Placeholder Image

Subtitles section Play video

  • >>

  • DEFAY: Hello and welcome everybody. My name is Chris DeFay. A member of the Authors@Google

  • team here in Santa Monica. Today, I'm pleased to introduce as part of our Tech Talk series,

  • Beau Kilmer. Our guest is a co-director of the RAND Corporation's Drug Policy Research

  • Center, which I just learned is over 20 years established, which is great. His primary field

  • of interests are elicit markets, community corrections, drug treatments, and he used

  • advanced technologies to help monitor drug and alcohol use among problem populations.

  • Kilmer's current work includes projects to estimate the economic cost of drug use and

  • the evaluations of community level effects of drug treatment. Dr. Kilmer joins us today

  • to discuss the policy implications of marijuana legalization in California nationally and

  • internationally. There's been a dramatic shift in drug policy in recent years. Ballot initiatives

  • have been proposed at the state level and--excuse me--and municipalities are today grappling

  • with how to regulate marijuana dispensaries and enforce existing drug law. Please join

  • me in welcoming Dr. Kilmer in discussing this fascinating topic.

  • >> KILMER: Thank you, Chris. And thanks to all of you for being here. So firstly, my

  • name is Beau Kilmer. I'm the Co-Director of the RAND Drug Policy Research Center. For

  • more than 20 years, we've been doing work on a variety of issues related to substance

  • use and drug policy. If some researchers are developing innovative prevention programs,

  • others doing evaluations and assessments of racial disparities and marijuana arrests,

  • if some folks are doing kind of high level statistical analysis of data from undercover

  • drug busts, and with all of these projects, the goal is to provide objective research

  • and analysis to decision makers. And so lately I've been working on a project looking at

  • marijuana legalization in California and that this is definitely a team project and I got

  • to be a part of a great team. I got to work with Jon Caulkins at Carnegie Mellon University,

  • Rosalie Pacula, who's the other Co-Director of the RAND Drug and Policy Research Center.

  • I got to work with Robert MacCoun at UC Berkeley and Peter Reuter at the University of Maryland.

  • And in addition, we actually had a number of students from Carnegie Mellon University

  • actually doing a lot of the background research and we wouldn't have been able to do this

  • without them, so thanks. So, as you know, marijuana legalization is a hot topic in California.

  • And most of the focus right now is on two different proposals. The first proposal is

  • Assembly Bill 2254, often referred to as the Ammiano Bill. And what this bill would do

  • is it will legalize marijuana for those who are 21 and older and it would put the California

  • Department of Alcoholic Beverage Control in charge of regulating the production and distribution

  • of marijuana and initially they will place a $50 an ounce excise tax on marijuana. Last

  • year, the California Board of Equalization did an analysis and said that at $50 an ounce

  • this would bring in $1.4 billion in tax revenue to California each year. The other proposal

  • being considered is the Regulate, Control and Tax Cannabis Proposition. This is what's

  • going to be on the ballot on at November 2010. This initiative would also legalize marijuana

  • for those over--those 21 and older and it would also make it legal to cultivate your

  • own 5x5 plot in your home. The interesting twist here is instead of having statewide

  • regulation, it would allow each local jurisdiction to have the power to regulate production and

  • come up with their own tax rates. And--but--and just to kind of put this in perspective, I

  • mean what these proposals really are kind of revolutionary. And no other place in the

  • world have we legalized the production and distribution of marijuana. You know, a lot

  • of people like to think, "Well, you know, and that, you know, when you go to Amsterdam

  • it's legal and." No. Well, it's legal to go to a coffee shop in the Netherlands and buy

  • five grams it's still illegal to produce it. So it's kind of it's legal in the front door,

  • illegal in the backdoor. So, I mean, to the extent that this hasn't happened in other

  • places, I mean, it's really unclear about trying to project what would happen. You know,

  • there's a lot of, you know, a lot of debate and there's actually a lot of rhetoric in

  • this debate. So, the goal of our analysis really was to just focus on two issues; one,

  • try to understand how legalization of marijuana in California could influence consumption

  • and then also look at how legalization could influence public budgets. And I want to make

  • it very clear that the--we did not--we neither had time nor the resources to do a comprehensive

  • cost-benefit analysis. I mean, our goal wasn't to, you know, come out and say, you know,

  • "This would be a good idea for California or this would be a bad idea for California."

  • Similarly, I mean, we're not trying to tell people how to vote on the initiative. You

  • know, RAND doesn't take positions on ballot initiatives or a specific, you know, specific

  • bills being considered. I mean, we really don't have a horse in this race. We just wanted

  • to kind of provide some objective information to actually help guide the discussion we'll

  • be having for the next five months here in California. And I'm sure we'll continue to

  • have this debate and discussion after November. So, today I want to briefly just talk about

  • how we built this model and then go into some of the key insights. So, you know, we begin

  • with this logic model where you can see on the left-hand side you've got your choice

  • variables. You know, when you legalize you make a choice to remove the sanctions for

  • possession and sales, then you also have to make decisions about the regulatory regime,

  • the tax rates. On the right-hand side, you have these octagons, are kind of the outcomes

  • that we cared about, you know, marijuana consumption and also the net impact on state and local

  • budgets. And as you can imagine, I mean, these policy decisions have direct and indirect

  • effects. And I'm not going to walk you through each of these different boxes and arrows during

  • the presentation but I want to make it very clear that we were systematic about this.

  • And so, for each of these intermediary boxes, we actually not only had to come up with a

  • point estimate but we also had to kind of come up with a range. And so, when we could,

  • you know, we looked at the peer review literature for a lot of these boxes. There wasn't a lot

  • there in the scientific literature. I went to the gray literature, I went to greenhouses,

  • talked to farmers, talked to people at medical marijuana dispensaries and we did a lot of

  • different things in order to kind of come up with these ranges. And I mean, while this

  • is useful in terms of kind of making projections for the model, just the idea of kind of bringing

  • all that literature together for each of these boxes turned out to yield some of our most

  • important insights. So now let's talk about some of the key insights. And kind of the

  • main takeaway from the analysis is that we expect that the pre-tax retail price of marijuana

  • to drop substantially post-legalization, probably on the order of 80%-90%. Right now if you

  • want to get an ounce of sinsemilla in California, and this is your high quality marijuana, it's

  • going to run you between $300 to $450. I just want to make it clear for the analyses; we

  • actually end up having to convert everything into sinsemilla equivalents because we know

  • that most of California isn't using sinsemilla right now. But in order to get an idea about

  • what happens to the price post-legalization, you actually have to make some assumptions

  • about what would production look like. You know, we just don't know, so we kind of cost

  • it out four different--in four different approaches. One being, you know, we would allow everyone

  • to do their own private hydroponic 5x5 plot. Another mode of production we looked at was

  • allowing residential grow houses, assume it's a $1,500 or 1,500 square foot grow house or

  • 300 square feet, would have be devoted to production. Then you also have greenhouse

  • farms and then unfettered outdoor farms, you know, we costed it out for each of those.

  • But ultimately, we had to make a decision about which one we thought would be most likely

  • in order to do the projections. And we ended up focusing on the grow houses for a few reasons.

  • First of all, if you're a jurisdiction and you're trying to make money off of taxing

  • marijuana, the 5x5 plot that's just inefficient, you're not going to get that much. And with

  • respect to greenhouse farms, your kind of unfettered outdoor farms, you know, we don't

  • know what the Federal Governments' going to do. But we thought that the Federal Government

  • would probably have a problem with all these greenhouses and unfettered farms up and down

  • I-5. You know, I want to make it very clear, we don't know what the Feds are going to do

  • but we thought, so--we felt comfortable basing in our assumptions on this grow house model.

  • And with the grow houses are--in fact, with any of these kind of modes of production,

  • there are a number of reasons why you would expect the cost of production to go down.

  • First of all, you're getting rid of the risk. Right now, when you buy cocaine, when you

  • buy heroine, when you buy marijuana, a lot of what you're paying for is actually to compensate

  • the dealer and everyone else in the supply chain for their, you know, their risk of arrest,

  • their risk of incarceration. That will go away with legalization. You also have to--and

  • there's also going to be a decrease risk of asset forfeiture. You also have to think about

  • automation, too. I mean, right now, when you're trimming buds, that's a very labor intensive

  • process. I mean, they now have machines, which are much more efficient at doing this. And

  • we're going to expect those machines not only to be more available post-legalization but

  • also cheaper. And in fact, people wouldn't necessarily even have to buy them. You could

  • actually just, you'd probably could just rent some of these machines in order to help trim,

  • you know, when it's time to actually manicure. And then finally, also economies of scale.

  • I mean, it's one thing if you have one or two grow houses, but if you're able to actually

  • have 15-16 grow houses then you could start really buying the fertilizer, the nutrients

  • and kind of the other substances in bulk and so one could imagine that there would be savings

  • there. So there's a lot of theory about, well, that we would expect the price to be low,

  • but then we went and just tried to figure it out. Okay, assuming that we have a grow

  • house and knowing how much lighting it would require, how much labor it would require,

  • what would actually cost to produce a pound of sinsemilla? The range we came up with was

  • with--was between $200 and $400 a pound. So, if you're trying to figure out what that retail

  • price would you'd have to add on your wholesaler markups, retailer markups, distribution. When

  • all is said and done, we expect that post-legalization--an ounce of sinsemilla pre-tax would run less

  • than $40. That's a big difference from the $300 to $450 that you see in the market right

  • now. And just to kind of put this in perspective, some others have tried to estimate this and

  • our estimate kind of falls in those ranges. The Board of Equalization and Miron, they

  • both put it at 50%. The head of the--Gieringer here, the head of the California department--California

  • division of the national organization for the reform of marijuana laws testified last

  • year. They now hay at 300--you can begin with $300 an ounce, but post-legalization where

  • it's unregulated, it would only end up being on the order of a few dollars per ounce. So

  • ultimately, we're most comfortable saying that post-legalization, we expect the price

  • to drop at least 80%. Leads us to our next point that, you know, we expect the consumptions

  • are going to increase post-legalization but it's unclear to how much. All right, there

  • are two reasons for this post-legalization. First of all, you have these non-price effects,

  • right? For some people, it's going to change the stigma, they'll be more likely to use.

  • But then you also have to be thinking about advertising and promotion. For those reasons,

  • you would expect the use to take up a little bit. But then obviously, also when you have

  • such a large price drop you would expect there to be price effects. We know that users and

  • potential users are sensitive to the prices of marijuana. But in order to do that, you

  • really have to really have a good idea about how sensitive consumers are to these price

  • changes. And for you economists out there, you have to have a good idea about the price

  • elasticity of demand. The thing is, is what this price drop that you would see in marijuana

  • is going to be large. And it's something we've never seen before. And so, when you're talking

  • about changes that large, it actually requires that you know what the demand curve looks

  • like. I mean, if we're talking about something small the shape of the demand curve does not

  • matter as much. But for this, it actually--it makes a difference about your assumptions.

  • And you know, and the thing is we don't know what the demand curve for marijuana actually

  • looks like. So, for our analysis we focus on two demand curves which are kind of common

  • in the literature which you learn about in Introductory Econ. You know, constant elasticity

  • demand and a linear demand curve. But we want to make very clear that we'd--we're not--we

  • don't know if either of this is correct. But for analysis, we just want to see, "Well,

  • how would the results change?" You know, depending on ones assumption about the shape of the

  • demand curve. And the take-away from this chart is that it matters a lot. Your assumptions

  • about the demand curve are really going to influence your projections about consumption.

  • On the y-axis here we have the percent increase in consumption post-legalization and on the

  • x-axis we actually have the percent of consumption that evade sales taxes, because we actually

  • don't know how much tax evasion is going to be happened. But just focus here at the, you

  • know, at the y-axis. Assuming that--assuming a linear demand curve, a $50 an ounce tax,

  • no tax evasion, a perfectly elastic supply curve, we would expect that post-legalization,

  • the price or the consumption would increase about 76%. Now, keep all of that constant

  • and just switch out the linear demand curve for the constant elasticity demand curve and

  • that goes to about 150%. Now, once again, I want to be very clear, we don't know if

  • either of these is correct, but this assumption actually makes a big difference. And oftentimes,

  • when individuals are doing these analysis, they just kind of make an assumption and don't

  • think about it, but we say it actually does matter. Minor assumptions have major implications

  • when you're thinking about, how to project the effects of marijuana legalization. The

  • third point is that tax evasion could be a major concern especially if the tax rates

  • are set too high. I mean, the obvious comparison product here is tobacco. You know that when

  • tobacco taxes are too high, folks are more likely to buy from the Internet, go to an

  • Indian reservation. You know, there are these great stories in Canada where a few of the

  • provinces added on a $3 a pack tax on tobacco and there ended up so much tax evasion they

  • actually had to repeal the taxes. We do know that--we know that tobacco tax evasion does

  • happen in California. We don't know how much. I mean, some people have put it at 1% to 4%.

  • Board of Equalization came out about 10 years ago saying it ranged between 12% to 27%. We

  • don't know exactly where that is but we know that it happens. But to kind of put this in

  • perspective, in no state is the excise tax for an ounce of tobacco more than $5. It was

  • being promote--it was being--and initially introduced with the Ammiano Bill as a $50

  • an ounce tax, that's pretty high. And just forget about ounces for a moment, let's actually

  • think about pounds. The finance--if you assume that the tax is going to be $50 an ounce,

  • the financial reward for not paying that tax is going to be between $800-$850 because you

  • also have to account for the sales tax. I mean, that's more than they actually cost

  • to buy a pound of marijuana from Mexico right now. So, you know, there's a lot of uncertainty

  • here and we don't come up with a specific point estimate, but we do want to make it

  • very clear that if you do set the tax too high you could have this--you could have a

  • fair amount of evasion. And what's interesting about that is not only will evasion reduce

  • the amount of revenue going to the state, but all other state or local governments,

  • but when you have more evasion that means that the consumers are actually facing a lower

  • price, so you actually expect more of an--a larger increase in use. Fourth point's all

  • about criminal justice costs, in terms of how much money we actually spend enforcing

  • marijuana laws in California. The take-away here is--and if you're thinking about this,

  • be thinking about hundreds of millions of dollars not billions. You know there are--you

  • know, a lot of people like to say, you know, if we were to legalize marijuana we would

  • free up all these resources and we'd use that money for, you know, education, we could use

  • it for, you know, other services. Right now, there are--kind of before we looked into this,

  • there were two other estimates out there about how much California spends enforcing marijuana

  • laws. One put it at 200 million; the other one put it at close to two billion a year.

  • And that's an order of magnitude difference. So, we thought, "Okay, let's just figure this

  • out," I mean, this is not rocket science. Give me the number of arrests, the number

  • of people incarcerated, information about adjudication, we can throw on some unit costs,

  • I can get a pretty good ballpark figure of what it would it be. And when we did that,

  • we estimated that probably each year less than $300 million is spent enforcing marijuana

  • laws. You know, in terms of--these are funds spent by the state and the local governments.

  • But what we also have to remember is that this doesn't necessarily mean savings. It

  • means it's not as if, you know, if it were to be legalized that money is going to go

  • back into the general fund. That money is probably going to stay with the local law

  • enforcement, stay with Department of Corrections. Now, no--maybe, the case of that money will

  • be better spent, I mean, that's something we didn't look at. But just when people are

  • talking about this, I mean, yeah I'd be thinking--be thinking in the millions not in the billions.

  • And finally, the revenue estimates that the Board of Equalization came up with, that $1.4

  • billion, we can think of a number of reasons why that number could actually be dramatically

  • lower or dramatically higher. First of all, there are four reasons why one could expect

  • the tax revenues coming into California to be less than $1.4 billion. First of all, tax

  • evasion. We don't know what it's going to be but the tax rate is set high enough we

  • expect there to be evasion when the Board of Equalization did this analysis, it assumed

  • there'd be no evasion. So, should we expect there would be no evasion, you'd expect that

  • to lower it. Also, we expect a larger drop in prices. So, if there is--if consumer pays

  • a lower price that means the sales tax revenue is also going to be lowered than what was

  • projected. Third, one thing that we account for is the fact that there could be the shift

  • for--shift to higher potency marijuana use post-legalization. Right now, we think most

  • of the marijuana consumed in California is commercial grade, not sensimilla. But it's

  • going to become so cheap post-legalization we expect that most individuals who are smoking

  • will be smoking sensimilla. And to that extent, you don't have to spend as much to get the

  • same high per an hour. So, you would actually--you have to make an adjustment when you're doing

  • these calculations. And so, once you do that--once you've account for the fact that that the

  • excise tax is based on weight, you would expect that amount to go down. Finally, the tax rate

  • may not be $50 an ounce. You'll never--that's what was initially proposed in the Ammiano

  • Bill. That's when it seems they have a lot of currency but it's very clear that the--with

  • the ballot initiative, it allows each of these jurisdictions to come up with their own estimates.

  • However, the revenue's actually could be a lot higher than $1.4 billion if California

  • is actually able to make money off of sensimilla being exported. So, in addition to the report

  • that we have online we actually have nine additional working papers which provide the

  • background calculations for a lot of what we're doing. And in one of those chapters

  • by Brittany Bond and Jon Caulkins, they actually estimate smuggling cost. What it costs to

  • smuggle marijuana from Humboldt as well as from Mexico. And so, assume that we have this

  • big price drop, assume that the tax is going to be $50 an ounce, add on this smuggling

  • cost, we still expect that sensimillia coming from California will still be competitive

  • with a lot of the sensimillia being sold in the rest of the country. So, there is a chance

  • that California could actually make a lot of revenue if individuals who come to California,

  • they buy it, then they take it back. But the big question is, is, you know, someone from

  • Michigan drives to California, loads up their car full, you know, several pounds. Are they

  • going to buy it and pay taxes? Are they going to buy it above board? Or are they going to

  • try to buy it on this gray market? That's what we don't know. But there are actually

  • is this possibility that California could make a fair amount of money if they can make

  • money out of these exports. But so much of that's really going to depend on what the

  • Federal response is. And we don't know what the Feds are going to do. You know, in one

  • hand the Feds could step up enforcement or they could do what they did in the '80s when

  • they wanted to raise the minimum legal drinking age. They didn't pass a law saying, you know--you

  • know, "The drinking age has to be 21." What they said is, "If you want all of your Federal

  • Highway Funds, your drinking age better be 21." And so there--you can imagine something

  • like that happening with this. I mean, that and I mean right now, I think California gets

  • at least $3 billion in Federal Highway Funds. I mean, assume that, you know, they would

  • lose 10% of that. Even if they lost 10%, there'd be 300 million. I mean, that could offset

  • or more than offset some of the revenue coming in. On the other hand, like I said if the

  • Feds are kind of--are kind of hands-off about this and they don't get involved, it actually

  • could make it easier to make money off of exporting it to--marijuana to other states.

  • And in that case actually, California we would expect more money to come in. Like I said,

  • we don't know what the Feds are going to do and we also don't know what the other states

  • would do too. We don't know how Nevada would react if all of a sudden people just kept

  • driving across the border and then heading back to Vegas to sell. So, in terms of conclusions,

  • decision makers, whether they are policy makers or voters, you need to be skeptical of the

  • estimates that claim precision. If someone comes up to you and says, you know, "Legalization

  • we think is going to increase consumption by this amount or, you know, is going to bring

  • in this much in revenues." And they feel that that number is pretty precise, be skeptical.

  • We saw that there's a lot of uncertainty here, not only with respect to tax evasion but also

  • with the shape of the demand curve. This is such a large drop that--I mean, it requires

  • a lot of assumptions, there's a lot of uncertainty there. Second, we know that consumption is

  • going to increase but it's unclear by how much. I mean, with our models we can't rule

  • out increases of 50% to 100%, perhaps more, but we don't really know. But one thing to

  • kind of keep in mind is if you took the prevalence rate that we have today in California for

  • the number of people who smoke pot in the past 30 days, which I think is 6.5%, if you

  • were to double that, you know, and assume 100% increase and say it was at, you know,

  • close to 13%, we'd be back to where we were in 1978. So, I mean, there has--that is a

  • world that we've seen before. I mean, granted marijuana now is more--is stronger. I mean,

  • we have less disco, but I mean, we actually have seen a world where there has been many

  • more marijuana smokers. And I want to be very clear, we don't--we're not necessarily saying

  • that we think it's going to double but, you know, you're going to be seeing more of these

  • estimates coming out for the next five months. So we--for us, this is actually a useful bright

  • line for thinking about how to interpret, you know, what that world could possibly look

  • like. And finally, the evidence base for this analysis is severely limited. You know, so

  • much of the Economics Literature is all focused on marginal changes. You know, if there's

  • a $3 increase in the price of marijuana, how does that influence consumption? These are

  • all marginal. And you realize that legalizing marijuana in California would not be a marginal

  • change. So to that extent, it really calls into question how much we can actually rely

  • on the existing literature in order to inform our projections about marijuana legalization

  • in California. With that, I'll close. I look forward to your questions and comments. And

  • I guess I'm supposed to say that this concludes our videotaped portion of the talk. So, thanks.

  • Thank you.

>>

Subtitles and vocabulary

Click the word to look it up Click the word to find further inforamtion about it