — 20,000 to 25,000, based on the 2010 National Drug Threat Assessment — is reasonable.

Gettman’s figures are based on around 15,000 metric tons consumed. Acknowledging the Chaiken factor, we’ll bump Gettman’s $40 billion figure another $10 billion, bringing our core estimate to $50 billion.

In case anyone or everyone disagrees …

There are no right or wrong answers

We’ve heard from three super-intelligent, highly educated, and highly informed sources. Listen to their interviews. Read their white papers. But what did that really get us? A really great education, for one thing! You can’t discount that.

It also got us estimates ranging from $7 billion to $300 billion! I don’t mean to belabor the point, but it should be abundantly clear by now: there are no right and wrong answers.

In case anyone’s wondering why this report doesn’t include one footnote after another, or include hundreds of references, well … re-read the last paragraph.

Our three poteconomists liberally sprinkled footnotes and references all over their papers — and look how all over the map their results were.

All our poteconomists are more than qualified to voice their opinions. Their groundbreaking work is appreciated.

But as far as any or all of them being the be-all, end-all, or last word on cannatax , I’m afraid we’re still missing valuable input.

Where would that input come from? Glad you asked.

Other voices CC wants to hear from

It would come from:

• Futurists
• Convicted “drug” kingpins
• Wholesalers
• Winnebagos — don’t laugh, these have a tale to tell!
• Growers
• Dispensary owners

Stories these voices could tell would really supercharge this report or future reports.

[Update: 8/16/2012: Fear not! They’ll all be in Cannatax 2012.]

This fresh input could be more compelling than the combed-over data in government surveys that’s been regurgitated one too many times.

Futurists

What’s a futurist? Are futurists jokes? Do they romp around in sci-fi jumpsuits, straight out of 50s’ flicks like Forbidden Planet? I can’t tell you what they wear. I can’t tell you if they’re nerdy or nice. What I can tell you is that corporations with a lot of money on the line don’t introduce bleeding edge products without consulting one.

According to Wikipedia:

Many corporations use futurists as part of their risk management strategy, for horizon scanning and emerging issues analysis, and to identify wild cards and black swans — low probability, potentially high-impact risks. Every successful and unsuccessful business engages in futurizing to some degree — for example in research and development, innovation and market research, anticipating competitor behavior and so on.

Futurists – why not?

Convicted kingpins

“It takes a thief to catch a thief.” Why has that saying stood the test of time? Because it’s true. Who does the Treasury Department hire to find forgers? Convicted forgers. Who do insurance companies hire to detect art forgeries? Convicted art forgers. Who knows more about the size and scope of cannabis commerce in the USA than the people who have profited the most from it?

Nobody.

Can some kid busted for a marijuana DUI tell us a whole heckuva lot about predicting cannatax ? Doubtful. Conversely, someone who’s actually sold metric tons worth of ganja has meaningful insight — in spades. That’s real cannabis commerce. Metric tons aren’t ink on a page or pixels in a .pdf file, they’re big, bulky, pungent chunks of America’s most valuable crop matter.

I want to know how much cannabis the biggest dealers in captivity think could be on the market. If I ruled the world, I’d be on the next plane to San Quentin, with a bunch of interviews lined up. I bet I’d get a lot more out that than the DEA gets out of its drug surveys.

It’s “high time” the feds survey some real movers to find out how much pot is really out there. Measuring things from the one-joint perspective has some value — it tells you something about minor retail transactions.

What currently tells us about major wholesale transactions?

Seizure statistics may hint at major wholesale transactions. But do they recreate them? How could they? What if only one truckload out of three truckloads intended for a deal gets seized?

How, exactly, does knowing how much weed has been eradicated tell us how much weed has not been eradicated? Well … it doesn’t. That’s why ultra-cautious predictors like Jeff Miron don’t touch these data sets.

Would convicted kingpins tell the truth, the whole truth, and nothing but the truth? Don’t know, but with nothing to lose, the more articulate ones could help us define the overall scope of cannabis commerce in the USA.

Wholesalers

The next best thing to hearing from convicted kingpins would be hearing from wholesalers. Who else could better answer questions like “How many middlemen are typically in between cultivators and the customer buying an eighth of an ounce?

What good is knowing? Because there could be three, four, or five sets of hands touching those buds along its journey — meaning that in a legal, regulated, landscape, maybe three, four, or five people would be paying state and federal income taxes on the profits they made from the same amount of cannabis.

That’s a lot of money unaccounted for.

Compare pot with another agricultural product everyone has purchased at one time or another:  oranges. Some oranges change hands directly from farm stand to consumer, but, usually, produce is sold through a commission agent or a broker. Oranges go through through a chain of middlemen or agencies before a consumer plucks one from the produce section of Piggly Wiggly. The main functionaries are the producer, the village or itinerary merchant, pre-harvest contractors, commission agents, transport agents, etc.

Ditto for pot.

The Winnebago’s Tale

Don’t laugh — these behemoths have a tale to tell!

While some pot is sold locally, plenty of it gets transported from Point A to Point B, for sale thousands of miles from its point of origin. A Winnebago is the perfect conveyance for transporting metric tons of bulk marijuana pressed in 50-80 lb. bales.

Pressing pot into bales is a common practice with commercial strains. Exotic strains, whose value is dependent to a great degree on cosmetic appeal, are handled more delicately.

Note the term “bale,” as in “hay bale,” is absent from all the reports in our library.

What, then, is the significance of the bale? And what can a Winnebago tell us?

Bales and Winnegabos tell us that marijuana goes directly from grower to consumer only some of the time. They tell us there are usually middlemen in the equation, not to mention a (potentially tax-paying) driver, who is compensated handsomely for taking the risk.

There’s something else Winnebagos tell us. They tell us to forget whatever lingering Miami Vice imagery anyone’s retained, that is, flashy guys driving Ferraris buying from sinister Colombians flanked by Uzi-toting drug soldiers.  Sorry to kill the illusion, but that’s a romanticized version of the cocaine trade.

In the real world, a Winnebago’s worth of pot can be delivered to four or five suburbanites or college kids to distribute to their network of friends and stoner buddies — who in turn may sell to other wholesalers a few rungs down the ladder. That’s real cannabis commerce in action, in the non-legal, non-regulated world. And, yes, it would be great to hear from those college kids and suburbanites one level up from “street” sales.

The Winnebago’s tale screams, “Hey, NSDUH, you need a new survey! You forgot the middlemen. There are a lot of us. We’ve been making tons of money and stimulating the economy. You could be taxing us, and we’d pay it, if the rate wasn’t too outrageous, to eliminate the fear of possible arrest.”

Growers

Who better to answer the following questions?

• Regarding sin tax, what is your resistance point? 10%? 25% 50%? More?
• What’s the average amount of money you wholesale 25 pounds for? 100 pounds?
• How many levels of wholesale would you say exist between yourself and the end “user?”
• What are your supply costs per pound?
• How much yield do you obtain per plant?
• How would it affect your business if marijuana were legal and regulated?

Dispensary Owners

The last dispensary owner I talked to, Chuck D, from Colorado Wellness in Denver, told me that if things proceed according to his business plan, his shop would pay $150,000 in local and state taxes in 2010. He, like every other dispensary owner, paid the State of Colorado $5,000 in fees just to open his doors. He’ll pay another $3,000 per year for license renewals.

Chuck D could tell you what the average amount a customer buys is. He could tell you what the average weight of a joint is. He could tell you what he pays per pound for medical grade marijuana. The difference is, these would be real figures.

Exactly what method would I use to cull data from all these sources? Can’t tell you off the top of my head.

However, no less a cultivator than Albert Einstein said:

If we knew what it was we were doing, it would not be called research, would it?

Conclusion

We came up with a core cannatax estimate of $50 billion. That represents an amount based on individuals’ government receipts, which you’ll recall, consists of sin taxes, local and state sales taxes, state and federal income taxes, FICA, and Medicare.

Checking in with other voices could really help fine-tune our $50 billion core cannatax estimate. Cannabis Commerce can and will check-in with these voices in the future.

Presently, undertaking that level of research is beyond the purview of this paper.

Next Section Preview

Sources we wish we could check in with, to anchor our estimates in reality, have been duly noted. That still leaves the question: what else do we need to know?

Plenty! It’s time to plow some untilled ground. When I start rattling off the prime taxation sources missing in action from serious studies, they’re so obvious, you’ll be amazed!