Cannabis Economics: Questioning the Licensing Costs in Washington State

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Economics:  The science that deals with the production, distribution, and consumption of goods and services, or the material welfare of humankind.

By that basic definition of Economics, every individual who produces, distributes, or consumes goods should have some sense of what economics is, if for no other reason than the unavoidable fact that economics -- supply and demand -- impacts every person in society:

1. Free PDF: Economics in One Lesson by Henry Hazlitt
2. Free PDF: Economics of Prohibition by Mark Thornton
1. Economics of Prohibition Excerpt
2. Economics of Prohibition Excerpt

While growers are now producing supply to meet demand, and sellers are obtaining supply to feed demand, and buyers are paying for supply they demand, it leaves me wondering:

• What is the breakdown of the money once the buyer pays the seller and the seller pays the grower?
• Who is making the most money from taxed cannabis?
• What is being done with the tax-generated revenue?

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I won't be answering all these questions right now and new questions will arise as I conduct research.  My answers are not necessarily correct as they are conjecture based on my understanding at the time of writing and based on the best research I have at that time. 

This will be an ongoing series of articles featuring information I learn as I search to find answers to my questions.  I will be sharing what I find here so that others may learn from it what they will.

My research is based on the information I read in various news reports and the questions those reports bring to my mind.

This is no rabbit hole.  This is the Pot Hole: 

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Out of the Marijuana Business Daily it is reported that 1,000 applicants in Washington State have made it onto a final lottery licensing round, out of an initial 2,100 applicants.  

According to the Washington State Liquor Control Board's Retailer License Description and Fees for recreational cannabis, the filing fee for the application is $250, and the annual fee for issuance and renewal is $1,000.  

Therefore, the $250 filing fee multiplied by the 2,100 applications filed, equals $525,000 in application fees that the State of Washington generated in revenue, according to my calculator.  However, only 1,000 applicants have moved on to the later round, and the other 1,100 applicants have dropped out of the running.  Because of this there may be refunds given to those 1,100 applicants, according to the local news, even though the licensing website clearly states Secretary of State filing fees are non-refundable.

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Giving the State the benefit of the doubt, $250 multiplied by 1,100 is $275,000 the State now must refund, leaving the State with a revenue stream totaling $250,000 from a single license application.  Not too bad considering all that was generated in a 30-day time period due to one application.

Now, of those 1,000 applicants that are moving on to the final round, only 334 will be chosen in the lottery on April 21, 2014.  Those 334 people will get to pay $1,000 for the issuance of the retailer license and the annual fee to renew it, which may increase or decrease over time as all licensing fees tend to do.  With those 334 new recreational cannabis retailers, the State of Washington will net $334,000 in licensing fees alone, every year.  

As for the 666 applicants of the 1,000 who won't get drawn at the lottery, I'm presuming that their $250 application fees will not be refunded, meaning the State will earn $166,500 from those application fees.  Plus, the State made $250 for each of the 334 applicants who moved on to the lottery, totalling $83,500.

• $83,500 + $166,500 = $250,000 in application fees
• $250,000 app fees + $334,000 license fees = $584,000 to the State of Washington*
• *not including other fees that may be included in the small print

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Now, I was curious about what other professional licensing fees are in Washington State.  So, to give some perspective on the $1,000 cannabis retailer license, I looked up a few fees to see how they compare:  

• Pharmacist: $145 application; $190 renewal 
• Midwife: $978.75 application; $516 renewal
• Dentist: $500-1,000 application; $400, renewal

All professions have various fees aside from applications and renewals, so this comparison is by no means a full view of what professionals pay to be in business, not even close.  This is for demonstrative purposes and to bring attention to the licensing fee differences.

The licensing fees alone tell me that the cost to renew a business license as a cannabis retailer is almost 80% more than the cost to renew a pharmacist's license, who is in charge of prescription medications; almost 50% more than the cost to renew a midwife's license, who assists a woman through pregnancy and delivery; and 60% more than a dentist's license, who has oversight of a person's oral health.

Maybe there is a reason why the retail cannabis license fees are so high compared to other professions; perhaps the high fees were part of negotiations to get recreational cannabis approved, is my theoretical speculation.  I have not found an answer as to why a retail cannabis license renewal fee is so much more costly than other professions though, and I leave my mind open to the idea that a valid reason does exist in spite of not finding one yet.  Therefore, until I find that reason, I have my own thoughts and further questions on the matter:

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Seeing this difference in the mark-up of cannabis retailer licenses compared to other professions, coupled with reading about governors who are petitioning for projected revenue, and the State legislature who is eager to get their hands on the cannabis revenue stream -- so much so that State legislators killed a bill -- causes me to wonder if cannabis businesses are being unfairly singled out, targeted, misused, exploited, and/or taken advantage of by bureaucrats in the State of Washington. 

• If this is the case, and with more taxes added into the mix, will it impact the supply and demand of cannabis?
• Will it impact the money transacted between grower, seller, and buyer?
• How far will bureaucrats go to ensure this new revenue stream doesn't go away and that they have access to it?

Free PDF: Economics in One Lesson by Henry Hazlitt

Free PDF: Economics of Prohibition by Mark Thornton

Economics of Prohibition Excerpt

Economics of Prohibition Excerpt

This will conclude the first article of Eve's on the economics of cannabis and the taxation impact she is observing.  Don't miss the next installment of Economics with Eve: Subscribe for email updates from the PotHole Gang in the sidebar.  

BONUS: Read up on Economics for free with the links posted in the article and in the sidebar, Economics in One Lesson, and Economics of Prohibition.

EvePenman is not an economist.  Eve has been an autodidact student of economics by way of the Austrian School for seven years; she has invested numerous hours towards the study of economics via books, journals, videos, in-person seminars, and has taken down testimony from economists and market specialists in the legal setting.  She applies her personal studies and knowledge to the markets and mandates she sees around her in order to formulate her questions and conjecture.  Eve can be contacted here for questions, her blog would appreciate your visit here.

Thanks, from the PotHole Gang