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Computing a Harmfulness Tax

Economics of Cannabis Legalization (1994) Detailed Analysis of the Benefits of Ending Cannabis Prohibition

June 1994
by Dale Gieringer, Ph.D.
Coordinator, California NORML

Abstract
The Case For Legalization
The Cheapest Intoxicant
Putting A Value On Cannabis
Computing A Harmfulness Tax
Revenues From Legalization

Computing a Harmfulness Tax
    The question might well be asked from a libertarian free-market perspective why cannabis (or other drugs) should be taxed in the first place. Why should government concern itself with regulating what is in essence a private decision, that is, what kind of drugs to ingest? Why shouldn't prices simply be settled by supply and demand?
    The best answer is that marijuana consumption may impose costs on innocent third parties who do not consume it. According to standard economic theory, such "external costs" may be compensated by means of a harmfulness tax.9 Examples of external costs of drug abuse include increased insurance costs, accidents affecting third parties, and drug-induced violence and criminality. In principle these costs must be distinguished from "internal costs" that fall on the user, such as ill-health, reduced personal income, poor achievement, etc. Because users already pay for the latter, there is no sense in making them pay again through a tax.
    From a non-libertarian, public health perspective, higher taxes are often justified simply as a disincentive to prevent people from overindulging in what is presumably an unhealthy habit. This argument is most persuasive in the case of highly addictive drugs such as nicotine, where naive users run a high risk of getting themselves trapped in an unhealthy habit due to initial misjudgment. Punitive taxation appears less justifiable in the case of cannabis, not only because it has low addictivity, but also because of the ease with which home growers can evade excessive taxes.
    In the following discussion, we will examine the external costs of marijuana abuse as the basis for a prospective harmfulness tax. At the outset, it should be noted that much further epidemiological research is needed to accurately assess the costs of marijuana; nonetheless, it is possible to hazard a guess at their magnitude. Overall, the general scientific consensus is that marijuana has definite deleterious effects, though less so than alcohol or tobacco. In the words of the California Research Advisory Panel: "An objective consideration of marijuana shows that it is responsible for less damage to society and the individual than are alcohol and cigarettes."10
    From a physiological standpoint, the major health risk of heavy marijuana use appears to be respiratory harm due to smoking.11 A recent epidemiological study by the Kaiser Permanente Center for Health Research found that daily cannabis smokers had a 19% higher rate of respiratory complaints.12 Aside from cases of passive smoking, these must be counted as internal costs, except to the extent that they may raise group health insurance costs for others. (There are actually good grounds to believe that legalization would reduce the costs of respiratory damage from marijuana smoking by encouraging the development of better smoke filtration technology, the substitution of more potent, less smoke-producing varieties of marijuana, and the substitution of oral preparations for smoked marijuana.)
    More important than the respiratory harm of marijuana is the increased risk of accidents due to mental impairment. In the Kaiser study, this emerged as the number one hazard of marijuana use, with daily users reporting a 30% higher rate of injuries than non-users. Presumably, these injuries reflected an increased risk of accidents that might also involve third parties. Hence, accidents should probably be counted as the major external cost of marijuana use. Other concerns, such as amotivation, poor school performance and the controversial "gateway drug" syndrome are more properly classified as internal costs.
    In order to quantify the external costs of marijuana, it is useful to consider those of alcohol and tobacco. These are shown in Table 1, based on an analysis by W. Manning et al.13 aimed at estimating the appropriate level of taxation for alcohol and cigarettes. Manning’s analysis shows how the health costs imposed on the insurance system by tobacco- and alcohol-related illness tend to be counterbalanced by the fact that smokers and drinkers die younger, and therefore collect fewer pension and retirement benefits.

Table 1
External Costs of Drug Use
 Cigarettes (pack of 20)*Alcohol (1 excess oz)*

Marijuana (1 joint)

Net Health Costs$0.15 smoking diseases
$0.23 passive smoking
$0.26$0.01 - .02 smoking
Accidents $0.93$0.38 - 0.93
Total$0.38$1.19$0.40 - 0.95


*Source: Manning et al., "The Taxes of Sin: Do Smokers and Drinkers Pay Their Way?," JAMA 261:1604-9.

    In the case of tobacco, Manning estimates the gross cost of medical care for smoking-related diseases at $.26 a pack, or just over one penny per cigarette. This turns out to be largely compensated by savings in retirement pensions and nursing home care for smokers. The final balance is highly sensitive to technical assumptions about the economic discount rate, and can even be made to show net external benefits at interest rates under 3%. Manning’s final net estimate of $.15 per pack assumes a 5% interest rate.
    By estimating the equivalency between joints and cigarettes, one can translate these costs to marijuana. On a weight-for-weight basis, pot smokers inhale about four times as much noxious tars as cigarette smokers;14 as we have seen, however, the average joint weighs about half as much as a cigarette. Also, cannabis lacks nicotine, a leading factor in tobacco-related heart disease. It seems reasonable on this basis to suppose that a joint is equal to less than two cigarettes, putting the net external cost of marijuana smoking at under 1.5 cents per joint.
    One fault in Manning’s accounting of external costs is that it excludes the costs of second-hand smoking, which he estimates at $.23 per pack, on the questionable grounds that these costs are mainly internal to the users’ families. We treat them here as external costs instead. There are grounds to think that passive smoking is of much less concern with cannabis since pot smokers emit less smoke than cigarette smokers. It therefore seems reasonable to conclude that the total smoking-related costs of active and passive pot smoking are unlikely to exceed two cents per joint.
    Turning to alcohol, Manning concludes that the net medical-less-pension costs of alcoholism-related disease are $.26 for every “excess ounce” of alcohol, which is defined to mean an ounce in excess of one per day (Manning does not try to account for the possibility that moderate consumption may actually extend life.) These costs turn out to be greatly outweighed by the cost of alcohol-related accidents, which he estimates at $.93 per excess ounce. This figure includes traffic accidents to third parties caused by drunken drivers, but does not appear to include other alcohol-related accidents. Also missing from Manning’s account are the external costs of alcohol-related violence. Altogether, Manning concludes that the total cost of alcohol is $1.19 per excess ounce, or $.48 per ounce when averaged over all alcohol drunk.
    While the cost of alcohol seems clearly dominated by accidents, it is unclear how to relate these to marijuana. The burden of expert opinion appears to be that marijuana is less of an accident risk than alcohol, though this is disputed.15 Studies of fatal car accidents indicate that, at least on the road, marijuana tends to be a secondary risk factor compared to alcohol.16 On the other hand, one survey of trauma patients found that with respect to all accidental injuries, cannabis may be every bit as much a risk factor as alcohol.17 In terms of intoxicating potential, one joint probably lies between one ounce and one excess ounce of alcohol. At the high end, if one equates a joint with one excess ounce, the accident costs of pot would be $.93 per joint. More reasonably, one could equate a joint with an “average” ounce of alcohol, the accident costs of which work out to $.38. There are reasons to favor a lower external cost on marijuana relative to alcohol, notably the fact that marijuana tends to suppress violence, whereas alcohol tends to aggravate it. From this perspective alone, an overall shift from alcohol to marijuana may be desirable.
    In conclusion, one can reasonably argue that marijuana should be assessed a harmfulness tax of $.40 to $.95 per joint—or, say, $.50 - $1 in round figures. Experience indicates these taxes would probably be magnified at least twofold in the market, resulting in a minimum retail price of $1 - $2 per joint.18 Happily, this is consistent with the target price range we derived previously.
    Different lines of reasoning thus converge to argue that cannabis should be taxed at $.50 to $1 per joint. That is $15 - $30 per ounce for low-grade 3% leaf or $30 - $60 per ounce for 6% standard cannabis. Ideally, the tax rate per ounce should be proportional to THC potency. In practice, this could be implemented through a schedule of fixed product categories similar to those used for alcohol (beer, wine and hard liquor). These categories might include: (1) leaf (potency <3%), (2) standard blend cannabis (4 - 10% potency), and (3) high-grade sinsemilla or hashish (potency>10%). Other cannabis-based products, such as hashish, hash oil, tonics and foodstuffs, could be taxed according to their leaf or bud content. It should be noted that low-grade leaf, though harsh for smoking, could play a valuable role in the market as a source for cooked preparations and extracts, which are likely to play an increasing role in the market as health-conscious consumers seek to avoid smoking.

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