While browsing the commentary after Election Day 2013 I kept reading about the victory in Colorado. I thought, “Fantastic! They shot down that silly marijuana tax.” Actually, what they shot down was Proposition 66, a different tax and an effort to revamp the government schools there.

Proposition AA, the marijuana tax, passed with over 60 percent of the vote. It creates two new taxes for the newly legalized recreational pot: 15 percent at the wholesale level and a 10 percent retail sales tax. Some cities, like Boulder, piled on to the tune of a further 8.5 percent local tax on top of the state tax.

"The passage of Proposition AA today completes the historic process of regulating and taxing marijuana in the state of Colorado," Brian Vicente, one of the architects of marijuana legalization and a proponent of the tax measure, said in a statement.

That is to say, Vicente sees the institution of these taxes as inherent to the process of legalization—if there aren’t taxes applied and bureaucracy erected around it, it’s not actually legal.

Vicente isn’t alone: “Colorado is demonstrating to the rest of the nation that it is possible to end marijuana prohibition and successfully regulate marijuana like alcohol,” said Mason Tvert, a proponent of Amendment 64 (which legalized recreational marijuana use in the state) and spokesman for the Marijuana Policy Project. “It is only a matter of time before voters and lawmakers in other states recognize the benefits and adopt similar policies.”

The assumption seems to be that no market is legitimate unless it is regulated, and that regulation is some sort of fairy dust to keep “criminal dealers” out of the industry. The Yes on AA website cites this view repeatedly. A passage that Yes on AA cites, from the Colorado Springs Gazette, makes exactly this point:

A majority of Coloradans voted to legalize marijuana for recreational sales and use, but few wanted mayhem. They wanted what advocates of Amendment 64 promised: a regulated, above-ground market that would help fund government and make business hard for criminal dealers.

It's a good thing that people can now enjoy marijuana without the threat of winding up in jail. The politics of prohibition being what they are, the better outcome—where, like any other peaceful activity, smoking marijuana needs no special provision in the law—probably wasn't on the table. Payoffs had to be made. Politics is politics.

But if Prop AA is a victory for anybody, it’s for the newly expanded bureaucracy and the black market. It’s certainly better to have some form of legalization replace prohibition. Vicente’s and Tvert’s views suggest a troubling view about what constitutes “legality” itself, made all the more troubling because they appear to represent the conventional wisdom.

Puff or Pass

In this case, with each new tax (state, local, etc.), a set of new state and local departments are formed, allegedly paid for with the “windfall” of tax revenue Colorado and its various hamlets will receive when every recreational user decides to do his civic duty and buy his weed from the government-approved store. An estimated $39.5 million will go to the pot police, with $27.5 million set aside to build new schools.

The revenue estimates seem optimistic. They assume that pot smokers will go through Colorado’s officially sanctioned channels; but that assumption ignores the incentives that come into play here.

For instance, think of another product that is perfectly legal but also subject to high taxes: tobacco. Sellers still risk punishment skirting high taxes in order to feed consumer demand. New York’s high tobacco taxes make illegal shipments of cigarettes into the city a common and persistent phenomenon. New York pursues tobacco so doggedly that even less harmful alternatives to cigarettes, like snus (a Swedish form of smokeless tobacco), taxed at $2 per ounce, are still cheaper to obtain elsewhere and ship in.

Even here in Tennessee, which is known for relatively low tobacco taxes, droves of citizens cross the border to the Cherokee reservation in North Carolina for cheaper cigarettes. My wife and I take a more convenient route: We pack our own cigarettes with pipe tobacco to avoid the excessive taxes on “tube cut” cigarette tobacco.

Recently a federal tax on cigarette rolling machines was expanded, treating them the same as “cigarette manufacturers” and adding several dollars per pack to roll-your-own cigarette prices. Senator Max Baucus (D-Mont.) predicted that the tax would generate $97 million in new revenues. But I can see, within a five-mile radius of the Liberty Bunker, several shuttered storefronts that used to house several $30,000 electric rolling machines each, and employed at least three people per shift. Those machines can now be found on eBay for $8,000 or less. I’m not sure where Baucus is going to make up for that lost revenue, but it sure will not be in Knox County, Tennessee.

Back to the weed. Somehow, the legalization “discussion” has amounted to, “Legalize it, regulate, and tax the stuffing out of it just like alcohol.” There has been another tangent to this discussion: Legalize it as medicine. That turns out to be not much different than regulating and taxing, but it adds a doctor visit and bill to the costs (which is why one could find prescription drugs on Silk Road).

And here is the real problem: Go back to Vicente’s statement praising the tax measure. In his mind, the tax is the final—and crucial—step in legalization. Today when a free market for anything is discussed, an element of regulation and taxation at every turn is presumed to be a requirement. We have an example in Colorado where an intoxicant was legalized for adults to consume, and the next thing on the agenda was how to regulate it from seed to wrapper, and that approach won in a landslide.

Colorado already has a 2.9 percent state sales tax, with a city/county combined average of 6.1 percent, which is lower than most of its neighboring states and most certainly draws some economic activity in Colorado’s favor along those borders. Where else is a new tax required for a lower enforcement requirement? No longer are law enforcement resources needed to arrest every Mary Jane and Joe User within the borders of Colorado. If they just left things at that, there would be no need to expand the bureaucracy. Now they have made a popular product somewhat more legal in their state than in surrounding states. Why not try that out, taxing it like a Coke first, rather than leaving the pot on the table of the existing suppliers?