Uruguay flag

Marijuana is now legal in Uruguay

Unlike Colorado and Washington State which have imposed significant excise taxes on marijuana to keep prices high, Uruguay is planning to make the newly legalized product mostly tax-free to drive down prices. From Reuters:

Uruguay will exempt marijuana production and sales from taxes in a bid to ensure prices remain low enough to undercut competition from black market pot smuggled in from Paraguay, according to consultants advising the government on a legalization plan. [...]

“The principal objective is not tax collection. Everything has to be geared toward undercutting the black market,” said Felix Abadi, a contractor who is developing Uruguay’s marijuana tax structure. “So we have to make sure the price is low.”

This a very interesting development because it gets to the heart of what the top goals of marijuana legalization should be. There are many stated priorities regarding marijuana legalization which don’t always line up perfectly.

The most cited goals by policymakers often include shrinking the black market, improving government finances, trying to minimize use, and improving overall public health.

As we have seen with cigarettes, high taxes can bring in revenue and discourage use but create a financial opening for some black market activities.

Uruguay has made their top goal to eliminate the black market and the best way to do that is completely undercut it on price — but when things are cheaper people tend to buy more of it. While Uruguay uses high excise taxes to discourage use of tobacco, with marijuana the plan is to use the more blunt tool of directly restricting the amount of marijuana individuals can buy each month to discourage its use.

Washington State, on the other hand, is going to treat marijuana very much like tobacco. Currently, the rules there put more of a premium on bringing in new tax revenue and trying to keep prices high to decrease consumption. This strategy does leave open the possibility for some bootleg pot sales, but the thinking is that a combination of enforcement against unauthorized sales and the convenience of licensed stores will keep that to a minimum.

In the coming years as more places experiment with legalization we will see not just which strategies work best for advancing individual goals but which of the policy goals should be considered most important.

We may even find that trying too hard to discourage legal marijuana use with high taxes, on net, hurts public health and government finances. For example, if marijuana use increases mainly because certain people switch to it from alcohol that could actually reduce mortality rates and government spending on health care.

Jon Walker is the author of After Legalization: Understanding the future of marijuana policy

Photo by Matt Hintsa under Creative Commons license