Cigarettes and Booze: What They Can Teach Us About Regulating Cannabis

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As California voters prepare to cast votes at the 2016 ballot, it is time to draft an initiative that moves recreational cannabis into the legal sphere. Transitioning an illicit substance from the black market into the legal sphere is not a novel exercise for California (or the U.S. at large), just as prohibitionist posters (above) are not new. The Nation brought alcohol back into the legal market after over a decade of prohibition in the early 1930s. And, while tobacco never drew such dramatic attention, our recent history of anti-smoking sentiment has also taught us many things about which taxation and regulatory schemes are effective in minimizing harms correlated with harmful substances. Our past experiences regulating alcohol and tobacco provide us with useful insight into what regulatory schemes are effective and warrant future use. In many respects, the public feels the same way about cannabis as it does towards alcohol and tobacco products; we want to keep it out of the reach of children, prevent teen use, prevent over use or addiction, reduce criminal behavior associated with use, and encourage responsible marketing. While there are some important differences between cannabis and alcohol or tobacco, there are also some similarities between them, both of which offer lessons that cannabis regulators can apply throughout the recreational marijuana initiative drafting and subsequent rule-making process.

CIGARETTES

 Tobacco control in California over the past three decades is a good place to start the discussion. Throughout the late 1980s and 1990s California triumphed over the tobacco industry and minimized some of the harms of smoking through various taxation and regulatory schemes (ordinances such as smoke-free parks and smoke-free workplaces that reduced both secondhand smoke and rates of smokers, as well as advertising restrictions). The historic 1988 passage of Proposition 99 introduced a cigarette tax increase and a health education program against smoking and saw continued success in the decades that followed. Between 1988 and 1998 many anti-smoking regulations went into effect locally and statewide, and in 1998, California voters passed another cigarette tax increase via Proposition 10. While numerous tax increase initiatives failed to pass at the ballot throughout the early 2000s, anti-smoking regulations continued to succeed.  As a result of numerous anti-smoking regulations the California smoking rate reached a historic low by 2011.

A comparison of some aspects of the tobacco industry and what we know about the cannabis market is also very useful. One way tobacco is similar to cannabis is that both are largely inelastic. Empirical evidence estimates “the elasticity of demand for cigarettes is -0.3 to -0.5, implying that cigarette consumption is fairly insensitive to price but certainly not completely insensitive.” The elasticity of demand for cannabis is estimated to be -0.54. Recall that price elasticity of demand measures how much consumption of a good changes (in percentage terms) in response to a one percent change in the price of that good holding all other factors constant. The price elasticity of demand is generally negative, indicating that when price goes up, consumption goes down. A value between 0 and 0.99 is generally considered to be “inelastic” or less responsive to price changes because consumption drops (in percentage terms) less than the price rises (in percentage terms).

The reasons for the inelasticity of both products, however, are not necessarily the same. The inelasticity of tobacco demand is largely the result of tobacco’s highly addictive nature and the fact that many consumers cannot willingly quit the vice. The reason for marijuana’s general inelasticity is not as clear. Most studies on cannabis elasticity categorize users by “prevalence of use” without accounting for “total amount consumed,” thus are not very reliable when used to try to calculate true elasticity. That is, someone might still get high as often when the price increases but might consume less on each occasion. Such categorization is unreliable because cannabis users fall into various categories, each having different degrees of elasticity based either on price alone or based on price and other factors. Regardless of the reasons for the inelasticity, the fact that it exists is important to account for when deciding how to tax and regulate cannabis in a legal market.

Lesson One: Cigarette Use Is Mostly Inelastic, And While High Tax Increases Create Some Elasticity, The Result Still Fails To Meet The Objective Of Significantly Reducing Harms Associated With Smoking.

The main argument against implementing a high tax for cannabis is the fact that it is likely to be regressive and have disparate impacts on users. This notion stems from the many experts who consider the high taxes on cigarettes regressive since high taxes do not significantly lower the rate of smokers and disproportionately affect low-income users. Another argument stemming from experience with the cigarette market is that if the desired product becomes too expensive, consumers will find other products to curb their need for tobacco, creating a substitution problem. A high tax alone will not do much to curtail consumption in the long run. Economists, however, do recognize that if consumers are faced with a high tax increase (say 50-100%), their consumption patterns do change in the short-term. The highly addictive nature of tobacco, however, leads to users seeking out potentially more harmful, albeit more affordable, products to feed their addiction. For cannabis, the preliminary issue of “substitution” may present as a market shift toward demand for more dangerous and typically more potent canna-products (e.g., butane hash oils) or by driving users to the black market. Both substitutes are undesirable for meeting our measures of successful recreational marijuana legalization schemes. Accounting for cannabis and tobacco’s shared degree of general inelasticity, we can tip our hat to the lesson tobacco taught us and respond accordingly in our implementation of the legal cannabis market. A reasonable response would be to set the price inclusive of tax to be near the black market price, and to avoid significant limits on types of consumption (e.g., smoking, edibles, oils, etc.).

Lesson Two: California’s Best Outcomes For Reduction In Tobacco Use And Its Associated Harms Have Resulted From A Combination of Taxation and Regulatory Schemes.

 Some experts suggest regulations and policies such as “smoke free workplaces,” “strong graphic warning labels,” and/or “anti-smoking media campaigns” are more effective at reducing cigarette use, while others argue that tax increases are more effective. However, studies have confirmed that the combined approach is the most effective, but warn that its effectiveness depends on “the magnitude of the taxes and the amount of media campaign expenditures.” Given our decades of experience taxing and regulating similar markets (alcohol and tobacco), it would be reasonable for us to apply our knowledge and take a comprehensive approach to taxing and regulating the cannabis market. Excise taxes and scheduled tax increases will help limit youth access, as they are the most price sensitive user group. The taxes however, should be set low enough to extinguish, or at least largely diminish, the existing black market. Policies implementing minimum age requirements for purchase would complement higher prices and raise barriers to youth access.

ALCOHOL

 Lesson One: Prohibition Does Not Work.

This lesson is barely applicable since the current voter sentiment towards cannabis legalization implies that we understand this and want to implement a more effective approach. Commentators on prohibition explain that during prohibition, alcohol was technically illegal but lack of enforcement, ease of manufacturing and distribution, and prevalence of public use prevented prohibition from having meaningful effect. One study found that an unintended consequence of prohibition was earlier onset of a drinking habit, with young adults reporting the “formation of a drinking habit” at an average age of 21.4 (males) and 27.9 (females) in 1914 and age 20.6 (males) and 25.8 (females) between 1920-23, compared to 23.9 (males) and 31.7 (females) in the years following the repeal of prohibition. Another unintended consequence of prohibition was the proliferation of organized criminal and gang activity due to the demand for bootlegged booze. Although prohibition did correlate with a decrease in alcohol related deaths, especially afflictions associated with the liver, the movement overall is considered a failure. The price of prohibition was too high; the government lost a significant source of revenue while simultaneously increasing its enforcement costs, and many drinkers had to rely on bootleggers or sought solace in other substances (e.g., opium, cocaine, patent medicines, etc.).

Similar issues are found in the illicit marijuana market. California’s medical cannabis system has created a quasi-legal cannabis market that has motivated many to enter the market regardless of the costs. This has created a similar phenomenon like that found with prohibitionist criminals; people are lured by the potential profits and the lack of meaningful regulation has led to large scale criminal trespass grows.” These “trespass grows” cause significant environmental harm, increase risk of criminal violence, and compromise the safety of cannabis use (e.g., increased risk of molds/fungi in products, potentially easier access to children).

Lesson Two: Legalization Will Only Significantly Diminish The Black Market If The Legal Regulatory System Is Flexible, I.E., Is Continually Monitored And Adjusted In Response To Market Demands.

During the early 1930s many believed that alcohol regulation was impossible. The illicit market was believed to be too financially strong and the participation in the black market was too ingrained in American life. To the disappointment of many prohibitionist sympathizers, repeal of federal prohibition and alcohol regulation worked. Of course, it was not an immediate success on all fronts, but based on the factors we delineated earlier as defining successful regulation, it met or exceeded expectations. A comprehensive regulatory system took effect, which allowed limited public drinking venues, licensed vendors to sell to individuals for private use, and local control was permitted to determine rules about time and manner of use.  The multi-faceted system is said to have been successful because it redirected the focus away from the moral woes associated with drinking towards a publicly conscious user market.  Regulators listened to their advisors’ warnings that the moral and social woes associated with alcohol could not be solved through regulation, but would need to be solved through other government and/or private agencies “as part of broader educational and health efforts.”

Unlike the history of taxing cigarettes, the alcohol market has not been the victim of such persistent tax increases. Efforts to reduce the harms associated with alcohol consumption have largely been pursued through policy and regulatory regimes, such as, for example, the federal Alcohol Traffic Safety Act of 1983, which encouraged and subsequently led states to increase the penalties for DUI, and the Federal Uniform Drinking Age Act of 1984, which set the minimum legal drinking age (MLDA) at 21 years of age. Our earlier exploration of the tobacco market revealed that regulatory schemes like local ordinances or system-wide limits tend to have greater impact on consumer use patterns than a tax could achieve on its own. Moreover, California voters are not always easily swayed into approving new or increased taxes. This is seen in the few tax increases passed compared to the large number of passed ordinances (city/county bar license limits, hours of operation requirements, local smoking bans in public parks, etc.).

There are a lot of rumors that the cannabis black market won’t play well with a legal market and will undercut it, but the post-prohibition alcohol market shows us that these rumors may just be sensationalized reactions from opponents to legalized recreational cannabis. Today’s California cannabis market is situated much like the alcohol market was during the last years of federal prohibition.  Like alcohol during prohibition, the illicit cannabis market is thriving. Rough estimates regarding use indicate consumption in California is holding relatively steady in the last decade. In order to capture black market participants, the legal market will need to offer a multi-faceted approach to regulation much like that of alcohol. Different licensing and venue structures and options for more private use should be accommodated. Rather than try to solve every problem related to cannabis use, California should focus on regulatory schemes aimed at quality control, ease of adult access, consumer choice/autonomy, setting and enforcing minimum age requirements and other license parameters. Revenues from tax and licensing fees should be earmarked for grants to agencies to complete scientific and social research to study the effects of legalization. Regulations should adjust and respond to the market as we learn more about how it functions.

Lesson Three: The Cannabis And Alcohol Markets Share The 80/20 Phenomenon Of Consumption.

That is, 80% of the total amount consumed is consumed by only 20% of market participants. This is important because it informs regulators that a “one size fits all” approach will not be effective if the goal of the regulations is to control externalities (social harms). Various groups of cannabis users will not respond to regulations the same way. This is also true with taxation. Levying taxes on cannabis products will not affect the whole market in one way.  This is really a culmination of the lessons we learned from both tobacco and alcohol; mainly that a combined approach of taxes and regulations is most effective to reduce harms associated with harmful substances.

CONCLUSION

Today we’ve discussed some of the successes of alcohol and tobacco regulation and we’ve seen that while regulating illicit or harmful substances in the legal market is challenging, it is not impossible. If we keep our eyes toward reducing social harms and setting balanced regulation, introducing a legal cannabis market is feasible. Similar to the alcohol prohibition of the early 1900s, cannabis prohibition is not working. All of our fears about cannabis are being realized under prohibition. The only likely solution to our cannabis problem is to responsibly regulate adult/recreational use. Some of the lessons learned from alcohol and tobacco became repetitive. As a researcher, I cannot do much about that. But, as Californians, we have the opportunity to learn from our past. Let’s take what we’ve learned from regulating the alcohol and tobacco industries and apply our knowledge to the regulation of cannabis. Like everything else in life, the best result will come from taking an “everything in moderation” approach. The regulatory framework for cannabis should feature low to moderate taxes, time, place, manner restrictions, a range of licensing options, and public health education programs to instill responsible use among Californians.

Alexa Quinn for Drug Law and Policy

 Follow Drug Law and Policy on Twitter @DrugLawPolicy or Alexa @aquinn_dlp.

You can also contact Alexa Quinn by email: aquinn.dlp@gmail.com.

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