California Marijuana Dreams May Go Up In Smoke.

One issue to be decided on November 2 will be proposition 19, the latest effort to legalize marijuana in California. This is another one of those “Be careful what you wish for” stories. Advocates claim that passage of such a measure would solve the state’s budget crisis, as it would bring in tens of billions of dollars of tax revenue while cutting the cost of our prison budget by billions more. Up to a third of the state’s 170,000 prison population are there for possession of small quantities of drugs.

Proponents are right on the second point, but miss on the first one by a mile. In 1933, the 21st amendment to the constitution repealed the 18th amendment, rendering the Volstead Act unconstitutional, ending prohibition. Tens of thousands of small time backyard distillers, basement breweries, and bathtub gin makers rejoiced at the prospects of a larger market. Instead, legalization caused the price of their products to collapse, driving them out of business. Today, the industry for alcoholic spirits is dominated by a handful of globally integrated marketing giants running volume driven businesses on razor thin margins, like Anheuser Bush (BUD) and Diageo (DEO).

The same would happen to the pot industry. An Internet search reveals that potent Mary Jane today sells for $200 an ounce wholesale, or $400 retail. Legalize it, and that price might drop to the $20 that I heard prevailed during my college days. Your typical Mendocino underground farm or Oakland grow house with its $3,000 monthly electricity bill, doesn’t fit anywhere in this picture.

The same would happen to anticipated state tax revenues. Right now, California smokers pay $1.05 in federal taxes per pack, and 87 cents in state taxes, bringing the average retail cost of cigarettes to $5.05 a pack.  I doubt actual marijuana tax revenues would exceed what it currently earns from cigarette taxes, or $839 million a year.

There is another matter proponents aren’t focusing on. US Attorney General Eric Holder last week said that his Justice Department would continue to prosecute pot dealers, even if the proposition passes, as federal law trumps state law. Federal prisons are already full of former growers who were deluded into thinking they were growing pot legally because they had licenses from the state.

My guess is that the state’s pot industry lobbyists have been smoking too much of their own product when preparing their budget forecasts.

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