Marijuana Legalization and Taxation: Approaches of States from the Perspective of Public Finances

FACULTY OF ECONOMICS AND ADMINISTRATION

Marijuana legalization and taxation: approaches of states from the perspective of public finances.

Diploma Thesis

SERENA IGLINA

Supervisor: Robert Jahoda

Public Finance and Economics

Brno 2021

MARIJUANA LEGALIZATION AND TAXATION: APPROACHES OF STATES FROM THE PERSPECTIVE OF PUBLIC FINANCES.

Bibliographic record

Author: Serena Iglina Faculty of Economics and Administration Masaryk University Department of Public Economics Title of Thesis: Marijuana legalization and taxation: Approaches of states from the perspective of public finances. Degree Programme: Public Finance and Economics Field of Study: Public Finance and Economics Supervisor: Robert Jahoda Year: 2021 Number of Pages: 81 Keywords: Marijuana, taxation, legalization, prohibition, revenue, drug consumption, economic cost-benefit analysis

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Abstract

The very long political debate, the growing amount of economic data and new scientific studies on drugs have brought to the attention the academic literature on the economic consequences linked to prohibition and legalization of drugs. This study aims to provide an economic and political analysis starting from the analysis of historical data concerning prohibition and legalization. Moreover, it aims to estimate the limits imposed by the so- called anti-drug policies, which have long hindered the growth and development of emerging and significant sectors from a mainly economic but also political and social point of view. The economic and social consequences related to alcohol prohibition in the U.S.A. are highlighted to be able to draw up a cost-benefit analysis that allows a comparison between a market in which consumption is prohibited with one that rules its consumption and sale. Then, drug consumption trends - in particular cannabis - are analyzed both in a context of legality and in an illicit market. After an overview about the regulatory systems in force, the potential tax benefit (in terms of savings on public spending and tax revenues generated by tax collection) generated by a tax on cannabis sales is evaluated, comparing the results of two different ways of taxation.

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Declaration

I declare that I have written the Master's Thesis Marijuana legalization and taxation: approaches of states from the perspective of public finances by myself under the supervision of both my supervisors, Doc. Ing. Robert Jahoda, Ph.D. from the Masaryk University and Prof. Roberto Zanola from the University of Piemonte Orientale, in accordance with the Agreement on Cooperation concluded between the Masaryk University in Brno, the Czech Republic and University of Piemonte Orientale, Italy. I certify that I have listed all the literature and other sources in accordance with legal regulations, Masaryk University internal regulations, and the internal procedural deeds of Masaryk University and the Faculty of Economics and Administration.

Brno, 2021 Serena Iglina

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Acknowledgement

I have always associated the memory of the scent of the pages of a book with a happy moment in my life. Since I was little, for pleasure or for duty, that perfume has accompanied me in an emotional and personal growth of which I am becoming aware only at this moment of my life. And so, with the last note of that perfume, I conclude my journey by thanking all those who have been close to me and those who, even making me suffer a little, have taught me that the beauty of reaching a goal is not so much the result as the "little" adventures you experience along the way. Finally, I want to thank myself for never giving up. Bob Marley said: None but ourselves can free our minds.

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Table of contents

INTRODUCTION ...... 1 CHAPTER 1...... 3 Description of historical attitudes toward marijuana ...... 3 1.1 The origins of cannabis ...... 3 1.2 Cannabis properties and current uses ...... 4 1.3 Marijuana as a psychoactive substance or medical principle? ...... 8 1.4 How harmful is cannabis? ...... 9 CHAPTER 2...... 12 Economic aspects of marijuana as an (il)legal drug ...... 12 2.1 Marijuana as an (il)legal drug? ...... 12 2.2 Economic pros and cons of drug legalization ...... 13 2.3 Drug consumption and consumers’ behaviour ...... 16 2.4 Drug consumption externalities ...... 17 CHAPTER 3...... 19 Current taxation models alternatives of legal marijuana ...... 19 3.1 Cannabis legalization: the current world overview ...... 19 3.2 Approaches and experiences of cannabis taxation models ...... 22 3.3 New consumer for to the legal cannabis market ...... 25 3.4 Taxation of cannabis: the case of U.S...... 27 3.4.1 Strategies of cannabis taxation ...... 27 3.4.2 Tax revenues ...... 31 3.4.3 Other factors influencing tax revenue ...... 38 3.4.4 The federal governments’ approach to cannabis taxation ...... 41 CHAPTER 4...... 44 Evaluation of the economic effects of legalisation in Italy ...... 44 4.1 The Italian position on the use of drugs ...... 44 4.1.1 The political opinion on drugs ...... 46 4.1.2 Analysis of current tax laws regarding marijuana use: the Italian regulatory framework ...... 47 4.2 Estimates of cannabis use in Italy ...... 50 4.2.1 The Miron’s model applied to Italy ...... 50 4.2.2 Economic forecasts deriving from the implementation of a taxation system in Italy ...... 55 CONCLUSION ...... 60 REFERENCES ...... 62

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List of Figures 1. Figure 1: CHOUVY, 2019, Global cannabis legalization 2. Figure 2: ITEP, 2019, Countries with recreational cannabis taxation – models from current taxation system in the U.S. 3. Figure 3: ITEP, 2019, Taxation models regarding recreational cannabis in the U.S. 4. Figure 4: ITEP, 2019, Taxation models regarding medical cannabis in the U.S. 5. Figure 5: ITEP, 2018, Tax revenues for states with legal recreational sales, Analysis of state revenue with sales of recreational cannabis 6. Figure 6: ITEP, 2018, Excise Tax Revenue from Cannabis Rivals Alcohol Revenue in States with Legal Retail Sales of Cannabis, Analysis of state revenue 7. Figure 7: ITEP, 2018, Per capita Cannabis excise tax revenue by month since start of Tax Collection, Analysis of state revenue with sales of recreational cannabis 8. Figure 8: SERPELLONI, GENETTI, 2012, % of drug use in Italy, in the last 12 months, regarding population aged 15-64 years (2001-2012 period) 9. Figure 9: SERPELLONI, GENETTI, 2012, Drug use, in the last 12 months, in the age group population 15-19 years (period 2003-2012)

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List of Tables 1. Table 1: NUTT D., 2018, Classification of drugs according to their dangerousness, The Lancet, University of Bristol 2. Table 2: ITEP, 2019 Legalization of medical and recreational cannabis by country 3. Table 3: ITEP, 2019 Pros and cons of cannabis taxation models 4. Table 4: ITEP, 2018, Excise Tax comparison across States, Analysis of state revenue with sales of recreational cannabis 5. Table 5: ITEP, 2018, State-by-state consumption tax estimates from taxing legal recreational cannabis, Analysis of state revenue with sales of recreational cannabis 6. Table 6: MIRON J. A., 2010, Effects of drug legalization in USA, The Budgetary Implications of Drug Prohibition. Cambridge: Department of Economics 7. Table 7: MIRON J. A., 2010, Cost savings on public spending due to legalisation, The Budgetary Implications of Drug Prohibition. Cambridge: Department of Economics 8. Table 8: Italian Ministry of The Treasury, 2005, Public expenditure attributable to drug prohibition (millions of euros) 9. Table 9: Italian Ministry of The Treasury, 2005, Breakdown of expenditure on substances (million euros) 10. Table 10: UNODOC, 2007, Value of the current expenditure of drug users 11. Table 11: UNODOC, 2012, Value of tax revenues generated by the “sin tax” and the general taxation (results of previous calculations) 12. Table 12: Breakdown of the tax cost by type of drug (millions of euros) 13. Table 13: VAN LAAR M., CRUTS G., 2012, % of drug users in the Dutch population aged 15-64 for years 1997, 2001, 2005, 2009, divided between first consumption and consumption in the last year 14. Table 14: VAN LAAR M., CRUTS G., 2012, % of Dutch students aged 12-18 who have tried substances for the first time 15. Table 15: VAN LAAR M., CRUTS G., 2012, % of Dutch students aged 12-18 9 TABLE OF CONTENT

who have used drugs in the last month 16. Table 16: SANTOS, A., DUARTE, O., MAIA, E., 2012, % of drug users in the Portuguese population aged 15-64, divided between first consumption, consumption in the last 12 months and consumption in the last 30 days 17. Table 17: VAN LAAR M., CRUTS G., 2012, National costs differentiated by the type of crime for the year 2010 (Netherlands) 18. Table 18: SERPELLONI, GENETTI, 2012, Social costs related to the use of drugs for the year 2010 in Italy

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List of Terms and Abbreviations 1. C.B.D.: Cannabidiol, a cannabinoid without the psychoactive effects of THC 2. NORML The US National Organization for Reform of Marijuana Legislation 3. Psychoactive drug: A drug that affects feeling, memory and thinking 4. T.H.C.: Delta-9-tetrahydrocannabinol, the principal psychoactive ingredient of cannabis 5. W.H.O.: World Health Organization 6. AIDS: Acquired Immune Deficiency Syndrome 7. Hepatitis: Inflammation of the liver tissue 8. F.D.A.: Food and Drugs Administration 9. MCDA: Multicriteria Decision Analysis 10. DPA: Department of Anti-Drugs Policies 11. VAT: Value Added Tax 12. GDP: Gross Domestic Product 13. EMCDDA: European Monitoring Centre for Drugs and Drug Addiction 14. Free market: regime that surrounding most legal goods 15. HEMP (or industrial hemp): is a variety of the cannabis sativa plant species that is grown specifically for industrial use

INTRODUCTION

The literature regarding the debate between prohibition and legalization of marijuana is vast. The economic and social consequences related to alcohol prohibition in the U.S.A. allow us to draw up a cost-benefit analysis that permits a comparison between a market in which consumption is prohibited with one that allows its consumption, after the introduction of a sales tax. Additionally, in the light of the new economic data and the new declarations issued by the United Nations, the matter is once again the protagonist. Indeed, on 2 December 2020 the United Nations Drugs Commission officially recognized the medical qualities of the plant and Italy is among the 27 countries that voted in favor of its removal from the drug table. Although it seems that Italy is making a turnaround, the path regarding the regulation of the use and sale of cannabis is still long and tortuous. According to the annual report on the phenomenon of drug addiction in Italy, prepared by the Department for Drug Policies (2019), the use of heroin and cocaine among students has collapsed in the last ten years, while the cannabis market is significantly growing. Interestingly, the 82% of those who have used cannabis (even one-off) knows where to get it, and the 83,8% knows where to buy it regularly. In short, the purchase is defined as "easy". The aim of the thesis is to create an overview study of the current approaches of states to the taxation and subventions of marijuana. A partial objective is to formulate recommendations for public policy of Italy using the overview. The first chapter focuses on the issue of legality. After a brief historical overview about the origins of the plant and its main uses, the methods of consumption and the effects on the health of the consumer. We describe the historical attitudes toward marijuana, also highlighting what are – nowadays - the most consumed substances in addition to cannabis, trying to understand for each of them the level of danger associated with the individual and the community. The second chapter addresses economic aspects of marijuana as an (il)legal drug and the economic aspects of marijuana as a medicine. This section mainly focuses on the economic aspects related to the production, sale, and consumption of cannabis. A cost-benefit analysis will be drawn up by comparing two scenarios: on the one hand, we present the economic effects of a market with a prohibitionist model (referring to the case of prohibition on the sale of alcoholic beverages in the U.S.A.), and, on the other hand, we present the economic effects of a free market model. In particular, both the

direct economic effects [understood as relevant elements for economic policy objectives, together with employment effects, and effects of the intervention on the public budget, including the financial resources necessary for the management of the intervention], and the externalities related to drug use and the position of the consumer with respect to consumption choice. Chapter three is about marijuana taxation - approaches and experiences –, the adopted tax systems, and the use of tax revenue. We provide an overview of the world situation, discussing the countries that have already adopted policies that regulate the marijuana consumption and sale. We assess current sales tax models and what a state should do to implement its own policy and attract the consumer to the legal market. Finally, we see how states - which have regulated the sale of cannabis - use the revenues (in terms of revenue or cost savings) generated by the collection of taxes. The fourth chapter is an evaluation of the economic effects of legalization in Italy. It begins by evaluating the context of insertion of the potential policy. It evaluates public and drug policy in Italy, followed by an analysis of the Italian regulatory framework, and an estimate of current cannabis use. Finally, we apply Miron’s model (1991) to estimate the potential savings in public spending resulting from legalization, and the revenues generated by a taxation system. We apply this model to Italy, taking into account the economic, political and social effects that possible legalization would bring.

CHAPTER 1. Description of historical attitudes toward marijuana

1.1 The origins of cannabis Cannabis is a psychotropic narcotic substance that comes from the plant belonging to the Cannabaceae family of the Cannabis sativa species. The key-ingredient of Cannabis Sativa is delta9-tetrahydrocannabinol [T.H.C.], from which its pharmacological properties derive. It acts on dopaminergic neurons and causes psychoactive effects (Mechoulam and Hanus, 2000). The plant shows up for the first time in Central Asia, and it is used for the very first time back to at least 10000 years ago (Stafford, 1992.). It is undoubtedly one of the most known and used plants in the world; its use influences all countries, all cultures, and all historical periods. It is not surprising, therefore, that different names characterise it: indicated in Sanskrit with the terms Bhanga, Vijaya and Ganjika, the Cannabis plant is also known by the name of Marijuana, Ganja or - again - Haschisch (which refers mainly to the resin that can be extracted directly from the plant), Shit (another form of wax that should be more "pure"), Skunk, Sensimilia, Mary Jane. Over the centuries it has been widely used for medical, spiritual, religious and recreational purposes. We know for sure that the Aryans smoked cannabis (Mel, 1997) and it may have been they who taught the properties of cannabis to both Indian and ancient peoples Assyrians. The first reference to the use of cannabis in medicine dates back to 2737 BC. in a Chinese pharmacology treatise attributed to Emperor Shen Nung. By studying history, we can find numerous examples regarding the uses of cannabis. The Greeks, although they preferred wine to the use of marijuana for recreational purposes, were very dedicated to the trade of this product with other peoples. We know, thanks to the writings of Herodotus dating back to 5 B.C., that the Shiites (an ancient population of Iranian origin) used to cultivate and, later, vaporise the cannabis. Other stories by Pliny, Marco Polo and other spokespeople from ancient times show first and foremost that cannabis cultivated for a long time and that is used for both its fibre and its psychoactive properties throughout Asia, the Middle East and widely also in the Mediterranean area. For example, the Phoenicians used to build the sails of the ships of

hemp fibres. As regards central, northern and western Europe, it is not known when it was introduced, although it can be said almost with absolute certainty that it dates back to at least 500 years before Christ. In Berlin, for example, an urn containing cannabis leaves and seeds dating back to around 2500 years ago was found. Always historical sources suggest that various European peoples such as the Celts and the Picts (before Christ and before the advent of the Roman Empire) cultivated and used cannabis (Fratticcioli, 2009). From that moment on, Europe has shown a great appreciation for this particular plant by giving itself to massive cultivation for several centuries and various purposes in the textile and industrial sectors. From its first appearances, until the era of industrialization, the hemp was used to make paper. Gutenberg’s Bible was printed in 1453 on hemp paper explicitly imported for that purpose from Italy (Fratticcioli, 2009). However, also Europeans were aware of the recreational use associated with the consumption of this substance. For centuries, the use of marijuana for recreational purposes became a real trend, especially among intellectuals. Poets and writers of the calibre of Victor Hugo, Alexandre Dumas, Charles Baudelaire and others used to frequent clubs born precisely to welcome a user of this type; in Paris, for example, the Club des Haschischins or Club of the Hashish eaters was born (Fratticcioli, 2009). Why is this plant so unique and potentially significant for collective well-being? Let us start by analysing what makes this plant distinctive, delving into some considerations about its composition and then understanding its different uses and how it can be approached.

1.2 Cannabis properties and current uses

The pharmacological properties of cannabis are due to its main compound, delta9tetrahydrocannabinol (T.H.C.) and other components such as cannabinol or cannabidiol. Flower peas, leaves and stems of the mature female plant are commonly used to obtain marijuana, which contains a percentage of T.H.C. around 1-6%, while the resin extracted from leaves derives hashish, which includes a high rate of T.H.C., around of 6- 15%. According to modern official taxonomy, cannabis should belong to the family of Cannabaceae, together with hops, after first being inserted into the Moraceae and subsequently among the Urticaceas. Regarding the species, most botanists today follow the

classification given by D.E. Janichewskyin 1924 and expanded to the west by Richard Schultes in the ‘70s. By studying wild plants growing in Central Asia, the Soviet botanist classified three different species: the first one is called Sativa, the most widespread and which reaches three meters high, very resinous and with a pyramid form; the second one is Indica which is smaller and with many leaves, and the third one is Ruderalis, which reaches at least half-meter of height and without branches (Costa, 2007). As far as its cultivation is concerned, it is necessary to distinguish the cultivation for industrial use from that for therapeutic use. There are, in fact, two main types of production: the outdoor one, used in the industrial sector, and the indoor one, which is oriented to a therapeutic benefit (Cervantes, 2007). Either way, cannabis products are seeing significant success in the cannabis market industry. It remains difficult to have a complete and precise picture about the world extent of cannabis cultivation and - therefore - the world quantity of products sold. For this reason, we cannot clearly define who the current world leaders in illegal cannabis production are. However, we can observe which countries are legal producers of medical or recreational marijuana. Recreational cannabis. The first country in which the consumption and sale of recreational cannabis was regulated was Uruguay in 2013; followed, in 2018, by Canada. A 2018 South African Constitutional Court law provides for a legalization of the private production and use of cannabis by 2020. Its use is also allowed in North Korea (within certain limits), but we do not have much data about the country (Chouvy, 2016). Until 2018, marijuana was illegal in the U.S. - federally - but it was legal in 10 states: Alaska, California, Colorado, Maine, Massachusetts, Michigan, Nevada, Oregon, Vermont, and Washington (Dufton, 2017) Medical cannabis. There are 36 countries that have legalized - partially or completely - medical cannabis (with or without a prescription). These include: Argentina, Australia, Canada, Chile, Colombia, Croatia, Cyprus, Czech Republic, Denmark, Finland, Georgia, Germany, Greece, Israel, Italy, Jamaica, Lesotho, Luxembourg, Macedonia, Malta, Mexico, Norway, Peru, San Marino, The Philippines, Poland, Portugal, South Africa, South Korea, Sri Lanka, Switzerland, United Kingdom, Turkey, Uruguay, Vanuatu, Zimbabwe. Furthermore, since 2018, France and Thailand are also moving in the same direction. The U.S. adopt medical cannabis in 33 countries (starting with California in 1996) as well as Puerto Rico, the Northern Mariana Islands, the U.S. Virgin Islands, and the District of Columbia. Starting from 2019, the European Union and the World Health Organization also

suggest allocating resources and promoting research in the field of medical cannabis (Angell, 2019). Hemp. It is the non-psychoactive cannabis and it can be used to make a wide range of products. It is legal and cultivated in 25 countries: Australia, Austria, Canada, Chile, China, Denmark, Egypt, Finland, France, Germany, Great Britain, Hungary, India, Nepal, Poland, Portugal, Romania, Russia, Slovenia, South Korea, Spain, Switzerland, Thailand, Ukraine. In the United States it remained illegal from 1950 to 2018. Since 2014 the cultivation of hemp has been allowed only for research and non-commercial purposes; since 2018 the ban has been repealed and the C.B.D. and other cannabinoids for industrial purposes (Chouvy, 2019). Interestingly, Canada is becoming one of the largest cannabis producers in the world thanks to the legalization of recreational cannabis in 2018 (following the legalization of medical cannabis in 2001). This is because they enjoy limited competition in the global analysis of medical cannabis, since the U.S. does not come from a federal legal structure. In addition, Canada has the leading mover advantage in emerging cannabis markets (such as Australia, Italy, Brazil ...) (Nawrat, 2018). Production of up to 3,000 tons of (processed) cannabis / year is estimated by 2020, if the U.S.A. they do not lift the ban at the federal level (Williams, 2018). In the figure below (figure 1.2) a representation of the global cannabis legalization.

Figure 1: Global Cannabis Legalisation

Cannabis is a sustainable plant both from an environmental point of view - because it is a renewable resource, arable in abandoned lands - and from an economic and social point of view - as we will examine later - because it is profitable cultivation that offers an opportunity of development for the territory (Parrella, 1994).

1.3 Marijuana as a psychoactive substance or medical principle?

By the mid-19th century, cannabis had entered the daily uses of nearly four generations of Americans — mostly for its therapeutic applications, handed down by the pioneers of the New World. The research appears in the Lancet, Science Magazine and other scientific journals, doctors prescribed it for numerous diseases, and local pharmacists spread different one's preparations. In 1894 the English Parliament published the results of the work of a special commission charged with studying the spread of hemp in India: the seven volumes of the report confirmed the harmlessness and therapeutic efficacy of the plant throughout thousands of years (Iversen, 2000). However, it is still difficult to assess the health risks associated with the use of cannabis, since they occur in the long term and, in most cases, the use of cannabis is also associated with the consumption of other addictive substances. By contrast, countless studies on cannabis have revealed, in addition to its recreational use and - therefore - potentially harmful to health, a truly formidable therapeutic use. Cannabis is a phytocomplex; this means that it does not contain a single active ingredient but a wide range of substances with pharmacological activity. The main - and best known - medicinal principles are cannabinoids (104 known so far) and terpenes (over 200). What differentiates the various types of cannabis is the different concentration of T.H.C. There are three forms of cannabis: marijuana, hashish and hash oil. Cannabis contains the highest concentration of T.H.C. in its leaves and flowers (ElSohly, 2000). Hashish is the resin (extracted from cannabis and dried) in its pure state: the concentration of T.H.C. is higher than marijuana. Hash oil contains even more T.H.C. (Adams, 1996). Numerous scientific studies reveal that repeated doses, at frequent intervals, of cannabis help T.H.C., accumulate in fatty tissues for a considerable time (Ashton, 2001). If T.H.C. were a toxic substance, storage by our body would be a threat to health. However, T.H.C. is not a toxic substance, and since it acts on receptors that are not present in the body, it is unlikely to do any harm while it is lodged in the body. A high concentration of T.H.C. in the plant results in effects such as euphoria, relaxation (including muscle relaxation), drowsiness, asthenia, analgesia, stimulation of appetite, antiemesis. In medicine, it is particularly useful for the treatment of spasms, pain and situations related to eating disorders as it increases the sense of appetite. C.B.D., on the other hand, does not include psychotropic

effects. Among its properties, we find anxiolytic and anti-psychotic, neuroprotective and anti-inflammatory, analgesic, antiepileptic, antiemetic and antitumor properties. (Whiting, Penny, 2015) Recently, on December 2 (2020), the United Nations Drugs Commission (N.D.C.) officially removed cannabis from the table of illegal substances: the medical qualities of this plant are officially recognized. Additionally, the W.H.O. [World Health Organization] had already asked the U.N. [United Nations] for a change of pace on the substance in 2019 to promote its therapeutic use. From December 2020 cannabis will no longer be in the Table number 4 (United Nation, 1961) of the cataloguing system established in 1961 (Single Convention on Narcotic Drugs), the one that lists plants and psychoactive derivates defined as dangerous. The use of cannabis in the medical field has already been tested in over 50% of the US States and the medical segment held the leading revenue of 71% in 2019. In general, the global legal marijuana market (both medical and recreational) size is expected to reach USD 73,6 billion by 2027 (Grand View Research, 2020).

1.4 How harmful is cannabis?

First of all, we must say that not all drugs are addictive, or in any case, various levels of addiction can be more or less incisive (see the previous section the distinction between “hard” and “light” drugs). To give an example, "across all categories of drugs at most a third of those who have ever used a drug say they have used that drug in the past year"(U.S., 1994). Levels of marijuana use - which is not considered an addictive substance - are similar to those of crack consumption, which is considered highly addictive. A considerable percentage of heroin users consume only occasionally, without becoming heavy users (Zinberg, 1979), and measurable withdrawal symptoms from opioids rarely occur until after several weeks of chronic administration (Jaffee, 1991). Many studies tend to overestimate drug-related health (or drug addiction) problems in most cases. We are not assuming that drugs do not pose health risks; however, it should be taken into account that all drugs carry a certain level of risk (in medicines there are reported a series of collateral effects related to the intake of a specific type of drug). The Merck Manual (Berkow, 1992) a standard reference book on diagnosis and treatment of diseases, states that "people who have developed tolerance [to heroin] may show few signs of drug use and function normally in their usual activities. Many but not all complications of heroin addiction are related to unsanitary administration of the drug." It also

writes that "there is still little evidence of biologic damage [from marijuana] even among relatively heavy users." The book shows that drug-related deaths do not rely on by the level of consumption but mostly by overdoses or adulterated doses. The table below (Table 1) offers a ranking of the 20 most dangerous drugs in the world. It was firstly published by David Nutt (2018) in journal The Lancet. David Nutt performed a research at University of Bristol with the aim to draw up a classification of drugs in order of danger. The experiment was conducted by applying multicriteria decision analysis (MCDA) modeling to a range of harmful drugs in the U.K. 20 drugs were assessed according to 16 criteria: 9 concern direct harm to the individual-consumer and 7 for harm to others. The drugs in question were rated on 100 points and the criteria were weighted in order to express their relative importance (Nutt, 2018). The numbers shown in the table are the result of the weights of the relative damage units calculated on equal scales. A final normalization has

preserved the ratios of all weights, but made sure that the weights on the criteria added to 1•0 (ordered from the most harmful to the least one).

Table 1: The classification of drugs according to their dangerousness

Physical Damage Addiction Social damage Average Acute Chronic Intravenus Average Pleasure Psychological Physical Average Poisoning Social Health intake intake intake addiction addiction Damage costs Heroine 2.78 2.8 2.5 3.0 3.00 3.0 3.0 3.0 2.54 1.6 3.0 3.0 Cocaine 2.33 2.0 2.0 3.0 2.39 3.0 2.8 1.3 2.17 1.8 2.5 2.3 Barbiturates 2.23 2.3 1.9 2.5 2.01 2.0 2.2 1.8 2.00 2.4 1.9 1.7 Meth 1.86 2.5 1.7 1.4 2.08 1.8 2.3 2.3 1.87 1.6 1.9 2.0 Alcohol 1.40 1.9 2.4 NA 1.93 2.3 1.9 1.6 2.21 2.2 2.4 2.1 Ketamine 2.00 2.1 1.7 2.1 1.54 1.9 1.7 1.0 1.69 2.0 1.5 1.5 Benzodiazepines 1.63 1.5 1.7 1.8 1.83 1.7 2.1 1.8 1.65 2.0 1.5 1.5 Anphetamine 1.81 1.3 1.8 2.4 1.67 2.0 1.9 1.1 1.50 1.4 1.5 1.6 Tobacco 1.24 0.9 2.9 0 2.21 2.3 2.6 1.8 1.42 0.8 1.1 2.4 Buprenorphine 1.60 1.2 1.3 2.3 1.64 2.0 1.5 1.5 1.49 1.6 1.5 1.4 Cannabis 0.99 0.9 2.1 0 1.51 1.9 1.7 0.8 1.50 1.7 1.3 1.5 Solvents 1.28 2.1 1.7 0 1.01 1.7 1.2 0.1 1.52 1.9 1.5 1.2 4-MTA 1.44 2.2 2.1 0 1.30 1.0 1.7 0.8 1.06 1.2 1.0 1.0 LSD 1.13 1.7 1.4 0.3 1.23 2.2 1.1 0.3 1.32 1.6 1.3 1.1 Methylphenidate 1.32 1.2 1.3 1.6 1.25 1.4 1.3 1.0 0.97 1.1 0.8 1.1 Steroid 1.45 0.8 2.0 1.7 0.88 1.1 0.8 0.8 1.13 1.3 0.8 1.3 Y-idrossibutirrato 0.86 1.4 1.2 0 1.19 1.4 1.1 1.1 1.30 1.4 1.3 1.2 Ecstasy (MDMA) 1.05 1.6 1.6 0 1.13 1.5 1.2 0.7 1.09 1.2 1.0 1.1 Qat (Catha edulis) 0.93 1.6 0.9 0.3 0.87 1.6 0.7 0.3 0.97 0.8 0.7 1.4 Aryl 0.50 0.3 1.2 0 1.04 1.6 1.2 0.3 0.85 0.7 1.1 0.8

Source: Nutt (2018)

The table shown is the source of a study by David Nutt of the University of Bristol. In his research, he takes physical harm, addiction, and social harm into consideration. The

results confirmed the high harmfulness of some drugs, such as heroine. However, it also reveals aspects related to drugs considered soft that - however - turn out to be much more harmful than cannabis, such as alcohol and tobacco. Among other things, a further study conducted by The Lancet journal confirmed the high alcohol level of alcohol, even counting it as the most harmful of drugs. The study reveals that alcohol is even more damaging than heroin and crack if you take into account, in addition to the harm to the individual consumer, the damage done to the rest of society (most of the road fires that cause the death of other people are for drunk driving). Still, scholars from the Independent Scientific Committee on Drugs believe that if substances were broken down by health hazard, alcohol should be on par with heroine and crack. It is interesting to note that cannabis, despite its very slight danger has been empirically demonstrated, remains subject to many more restrictions than alcohol. The W.H.O. states, in 2018, that worldwide, in 2016, more than 3 million people died from alcohol (5.3% of all deaths). Alcohol is the trigger for more than 200 diseases, including cancers.

CHAPTER 2. Economic aspects of marijuana as an (il)legal drug

2.1 Marijuana as an (il)legal drug?

As discuss in the previous chapter, drug use has been the subject of many bitter and harsh debates due to the link to personal and social ills. According to various experts (see Evans and Berent, 1992), subjects who regularly use drugs are more exposed to health risks and moral degradation. At the same time, however, other observers (see Friedman, Milton, 1991) declare that the other side of this coin is represented by a development of the illegal markets network, which brings with it, other types of risks that are often overlooked (such as uncertainty about the product quality, misinformation about the same harmful effects on health). Consequently, it promotes crime (organised and otherwise), it creates mistrust in the political and control institutions, it produces poverty, it increases social exclusion. It also promotes the spread of diseases such as AIDS or hepatitis (Evans and Berent, 1992). This minority strongly believes that prohibition itself causes many of the problems associated with illegal drugs. The easiest and - at the same time - the most used solution by the political authorities would seem to be to prohibit the production, the sale and the use of these illegal drugs. A minority of researchers argues, however, that the problems associated with drug use lie in the product prohibition itself; they look at the problem from a new perspective. In what follows we deal with this issue, emphasizing - in particular - the case of the U.S., a country in which this debate has always been very heated. Despite the strong push towards prohibition, most of prohibitionist policies have failed to stop drug consumption: around a third of the population aged 12 and older claims to have used marijuana at least once, and more than 10% claims to have tried cocaine (U.S., 1994). Additionally, it has been found that a prohibitionist policy brings with it, substantial costs that weight on the economy. For instance, federal, state and local governments (in the U.S.) expend more than $20 billion per year on drug enforcement (U.S., 1994) and in 1992 law enforcement officials made more than one million arrests for drug law violations (U.S., 1994). More than 20 per cent of the 700,000 state prisoners in 1991 and almost 60 per cent

of the 77,000 federal prisoners in 1993 were incarcerated for drug law violations (U.S., 1994). Thus, the various subsequent policies have always suffered from two main conflicting forces: prohibition and legalization.

2.2 Economic pros and cons of drug legalization

First of all, it is necessary to specify what we mean by some terms relating to the consumption of cannabis (or other drugs). Legalization implies the enactment of some laws that regulate the cultivation, production, trade, sale, and consumption. A legalized drug allows the individual to consume it in a legitimate context, where the state distributes the substances either through a monopoly (such as tobacco) or through licensed resale dealers to whom restrictions apply (e.g. prohibition of selling cigarettes to minors). By decriminalization, we mean a legislative system aimed at removing criminal sanctions for those who use certain illegal drugs. The consumption is not legal; however, it allows consumers to hold a substance within specific quantities in order not to resort to criminal sanctions (the so-called possession of drugs for personal use). It does not provide for sanctions or only administrative sanctions. Finally, liberalization means a policy aimed at eliminating any trace of legal regulation that prohibits or regulates or limits the cultivation, production, sale or consumption of some or more drugs. Obviously, in general, no good can be considered liberalized in absolute terms, since each one must, albeit to a minimum extent, submit to specific quality standards and limits in its marketing (Faupel, Horowitz, and Weaver, 2004). In what follows, we analyse the costs and the benefits of drug prohibition to better understand the economic pros and cons regarding the legalisation of drugs. To do that, it is appropriate to compare a prohibited market with a free market in drugs [by a free market we mean a regime that surrounding most legal goods]. Perhaps the first direct effect of a prohibitionist policy is that of an increase in the drug supply curve. How does this happen? With the banning of drugs, a sort of "tax" is imposed on suppliers, thus increasing supply costs - Miron (1991) calls it the “sin tax”. This tax includes fines that suppliers face in case of arrest, potential prison sentences, and other costs associated with prison evasion. Prohibition tends to lower the demand curve due to the sanctions related to it, such as legal or criminal sentences related to the possession and consumption of drugs, a certain level

of risk connected to the lack of knowledge of the quality of the product, dangers connected to dealing with illegal realities, and a sense of "respect for the law" thanks to which individuals tend to remain within the limits of legality (Miron, 1991). Nevertheless, the downward shift in the demand curve is assumed to occur to a lesser extent than the upward shift in the supply curve. As a rule, both legal prescriptions and realised punishments are less extreme for consumers than suppliers (Bruno, 1984). During U.S. alcohol prohibition, for example, the purchase and use of alcohol were never explicitly prohibited (Clark, 1976) even if the possession was treated as an intent to distribute. Also, the effect of "respect for the law" is likely to be not very powerful on-demand for drugs. It is interesting to note that - in general - a subject tends to respect the law selectively, based on the actual costs and benefits of the action in question, based on the opportunity cost. For example, weakly-enforced laws are supposed to be broken more easily by an individual, such as parking and speeding laws or specific tax laws. Furthermore, the "respect for the law"-behavior determine a reduction in demand, and that demand tends to vanish to the extent that prohibition promotes drug use (Miron, 1991). Since the prohibition formula generates a significant increase in the supply curve but not an equally significant decrease in the demand curve, the demand is likely to be more elastic than supply and, therefore, prices are higher under prohibition. There are numerous empirical data to prove this, relating not only to drugs but also - for example – to alcohol or prostitution: Warburton (1932) estimates that, during alcohol prohibition, prices were approximately three times higher than beforehand, and Morgan (1991) estimates that cocaine currently sells for at least 20 times its free-market price. In addition to these economic direct effects, there are others related to them, such as violence, organised crime, poisoning or overdose. Prohibition tends to lower marginal costs and to increase the marginal benefits associated with violence, in several respects. In fact, in an illegal market, there is no possibility – for example - to legally resolve disputes, so the alternative is represented by the use of violence. Furthermore, marginal costs are reduced in a free market rather than in a private one: avoiding arrest for drug-related activities (possession, dealing) is complementary to avoiding arrest for violence. Fewer charges often lead to a less-than-proportional increase in the sentence. Additionally, prohibition is also linked to facilitate the establishment of cartels. Once again, the marginal costs of a prohibited market are lower than those of a "free" market: the marginal costs of circumventing antitrust laws or the imposition of severe penalties decreased. Furthermore, even if there were small competitors, they would be "wiped out"

through violence by a more powerful cartel that monopolises the market. In a legal industry, when a large competitor engages in a price battle with a "weaker" competitor, the higher cost falls on the larger operator. In an illegal context, on the other hand, an equal loss risks having a more significant impact on a smaller competitor. However, even if disputes arise, the path of violence would be the fastest and easiest one and would immediately restore the dominance of a more massive cartel. Therefore, assuming that a prohibitionist strategy leads to cartelisation, it will lead to a reduction in supply and an increase in prices. It must be taken into account that cartelisation also produces real profits and not just rents that compensate for the costs of law enforcement; this brings additional marginal benefits associated with the use of violence. The possibility of generating real profits also spills over to an increase in the marginal advantages associated with corruption (both politicians and law enforcement) and incentives the same "illegal" suppliers to maintain legal bans and be unique on the market. Finally, another crucial aspect to take into consideration concerns the uncertainty about product quality. Obviously, in an unregulated illegal market it is impossible to have control over the quality of the product sold to consumers, thus causing – for example - a possible increase in costs due to hospitalisations for poisoning or overdose. In fact, during prohibition, deaths due to alcoholism rose relative to other proxies for alcohol consumption (Miron and Zwiebel, 1991). The explanation could be that the alcohol was diluted with some other substance, most likely harmful to health; indeed, federal regulation seek industrial alcohol manufacturers to sophisticate their product with poisonous wood alcohol, awaring that much of this product was allocated to illegal usage (Merz, 1932). Once, an adulterant used by bootleggers to disguise alcohol as medicine turned out to cause permanent paralysis, victimising thousands (Morgan, 1982). However, many studies show a correlation between drug use and violence in terms of crime; a high fraction for crimes such as test positive for drug use imprisonments, and many studies provide that the criminal activity rate is higher during periods of elevated drug use (Duke and Gross, 1993). A natural interpretation suggests that drug use loosens inhibitions and leads to aggression or that, driven by addiction, they are led to commit crimes in order to be able to secure supplies. Considering this last aspect, however, if addicts have inelastic demands - committing crimes to finance drug use - and, as a result, they have strict liquidity constraints, and they cannot legally supplement their income, a price increase is likely to go to increase the income generated by crime. Therefore, while the prohibition should reduce the crime by raising prices and decreasing consumption, on the other hand (if crimes are committed to financing drug use), the ban should increase crime as prices rise. By generating

this effect, the ban could lead law enforcement to "waste" stolen resources on other crimes. Silverman and Spruill (1977) state that increases in heroin prices is associated with increases in the rates of property crime, while Benson and Rasmussen (1991) and Benson, Kim, Rasmussen and Zuehlke (1992) figure that increases in efforts to enforce prohibition are associated with increased rates of income-generating crime. All these considerations take into account - however - only purely economic aspects, without evaluating the collective well-being of society.

2.3 Drug consumption and consumers’ behaviour

At this point, let us try to understand what kind of relationship links the prohibitionist regime to consumption levels, and if the prohibition is an effective and efficient method for reducing drugs consumption. According to classical economic theory, agents buy goods based on rational choices. However, the fact that consumers voluntarily decide to consume drugs despite it may lead to future harm does not challenge this theory. The dominant model of evaluating the effects of addiction linked with the consumers’ behaviour in using drugs is the Becker and Murphy’s one (1988). They hypothesize a market composed of individuals who intertemporally maximize a stable utility function: consumers begin to use drugs when the effect on lifelong expected utility is positive. In this way, any reduction in consumption generated by the ban entails an additional cost for the ban. Their theory based on the idea that market agents are rational, reveal stability in preferences, and are coherent on the intertemporal plane; it is assumed that individuals are rational and aware of the consequences deriving from their choices, which could determine a potential addiction. These hypotheses imply an individual pushed to maximize utility, that is, to be aware that the current consumption of the addictive good also depends on the expected future level of consumption. The ration dependency prototype assumes that individuals are aware of the "full" price of addictive consumer goods, including the cost of the potential negative consequences that the current monetary price. Therefore, we deduce that the consumer analyses the costs and benefits of the consumer good and bases the decision on solutions that imply benefits more generous than costs. Nonetheless, the model has been the subject of numerous criticisms. Intertemporal coherence shows that people are impatient (giving more weight to current than future utility)

and that the utility attributed to the future is the same (rather than increasing; future consumption should increase to offset the negative impact on the marginal utility of stock accumulation). As O'Donoghue and Rabin (1999) argue, there is often a tendency to ignore the inherent trend in individuals to draw momentary benefits and to delay costs as much as possible. For example, some consumers find it almost impossible to quit smoking even if they want to; even, they are reluctant to apply for devices that help quit smoking (Gruber and Koszegi, 2001). In particular, individuals tend to be inconsistent on the timeline; this inconsistency is called "present biased" (O'Donoghue and Rabin, 1999). This phenomenon leads consumers to attribute greater weight to the nearest future event in time. Consumers tend not to estimate future addiction costs correctly; even so, the dominant evaluating model - starting from the 1980s - the effects of addiction were that of Becker and Murphy (1998). Today, that model appears obsolete because it does not take into account any kind of benefit that the use of these substances may bring. For example, drinking alcohol is an act of socialisation and, in formulating policies relating to this issue, economists take into account the utility deriving from consumption. Regarding the formulation of drug use policies, there is never any discussion about the utility deriving from consumption, not even by economists. Since consumers - despite bans, severe penalties and inflated prices under the prohibition - continued to use drugs, it suggests that the utility of consumption is significant and worth considering. Nevertheless, why do policies aim at programs and interventions that generate a reduction in drug use?

2.4 Drug consumption externalities

As discussed in the previous section, most of observers and political authorities link the drug consumption to a greater exposure to health risks and moral degradation. Indeed, drug use mostly generates negative externalities; however, this does not justify ignoring the potential benefits for consumers. We cannot exclude that prohibition may accentuate certain externalities linked to drug use. If on the one hand a prohibitionist policy limits and effectively reduces the consumption of a good (drugs in this case), it must take into account that such a policy could induce consumers to replace that good with another (which equally produces externalities) such as – for example - alcohol or tobacco. Marijuana use raised and other drug use decreased in the 12 States (U.S.) that decriminalised marijuana during the 1970s (Model, 1993), and high school senior marijuana consumption grew while alcohol consumption

dropped after the minimum drinking ages increases along the 1980s (DiNardo and Lemieux, 1992). Similarly, data on actual marijuana prices along with indicators for decriminalisation indicate that drinking frequency and heavy drinking episodes are positively connected to the price of marijuana (Chaloupka and Laixuthai, 1994). Anecdotal evidence assumes that opiate consumption increased in the early years of alcohol Prohibition (Feldman, 1927), and patients in drug-treatment programs tend to increase their marijuana and alcohol consumption as their opiate consumption declines (Apsler and Harding, 1991). Furthermore, empirical evidence shows that the externalities generated by substitutes are of the same magnitude as those generated by illegal substances. For example, the deleterious effects of alcohol on driving ability are at least as significant as those of marijuana (U.S., 1993); a reduction in the marijuana price leads to a lower number of traffic fatalities, presumably because the lower price induces a substitution from alcohol to marijuana (Chaloupka and Laixuthai, 1994). However, many proponents of prohibition make the consumer health-aspect their workhorse. But how bad is marijuana actually?

CHAPTER 3. Current taxation models alternatives of legal marijuana

3.1 Cannabis legalization: the current world overview

To date, few states have opted for a legalization of cannabis. As we can see in the Table 3.1 the data updated to 2018 show a small number of countries that allow the use of cannabis for recreational purposes. The idea was still uncertain when, in 2013, Uruguay decided to focus on the potential opportunities deriving from alternative policies to that of prohibition. The impossibility of stopping illegal trafficking and dissuading consumers led Uruguay to accept the presence of this phenomenon and to change its perspective to better understand consumption and improve prevention (ADUC Salute, 2019).

Table 2: Legalization of medical and recreational cannabis by country

County Medical or Recreational Canada Both Uruguay Both Argentina Medical Australia Medical Barbados Medical Bermuda Medical Brazil Medical (for terminally ill patients) Chile Medical Colombia Medical Croatia Medicai Cyprus Medical (for cancer patients only) Czech Republic Medical Denmark Medical Ecuador Medical Finland Medical Georgia Medical Germany Medical Ghana Medical (with THC content < 0.3%) Greece Medical Ireland Medical (under pilot program) Israel Medical Italy Medical Jamaica Medical Lebanon Medical Lithuania Medical Luxembourg Medical Malawi Medical Malta Medical Mexico Medical (with THC content < 1%) Netherlands Medical

New Zealand Medical North Macedonia Medical Norway Medical Peru Medical Poland Medical Portugal Medical Saint Vincent and the Grenadines Medical San Marino Medical South Korea Sri Lanka Medical Switzerland Medical Thailand Medical United Kingdom Medical Vanuatu Medical Zambia Medical Zimbabwe Medical Source: Wikipedia (2020)

However, the beginning of 2021 gave a further "shock" to the world political scene in terms of legalization and more and more countries are moving to design and implement systems that regulate the consumption and sale of cannabis (it is recalled that the U.N. has officially removed cannabis from the table of substances harmful to health). The common idea is to accept not being able to "defeat" the problem, then accept that consumption is widespread and seek a way to regulate its spread. Not only political authorities and governments, but also public opinion is starting to take a different perspective on the issue of legalization. To this aim, it is interesting to analyse some statistics from the U.S., from which emerges a clear support to the legalization of cannabis:

- The 62% of Americans support the legalization of marijuana (Cowee, 2019); - The 66% of Americans support the legalization of recreational marijuana (Market Growth to Regulation, 2019); - The 51% of Republicans support the legalization of marijuana (McCarthy, 2017) - 55 million U.S. citizens are cannabis users (Merkovich, 2019); - The total demand for cannabis in the U.S. was 52,5 billion in 2017 (Williams, 2018)

However, although the debate is heated and full of interest from various economic and social aspects, many countries are reluctant to embrace a new perspective on the phenomenon. Most governments often opt for soft drugs decriminalization, a middle ground position. As we saw in the previous section, decriminalization is a policy of tolerance in which the consumption and cultivation of cannabis are legally prohibited; however,

consumption for personal use is permitted (within specific predetermined quantities). Besides, the states may impose other types of restrictions: for example, the ban on smoking in public places in Ukraine and Spain, a crime in case of recidivism in Italy. These regulations act as a disincentive for consumers. Thus, numerous U.S. and Europe countries have opted, since the early 2000s, for a decriminalizing policy.

Figure 2: Countries with decriminalization of cannabis

Source: Vaudano and Breteau, (2019)

The countries shown in the Figure 3 have chosen the policy of decriminalization (partial or total) of cannabis. In addition to the recreational aspect, medical access to cannabis is also complicated. There are many patients who require marijuana and - although some current governments have already tested its use in the medical field – the situation remains confused. For example, in Italy it is produced only by the Army, in Argentina it is accessible only by prescription, in Macedonia it is dispensed from pharmacies without a prescription. Decriminalization can be a first step to open the debate on the need for control over the drug market, but, in many states, it has turned out to be a halfway policy, which creates

a lot of confusion (for example in Italy, as we see in the next chapter). Thus, let us start by considering the model of the U.S.A., the only country that provides for a real legal regulation of the cannabis market, and of which there are numerous empirical data.

3.2 Approaches and experiences of cannabis taxation models

Talking about cannabis taxation - as well as other "sin" taxes such as alcohol and tobacco - raises many doubts: what type of taxation to use? How much to tax? How to use the revenue? In what follows, we give some examples from the current models on marijuana taxation, focusing on pros and cons of them. Excise weight-based duties often rely on the product quantity to be sold, and not so much on the price. For example, cigarettes are taxed for $ 1.01 per pack at the federal level and for $ 1.79 per pack at the state level (U.S. Department of Treasury, 2019). Fuel is also generally taxed in terms of gallon sold. Following the example, an ideal legalisation model would be to measure cannabis by its weight. One idea proposed by the Marijuana Policy Project has been to diversify prices based on the various components of the plant: for example, $ 50 for flowers, $ 15 for leaves, and $ 25 for young plants (M.P.P., 2019). This model has the advantage of relative stability in the amount of revenue raised, although a decrease in cannabis prices resulting from legalisation. Additionally, it collects tax at the beginning of the production process rather than at the end. Furthermore, this tax guarantees that it is also accurately collected the other taxes on edible products that only partially contain cannabis. For example, if we apply excise duty to the product of chocolates containing marijuana, it should be calculated based on the percentages of the quantities of the various products used in it (cocoa, sugar and other ingredients). In this context, a review by the state tax services would be relatively straightforward. Recently, in Maine, the legislature passed a law that bases the calculation of the cannabis tax not only on the weight but also on the price. In this regard, The Portland Press Herald put it this way: “officials say an excise tax would discourage diversion to the black market because it establishes a record of the plant when it is first produced, making it harder for that product to disappear along the way” (Overton, Penelope, 2018). A weight-based tax can also discourage tax avoidance. The application of such a tax is strongly recommended for all cannabis transferred from licensed companies. Weight-based taxes are simpler than price-based taxes because while it is difficult to determine the actual

value of cannabis transferred across the company, determining its weight is more effortless. The weakness of this system concerns with no taking into account the potency of cultivated cannabis. Since the primary source of interest for buyers is its active ingredient, tetrahydrocannabinol (T.H.C.), a weight-based tax could incentivise sellers to "boost" their product because it would have a slightly higher selling price, but suffer from same taxation system as lower potency cannabis (Hansen, Miller, Weber, 2014). However, this turned out to be a not very significant problem as earnings would go up a little despite the productivity boost. The potency of the substance also occurs in its tax base. For example, Alaska, California and Maine have imposed different taxes based on the power of the plant components (more or less powerful leaves and flowers). This model is very close to that adopted for an alcoholic beverage as the prices reflect the alcoholic volume; substances with higher alcohol content are subject to higher taxes (U.S. Department of Treasury, 2019). Another shortcoming of the model is related to the vulnerability to inflation. However, the solution could be setting up a tax law that automatically adjusts the rate each year to be ready for any inflationary shifts in the economy. Many states have decided to adopt this model, and it proves to be a useful and efficient solution for states that want to include recreational cannabis in their programs. To avoid long-term income declines, however, taxes must be inflation-indexed. Price-based excise duties, on the other hand, are the other great alternative in taxing cannabis. The price refers to both retail and wholesale prices. The first advantage of a price- based tax is related to paying higher amounts of taxes on cannabis, which is sold at a higher price and attracts a target of people with a slightly higher income. Besides, it may be easier for tax authorities to exercise their control and administration of a price-based tax rather than having to establish a dedicated system to measure, report and verify the weight of cannabis sold. On the other hand, the drop in the price of cannabis severely limits the resulting yield. In reality, there is still no awareness of how much the retail price of cannabis could decrease, and such taxes can be a barrier to lawmakers trying to determine its wholesale price. In Colorado, for example, cannabis companies were required to grow at least 70% of what they sold. This requirement created difficulties for the tax authorities in determining the wholesale price as most of the vertically integrated industry was "sold" within the same company. Therefore, the cannabis price results from a tax based on a single estimated average price of cannabis rather than based on a sales price indicated by the company (Oglesby, 2014). In this price-based tax model, care must be taken to prevent incidents of tax

avoidance, for example when a drug dealer sells at a heavily discounted price or even gives away cannabis on the condition that the consumer purchases another product subject to tax minor. The Washington Statute provides an example of prevention:

“Marijuana producers, processors, and retailers are prohibited from making sales of any marijuana or marijuana product if the sale of the marijuana or marijuana product is conditioned upon the buyer’s purchase of any service or non-marijuana product. This subsection applies whether the buyer purchases such service or non- marijuana product at the time of sale of the marijuana or marijuana product, or in a separate transaction” (ITEP, 2011).

The Governor of Vermont's Marijuana Advisory Commission also shared the words quoted above (Governor’s Marijuana Advisory Commission, 2018). States should consider applying their taxes to the gross price of cannabis, to avoid other types of discounts as well, such as those offered to employees or customers who purchase larger quantities. However, purely price-based taxation is risky; indeed, future cannabis prices are highly uncertain. Basing the tax on price is helpful to ensure that high potency cannabis or higher quality cannabis is subject to slightly higher taxes. In order to ensure and improve the fiscal sustainability of the revenue over the long term, a weight-based assessment must be accompanied. A third alternative is a potency-based tax. It would be even more accurate to base the tax, in addition to the weight, on the actual quantity of T.H.C. contained in the "portion". Technologies for reading the amount of T.H.C. contained in the plant are currently available, but the reliability and replicability of the tests remain insufficient. The laboratories are still elementary and do not follow the health and safety rules necessary to prepare accurate analyses. For these reasons, to date, there are still no industrial tests and standardisation systems. Assuming to apply a tax calculated on the contents of T.H.C., sellers would undoubtedly have an incentive to provide accurate content levels; they would be incentivised not to adulterate the substance by strengthening it in order not to fall into a higher taxation bracket. A test prototype could be based on a two-factor verification: on the one hand, the raw material and its value are analysed, on the other hand, a tax on the content of T.H.C. registered. However, it would be more accurate to take as an example the tax treatments on nicotine, which seem more similar than those on alcohol. While alcohol taxation based on

the actual alcohol content in the drink, for cigarettes, these are not taxed based on the quantity of nicotine recorded. Making further assumptions about a tax system based on the content of T.H.C. registered could prove useful and interesting; however, we do not yet have the right tools to carry out an accurate analysis (Caulkins et al, 2019). In summary, we investigate pros and cons of the 3 different tax strategy as displayed in the Table 3.2 below: Table 3: Pros and Cons of Cannabis Taxation Models Pros Cons Weight-based Relative stability in the amount Potency of cultivated cannabis of revenue raised; vulnerability to inflation Discourage tax avoidance Price-based Paying higher amounts of taxes Uncertainty about future on cannabis cannabis prices Potency-based An incentive to provide No industrial tests and accurate content levels standardisation systems avaible Source: ITEP (2019)

3.3 New consumer for to the legal cannabis market

When we decide to formulate a policy, we must give much importance to the implementation phase of the same in the company in which we are going to operate. Regarding this aspect, the biggest problem encountered in the formulation of policies aimed at regulating the cannabis market - and drugs in general - is represented by the competition of the illicit market. In the first phase of policy implementation, regular market cannabis prices would be higher than those on the black market. Consumers, at this point, will hardly be incentivised to abandon the illegal market for the legal one, given a higher price and given the sheer habit of shopping on the black market. Accordingly, it is highly advisable to consider imposing reduced tax rates on cannabis to be able to enter the market more efficiently and attract new customers. It remains unlikely that a low rate will equalise black market prices; however, this strategy avoids marking a price gap which, with a high rate, could be quite large (Amlung et al. 2019). The low tax rate strategy, however, is only expected to materialise in the short term. Next, an ideal long-term cannabis tax rate should follow a gradual introduction. This aspect is crucial because the problem of high prices is significant in the early stages of implementation; when the markets have positioned and stabilised, it is advisable to opt for a

gradual introduction. Colorado, for example, has shown that cannabis prices can drop significantly once knowledge and processing skills are acquired (Caulkins et al. 2015). It should be taking into account, however, that a low price could also favour adolescents with minimum income access to purchase. Furthermore, if pre-tax prices plummet, it will be challenging to move towards a policy that aims to lower tax rates to compete with the illicit market. Nonetheless, implementing a correct taxation system will allow consumers to instil the habit of buying authorised resellers price towards whom they establish a relationship of trust deriving, above all, from reasonable control over the quality of the product. States’ approach in attracting the consumer to the legal market should be based on a gradual and soft introduction, adapting the tax to changes in prices also to obtain long- term revenues. In other words, the legislator should not worry, in the short run, about formulating taxes for the long run. So far, no state started to adopt this type of policy in the field of legalisation of cannabis, but when the same approach was used in the 1930s with the end of alcohol prohibition at the federal level in the U.S.A., the method proved useful, and it can also be implemented in the field of cannabis taxation. Instead, other governments have adopted a policy that provides for a system of general sales taxes that apply to retail transactions. Local governments are also able to collect general sales taxes. However, cannabis was never able to be entirely sold within tax structures, the black market was often operational and therefore benefited from a sales tax exemption. General taxes should be collected on final cannabis sales, except for medical cannabis. As for cannabis for therapeutic use, a separate discussion must be made. The main obstacle to its regulation is that cannabis can be used for both recreational and medicinal purposes. The former can cause general costs similar to those of alcohol, such as driving disorders; while the second has as its primary purpose that of being a highly relevant element, as demonstrated by various medical studies, on the well-being of the community. Excise duties usually are used to limit consumption or finance social campaigns in order to promote awareness of the possible damage associated with its use. General sales taxes on medical cannabis exempted if the drugs are prescription-only. The problem is that it is currently registered as a non-prescription drug, as - as we saw earlier due to the lack of certified laboratories - it lacks approval from the Food and Drugs Administration [F.D.A.]. Doctors can only advise the patient to take cannabis, but they cannot legally prescribe it. This aspect implies that general sales taxes should apply to cannabis. Some states have already decided to work in that direction, i.e. to include the cannabis tax in

their general sales tax bases. Experiences so far show that recreational cannabis has entered the market after a consolidation of a previous medical market. The potential problem is that the consumers could exert pressure on their doctors in order to prescribe him the substance, to use it legally. It is a problem that for the moment arises only on a theoretical level and has not yet been empirically verified, but a reliable regulatory system on medical cannabis could lead to reflections on this result as well (Benda, Millis, 2018). Looking at what happened in Colorado, we can see that after the legalisation of medical cannabis in the 2000s, sales increased every year until 2016. When recreational cannabis was a couple of years legalised, there has been a decline in the number of medical cannabis sales while those for recreational cannabis have continued to increase.

3.4 Taxation of cannabis: the case of U.S. 3.4.1 Strategies of cannabis taxation

Many U.S. states that have opted a cannabis taxation system have opted for one of the options discussed above, based on price, weight, or both. Let us describe these approaches in the following text.

Figure 2: Countries with recreational cannabis taxation – models from current taxation systems in the US

Source: ITEP (2019)

Among the states that base taxation on the weight of the product are Alaska and California; Maine also follows the same policy, but sales have yet to start. Citizens had supported the decision to base the tax solely on price, but later the legislator pushed to change this design and also include a base on the price of cannabis in the system. That decision was a desire, by the legislator himself, to improve the long-term sustainability and applicability of the tax.

Figure 3: Taxation models regarding recreational cannabis in the US. (add year)

Source: ITEP (2019) Cannabis flowers, or bud, tax rates are $50 per ounce in Alaska, $20.94 per ounce in Maine, and $9.25 per ounce in California (Maine’s tax rates are officially set on a per-pound basis, but this section converts those rates to per-ounce amounts to allow for an easier comparison across states). Alaska levies a higher rate because it probably lacks a state-based sales price tax, which is not the case in Maine and California. These states also provide for a tax diversification based on the potency of the plant components. Per-ounce tax rates on trim are $15 in Alaska, $5.88 in Maine, and $2.75 in California (Oglesby,2013). Finally, these states provide for a collection of tax on the immature product; for example, Maine collects 30 cents per seed. California is the only state that indexes its inflation-weighted tax rates. As inflation erodes the real value of taxes, weight-based taxes will inevitably decrease over time; this happens in Alaska and Maine. Colorado and Nevada also have weight-based tax systems; these states impose a 15% tax on producers based on the average market price. As proof, the vertically integrated manufacturer in Colorado bases the calculation of the tax by multiplying the weight of the product by an average market price of $ 781 per pound and multiplying that figure by 15% (Oglesby, 2017). Nevada adopted a similar method. Every state provides for the sale of cannabis for recreational purposes by taxing that sale with an excise duty based

on the sales price, except for Alaska. States that provide for product-based tax collection include California, Colorado, Massachusetts, Nevada, Oregon, and Washington; Also, as seen above, Colorado and Nevada charge a 15% wholesale tax. California, Colorado, Maine, Massachusetts, Michigan, Nevada, Oregon, and Washington have specific taxes on a retail price of between 10 and 37%. Some states provide the ability to apply an additional cannabis- specific tax, as is the case - for example - in Alaska, Massachusetts, and Oregon (in the latter two states the tax rates are capped at 3%). In California, it is possible to apply a local tax for cannabis companies, ranging from 20% of the company's gross income and up to $ 25 per square foot of growing area (Benda, Millis, 2018). The first state to start retail was Colorado; began in 2014 with a 15% excise duty on producers and a 10% excise duty on consumers, in addition to the planned state sales tax of 2.9% and any local sales tax. Since that moment the producers' excise duty has remained fixed at 15%, while that on consumers has risen to 15%, subtracting, however, the state sales tax. Oregon has imposed a 17% excise tax on consumers and a local cannabis tax capped at 3%. Washington has changed its model from a 25% excise duty applied to producer, processor and consumer, to a single 37% excise duty. The data, as mentioned earlier, demonstrate a willingness to improve their taxation models as progress is made in knowledge and administration of this emerging sector (Ross, 2014). What about general taxation? There are currently nine states that have adopted a legal policy for the sale of recreational cannabis, six of which have opted to include the product in their statewide general sales tax bases. Colorado provides a sales tax exemption only for recreational, though, and non- medicinal cannabis. Alaska and Oregon do not collect general taxes. Alaska, California, Colorado, Nevada and Washington, however, allow local governments to impose general sales taxes; these states are allowed to include cannabis sales as part of their overall sales. For example, there are no general local taxes in Massachusetts and Oregon, but governments can impose cannabis-specific taxes with a limit of 3%. In Alaska, there is the option to include cannabis in local tax bases, with varying rates of up to 7.5%, impose an excise duty on cannabis, or do both (Benda, Millis, 2018) As stated earlier, a separate discussion must be made regarding medical cannabis. States have adopted different strategies. Some of them have decided to tax medical cannabis like non-prescription drugs, i.e. applying general sales taxes but not excise duties. Other states, on the other hand, apply excise duties to replace or supplement general sales taxes.

According to the Fox Rothschild, which provides us with a summary of the various state tax regimes on medical cannabis, at least sixteen states apply general taxes on the sale of medical cannabis, while fourteen states collect excise duties. Seven states collect both. Seven states only levy excise duties. Nine states do not apply any form of taxation to the sale of medical cannabis. In states that sell both medical and recreational forms of cannabis, there is often an exemption from consumption tax. Imagine in Colorado, Maine, Massachusetts, and Oregon; however, in Colorado and Maine, there are general taxes on the sales of medical cannabis. There are no general taxes in California and Washington, but medical cannabis may be subject to excise duty.

Figure 4: Taxation models regarding medical cannabis in the US. (add year)

Source: ITEP (2019)

3.4.2 Tax revenues

Colorado and Washington, states that allow a tax on retail recreational cannabis sales, have only raised $ 54.6 million in excise duty. 2015 saw an increase of four times the previous figure, rising to 218.5 million dollars, given the expansion of the retail markets. The following years have seen further growth of the first states adopted the system, while other new states have begun to appear in this new reality. For the first time, in 2018, thanks to state and local taxes and excise duties on cannabis - in the six states we have data - collected, the

estimated growth in tax revenues set at over $ 1 billion per year (computation is still completed due to the lack of some necessary data not available yet). Figure 5: Tax revenues for states with legal recreational sales [in $ millions]

Source: ITEP (2018) As we can see from the figure above, states - allowing the recreational cannabis for selling - apply state or local sales taxes to the purchase price of the drug. It is estimated, which is not shown in the figure that those taxes will increase more than $ 300 million in additional revenue. Excise duties represent a form of tax that arises with the will to limit and discourage, in a certain sense, the excessive use of a specific good, or to increase revenues to compensate for the costs associated with it because it is supposed to produce negative results or social issues. Products such as alcohol and tobacco, for example, are subject to excise duties. Let us try to make a comparison of the tax revenues deriving from state and local excise duties on alcohol and tobacco. Comparing the data obtained from the analysis of the revenues generated by the excise duties of alcohol and tobacco with those deriving from the excise duties on cannabis, it emerged that the amounts collected are almost the same ($ 1.04 billion and $ 1.16). Generally, the most substantial part of the tax revenue derives from the sale of liquor or spirits, and not, for example, from the sale of beer or wine. If one were to think by sector, and therefore only include taxes on beer and wine in the sale of alcohol, it would turn out that the proceeds from the excise duties on cannabis of these six states would be three times greater than the proceeds from the excise duties on beer and wine ($ 1,04 billion and $ 304 million). There is a strong link between these results and the cannabis legal market neo- growth, combined with relatively moderate taxation of beer and wine. However, the excise

taxes collected from the sale of tobacco are significantly higher than those of cannabis; those on tobacco amount to about 3.37 billion dollars in the six states.

Figure 6: Excise Tax Revenue from Cannabis Rivals Alcohol Revenue in States with Legal Retail Sales of Cannabis [in $ millions]

Source: ITEP (2018) As mentioned earlier, the six states "earn" more from excise duties on cannabis than from beer and wine. Even Colorado and Nevada collect more from excise taxes on cannabis than those resulting from the sale of all alcohol, including spirits and spirits. Looking at the data on Washington, it emerges that the revenues from cannabis excise taxes are almost on par with all taxes on the insanities of all forms of alcohol. We said earlier that excise duties on tobacco generate more revenue than those on cannabis and, in fact, only in Colorado are excise duties on cannabis currently estimated at par with those on tobacco ($ 243.5 million and $ 253.1 million). Some of these markets are very young. California and Nevada, for example, began implementing the new policy on the market a couple of years ago. Taking the time factor into account, therefore, we can expect profitable tax revenue growth in the years to come, when the market is more mature (Governor Gavin Newsom, 2019). Excise duties are not the only solution that states adopt in terms of cannabis taxation; they often combined with general sales taxes, such as taxes on clothing and other miscellaneous items.

Table 4: Excise Tax comparison across selected USA’s states States Date of Estimated Excise Tax Revenue in 2018 Cannabis Revenue to First (in millions $) Retail Cannabis Beer Alcohol Tobacco Beer Alcohol Tobacco Cannabis and (Beer, Wine, and Sale Wine Liquor) Wine I II III IV V VI III/IV III/V III/VI Colorado Jan. 2014 243.5 15.1 46.3 206.8 16.1 5.3 1.2 Washington July 2014 368.5 59.0 381.7 449.5 6.2 1.0 0.8 Oregon Oct. 2015 110.0 20.5 256.5 270.0 5.4 0.4 0.4 Alaska Oct. 2016 20.6 20.2 45.3 108.6 1.0 0.5 0.2 Nevada July 2017 87.6 21.7 49.3 210.6 4.0 1.8 0.4 California Jan. 2018 209.4 167.7 379.0 2123.1 1.2 0.6 0.1 Number of states where cannabis tax revenue is larger 6/6 2/6 1/6 SIX-STATE TOTAL 1039.6 304.2 1158.1 3368.6 3.4 0.9 0.3

Source: ITEP (2018) The overall sales tax revenue is higher for the sale of alcohol and tobacco than for the sale of cannabis. However, states usually do not report the amount of tax revenue generated by the alcohol and tobacco tax, so it is difficult to compare sales taxes between product types accurately. However, some information can be extrapolated from the analysis of excise duties applied because they should have the purpose of discouraging the consumption of a particular product. What considerations emerge from the contextualisation of this gain on revenue? As estimated, the amount for these six states of over $ 1 billion a year is undoubtedly significant in terms of revenue. State and local governments estimated to raise nearly $ 335 billion in fiscal 2016 as most of the revenue generated from cannabis collections flows to states rather than local governments, the most significant impact placed in the budget status level. The approaches analysed and reported show that, as far as recreational cannabis is concerned, revenues take time to show up; there is a need for time for companies to establish themselves on the market with adequate means and methods to be able to intensify their operations and, consequently, improve the performance of revenues.

Figure 5: Per capita Cannabis excise tax revenue by month since start of Tax Collection

Source: ITEP (2018) The figure shows the monthly pattern of tax revenue generated by cannabis excise duties in states that have adopted recreational cannabis for at least a year. These are per capita figures, calculated based on the size of the population for each state. An increase in revenues has been recorded since the first year; followed by profitable revenue growth also in the second year. In Oregon, for example – as shown in the figure 10 -, excise duties on cannabis produced 40% more tax revenues than in the previous 12 months. Similarly, Colorado is growing by 20% and Washington State by 9%. Although still in an early stage, Alaska experienced 173% growth over the previous year. Still, the figure 10 shows the trend of the growth rate resulting from the implementation of excise duties on cannabis and shows in particular, what could be expected in the first years. Alaska, Colorado, Oregon, and Washington have been taxing retail cannabis sales for two or more years; 3 of these four states doubled excise tax revenue between the first and second year of collection, with an average annual growth rate of 158%. Revenue growth was also significant during the second and third years; in Colorado, Oregon, and Washington, the average growth rate for that period was 55%. The only state to report near tax revenue data for five years was Colorado, which - between the fourth and fifth years - experienced an increase in excise duties of about 17%. Looking at these data, we can conclude that after legalisation, realising the full possible gain from taxing cannabis takes time. Moreover, even once a healthy market is

established, there is a risk in revenue stability concerning possible future price swings. The legal reasons for the legalisation of cannabis should not be limited to financial reasons alone, although the legislator is usually more interested in the aspect of tax revenues. As we have seen, the lack of available data and the lack of transparency still associated with this sector could lead to biased estimates. However, the data from the last five years, although limited in number, provide an accurate estimate.

Table 5: State-by-state consumption tax estimates from taxing legal recreational cannabis

Share of Adults Number of Potential Sales and/or Using Cannabis Adults using Excise Tax Revenue gain in Last Month Cannabis in from taxing Cannabis at last month Washington State Levels Alabama 6,48% 246.112 $121.333.418 Alaska 16,59% 91.846 $45.280.024 Arizona 8,59% 474.94 $234.145.496 Arkansas 8,44% 195.18 $96.144.090 California 11,78% 3.600.803 $1.775.195.979 Colorado 17,18% 761.131 $375.237.347 Connecticut 10,86% 308.149 $151.917.683 Delaware 10,18% 77.73 $38.320.840 District of Columbia 17,67% 101.596 $50.086.635 Florida 8,75% 1.493.646 $736.367.651 Georgia 6,89% 552.146 $272.207.773 Hawaii 8,31% 92.829 $45.764.746 Idaho 7,78% 101.703 $50.139.560 Illinois 9,01% 890.532 $439.032.099 Indiana 9,59% 491.367 $242.244.145 Iowa 6,80% 164.926 $81.308.372 Kansas 6,78% 149.536 $73.721.190 Kentucky 7,95% 275.036 $135.592.774 Louisiana 7,80% 277.997 $137.052.440 Maine 16,31% 177.453 $87.484.230 Maryland 11,04% 519.164 $255.947.718 Massachusetts 13,78% 762.763 $376.042.208 Michigan 12,00% 939.75 $463.296.573 Minnesota 7,91% 340.807 $168.018.054 Mississippi 7,17% 163.504 $80.607.418 Missouri 8,68% 412.267 $203.247.724 Montana 13,40% 111.605 $55.021.124 Nebraska 7,89% 114.596 $56.496.070 Nevada 12,11% 284.027 $140.025.476 New Hampshire 13,28% 145.853 $71.905.355

Source: ITEP (2018)

The table below shows estimates of 50 states on the taxation of recreational cannabis, based on the experience of the state of Washington. State and local governments collect approximately $ 460 million annually thanks to an excise duty of 37% state sales tax and local taxes averaging 2.82%. Despite the relatively large amount of tax rates, in Washington state, the substance has not increased in price, and there is still a lack of selection and quality controls. Taxing recreational cannabis in every state and applying similar levels of taxation to Washington state could generate $ 11.9 billion in local and state consumption taxes each year, a significant but not highly impactful sum on the state budget. In 2016, for example, tax collections were nearly $ 1.6 trillion, which would mean that the amount of tax revenue generated by cannabis taxation would be worth less than one percentage point of the state and local tax revenue collected nationally. In fiscal 2016, states raised about $ 7.3 billion in excise duties on alcohol and tobacco and $ 18.4 billion in excise duties on tobacco-related products. So far, governments are reluctant to adopt a taxation system similar to that of the state of Washington, which, despite the high levels of taxation, fails to maximise revenues. Interestingly, the model envisaged in Washington does not correspond to a copy of the state tax system. Briefly, Washington state voters steered their vote towards legalizing cannabis products for adults (21 and older) with the 2012 initiative 502 (I-502). This law permits the use and possession of cannabis up to one ounce, 16 ounces of cannabis products in solid form and 72 ounces of cannabis products. Also, the law provides for a regulatory plan for the production, processing, and retail sale of this substance. Among the regulations of that law, the then U.S. Deputy Attorney General James Cole established a ban on exporting the product outside state borders, a ban on the sale and consumption of young people (minors). The law provides for a seed traceability system upon sale. With this legalization policy, the State of Washington has increased its revenue every year thanks to the excise taxes collected from cannabis sales. The data is proof of this: in 2019, the tax revenues of the state of Washington exceeded 389 million dollars thanks to the sale of cannabis. Most of the proceeds went to the state general fund and to finance health services. However, there was also a drop in prices. in September 2019 the average price per gram for cannabis flowers is just above $ 6, sharply low relative to the usual average high of over $ 25 per gram (at the start of legalization). Prices have stabilized and have been growing slightly since last year. Washington state today imposes an ad valorem excise (37%) on the retail sales of any cannabis product. The proceeds go to the marijuana account to assist state services, including health services, for education and prevention programs. The excise came into effect in June

2015; the previous one was 25%, linked to the I-502 initiative in 2012. The changes made were aimed at creating price parity between the medical and illicit markets. Since then, the jurisdiction has maintained a price-based cannabis tax line, never moving towards a potency- based tax. However, some states, including Canada and Illinois have implemented product potency-based tax regimes. Both states are at the first trials, therefore there is not enough data to provide empirical evidence necessary for an accurate study (Prieger, 2019). Taxation in Washington revolves purely around the price of the product, so the state is more sensitive to any future drops in revenue if prices continue to fall - as we will explore later in this chapter. This aspect may suggest - to continue to collect even in the long term - the adoption of a weight-based tax rather than a price-based tax on cannabis.

3.4.3 Other factors influencing tax revenue

The years of experience that are accumulating in this sector are providing more and more information to consider the potential tax revenues generated by cannabis. In order to determine the amount of potential revenue and to be able to grow more in the legalised recreational cannabis sector, it is necessary to take into account five factors that significantly affect the tax and provide perspectives on cannabis revenue: • Falling cannabis prices • Trends in cannabis consumption • Consumption from the illicit market • Cannabis tourism • Federal policy towards cannabis (ITEP, 2019) As we have seen, almost all states collect taxes based on the price of the product, which means that the price of cannabis is a significant player in the possible amount of revenue obtained. However, cannabis prices are likely to drop with legalisation (see Colorado, Oregon and Washington) and competition will increase. A study by the RAND Corporation describes a price of $ 227 per pound (0,5 cents per gram) as an estimate of retail prices in the long run and indicates that the price could drop to as little as one-tenth of that amount (Lehner, 2018). Furthermore, the federal policy may also favour a drop in cannabis prices in the future. Cannabis price reduction will lead to a decrease in the revenues collected from any sales associated with it. Regardless of the tax applied, the amount of cannabis supplied remains a crucial point

in calculating the tax revenue. As several studies have shown, legalisation leads to an increase in cannabis use, although many people remain reluctant to claim to use it. Making exact calculations on the increase in post-legalisation cannabis use remains challenging, but analysts at the Cato Institute suggest that it would be reasonable to expect an increase in mostly casual users whose cannabis spending will remain modest. As with alcohol, it is the regular consumers who make the difference. As proof by many studies, consumers who use (or almost) cannabis daily account for only one-third of the three-quarters of the expenditure used for cannabis (Caulkins et al., 2015). Furthermore, it is good to keep in mind that, however, families will impose limits on the expenses related to their recreational activities, whether related to the consumption of cannabis or going to the cinema or out for dinner. Without a doubt, taking cannabis out of an illegal market and putting it into a legal one will generate revenue for the states; however, there is a risk of underestimating the conversion of a non-user into a user if this new user ultimately spends less money on other forms of taxable leisure. Always keeping an eye on the alcohol experience - where in America, in the 1950s, the share of Americans who claimed to be casual alcohol users was 58% to 71% - we can assume that this is unlikely. That, in the long run, consumer interest in cannabis will move in a straight line (Kerr et al., 2018). Assuming that it wants to enter a legal market, a first goal of the company is undoubtedly to encourage the consumer to move away from the illicit market; it is a determining aspect of the tax revenue that will potentially create. Regular cannabis users will undoubtedly be attracted to the securities provided by the legal market, quality control to name one; however, they will have a limit on the amount they are willing to pay. The evasion is impossible to avoid 100%, with any tax; it will remain impossible to eliminate competition from the illicit market permanently. However, the legislator should make sure to put in place a robust system that limits evasion as much as possible; One way to do this could be to apply the tax relatively "early" in the production process to minimise the risks associated with the diversion of cannabis from the legal market before the tax is applied. The experiences of Colorado and other states have shown that cannabis prices tend to rise over time, which is when competitive activity should be intensified. Therefore, the most appropriate moment of the application of the tax could be at the beginning of the production process. Furthermore, in the long term, consumers are unlikely to think of returning to an illicit market, despite a slight increase in prices, primarily because consumers have become accustomed to convenience in terms of quality and product selection; besides, legal shops improve efficiency and reduce pre-tax costs. Once the legal market has stabilised, states

should be able to raise tax rates without risking losing a substantial number of users to a return to the illicit market (Oglesby, 2015). What about homegrown cannabis? Giving people the ability to grow cannabis on a small scale at home could prove particularly significant on the size of the retail cannabis market. For this reason, homegrown cannabis should follow the same rules as for retail. Before legalising retail, doctors were allowed to own plants, but the law did not set strict limits on the number of implants, and how many plants were clinically needed was sent back to the health care provider. A limit of 100 plants imposed on home growers; the course of action aimed at limiting and curbing the excessive growth of domestic cultivation. Some states, including Alaska, California, Colorado, Massachusetts, Nevada, Vermont, and the District of Columbia, can grow up to six plants - for non-medical purposes - per person; other states, such as Maine, are granted three plants, four in Oregon and twelve (per family) in Michigan. Any form of home growing, for non-medical purposes, is prohibited in Washington (State of Colorado, 2015). Colorado collected more than $ 302 million in taxes and fees on both medical and recreational cannabis in 2019. The cannabis sales figure amounts to over $ 1.7 billion; market forecasts estimate growth of up to $ 31.1 billion by 2024, as suggested by a report by Arcview Market Research and BDS Analytics (BDS Analytics, 2020). Furthermore, according to the University-Pueblo's Institute of Cannabis Research the legal cannabis industry contributed - in 2017 - with more than 80.8 million dollars to the local economy, thanks primarily to the collection of taxes applied to it (CSU- Pueblo Institute of Cannabis Research, 2020). Clearly, a federal legalization (which has been under discussion very strongly since the beginning of this 2021) would greatly benefit the economy. In fact, according to a report by the Cannabis Analysis Society New Frontier, it estimates that, at the federal level, legal marijuana could grow to $ 105.6 billion in aggregate federal revenue by 2025 (New Frontier Data, 2020). An emerging sector in the cannabis field is related to the tourism industry. Some companies organise tours for tourists looking for cannabis, and tax revenue could make much money from this phenomenon; however, there is uncertainty about the actual impact on revenues. Travellers, by making a trip to a specific state due to the presence of legal markets, also increase revenues deriving from other types of consumption, such as accommodation, meals in restaurants, various items purchased during their stay, potential car rental or bicycles, greater participation in events of common interest (festivals, public events, concerts). Political thinking remains that cannabis revenues will mostly be paid by tourists and, indeed, not by residents. Estimates on Nevada have predicted a 63% increase in sales

from tourists; likewise, in Vermont, Maine, and Massachusetts, it is estimated that the earnings would come mostly from the consumption of tourists (Cano, Sonner, 2017). However, studies reveal that, in reality, the substantial income related to tourism is short-lived; the increase in cannabis sales occurs mainly in the short term by exploiting the wave of novelty. As proof by a study from Colorado conducted in 2016, only 4% of tourists motivated their visit with buying cannabis. Also, governments are reluctant to advertise cannabis as to attract visitors also because all states impose a ban on cannabis use in public places or hotels. Interstate transportation remains prohibited, so travellers cannot purchase an additional product to take home. However, with every state banning the use of cannabis in open places and public places, it is doubtful that it will become a significant long-term revenue generator (Orens et al., 2017). Additionally, increasing the number of states that will allow retail cannabis may further decrease tourist attraction. Some gambling studies reflect this, showing that, over time, the revenue generated by gambling has shifted from tourists to residents. An example comes from New Jersey, which was the second most successful gambling market at the time until Pennsylvania began to enter the market in 2006. From that moment the competition began to intensify with devastating effects on the Atlantic City economy. However, gambling revenue has partially recovered since 2018, and two new casinos opened in the same year. It is reasonable to expect similar trends in the cannabis market, with losses initially caused by competition and influenced by tourist flows, and then stabilise in the long run (New Jersey Division of Gaming Enforcement, 2018).

3.4.4 The federal governments’ approach to cannabis taxation

Federal government actions significantly affect the amount of revenue that general states can collect from cannabis; it can order the closure of all businesses and retail outlets at any time. However, at the moment it would be difficult to act in favour of a massive business closure; fears of potential aggressive government intervention have recently emerged with claims by Jeff Sessions - a candidate for the office of the attorney general - that he considers cannabis something dangerous that "good people" do not use (Ingraham, 2016). However, his tenure ended in 2006 and, in concrete terms, he did not make any changes in the relationship between the federal state and the cannabis industry. Of course, the federal government could significantly contribute to the growth of companies operating in this

sector, thereby increasing tax revenues and contributing to lower cannabis prices. Let us now analyse three political changes regarding cannabis taxation: reform of its tax treatment, allow and regulate the shipment and transition of cannabis between states, expansion of banking services for the cannabis sector. The Internal Revenue Code does not allow companies tax deductions on expenses for "trafficking controlled substances". The lack of cannabis deductions came at a cost represented by federal tax rates of up to 70% (National Cannabis Industry Association, 2015). The cannabis sector pushes for tax deductions as they exist for other types of businesses and industries. However, public opinion and public health scholars fear that the promotion of cannabis could increase the demand for consumption among the lower age groups. To help businesses, however, the NORML [The U.S. National Organization for Reform of Marijuana Legislation] allows tax deductions to cannabis companies on items such as rents and salaries, but such deductions are not yet allowed for advertising. The lack of tax deductions for cannabis companies discourages potential new businesses from positioning themselves in the market, on the one hand, and, on the other hand, would drive cannabis prices up for the few established players in the market. If the aspect of the Internal Revenue Code lightened and tax deductions also foresaw for cannabis, it would be reasonable to expect an increase in players present in the market, with a consequent increase in competitiveness and possible reductions in the price of cannabis. Therefore, the states will have to face a potential decline in revenue (Oglesby, 2015). As noted above, the federal government currently imposes a ban on interstate shipping of cannabis on states; legal markets currently operate only within their borders. However, liberalising the interstate cannabis trade could lead to imbalances within companies that entered the market late; the already well-structured and established activities would find it much easier to export products outside their borders if the federal government allowed it, to the detriment, in fact, of other new realities that jostle among the more established companies. Besides, these large companies could lead to a drastic reduction in prices with the establishment of economies of scale to reduce production costs. This effect will hurt the amount generated by tax collection, in any place that bases its taxation on the price of cannabis (Schoenberg, 2018). By analysing the last aspect, relating to banking services, it emerged that large banks are reluctant to offer financial services to cannabis companies for fear of federal laws. Indeed, according to the available data, the vast majority of banks have rejected the money made from cannabis sales. The lack of relationships with banks has forced suppliers to carry out

their cash transactions, which are not very secure in terms of taxation and expose dispensaries to the risk of robbery. To address this problem, Massachusetts - for instance - has opted for the use of technologies related to cryptocurrencies such as Bitcoin. There is a 'seed to sale' monitoring system to track cannabis cash flows; however, this is not enough to completely solve the problem. A federal intervention that incentivises banking to enter the cannabis industry could bring positive results in the revenue generated by the cannabis industry. However, there is the problem of a potential price drop that would affect states where tax systems mostly based on the price of cannabis (Alvaranga, 2018). How are the proceeds allocated? Advocates of legalisation are moving towards earmarking part of the tax revenue to pay for specific public services. For instance, in Colorado, the first $ 40 million generated by the cannabis tax is allocated to the construction of schools, and part of the proceeds destined to cover the following years partially. The fundamental problem is that state revenues can be substituted between the different areas of expenditure; for this reason, the discourse remains on the political level, rather than being a real political commitment. Furthermore, it would be counterintuitive to create an incentive to promote an activity that the tax itself initially intended to discourage. However, some of these revenues could be directed towards programs that compensate for negative externalities generated by consumption, such as educational programs. Many governments pay the funds to cover the costs of the project implementation itself or to oversee production processes. In California and Massachusetts, money has been allocated for social interventions in community assistance, targeting low-income people, communities of colour, which are significantly affected by the prohibition by the police. Some funds earmarked for universities; still others for clinical trials focused on innovative uses of cannabis in the medical field, as happens in Michigan (Federal Deposit Insurance Corporation, 2019). To sum up, legislators can set themselves several goals if they decide to tax cannabis, from increasing tax revenues to discouraging consumption and discouraging relations with the illicit market. The short-and-long-term analysed objectives are adaptable and observable for those states that have decided or are deciding to enter this emerging market. In particular, it has seen that about recreational cannabis it would be appropriate to apply taxes also based on weight to avoid an imminent collapse of prices, with tax rates indexed by weight to increase along with inflation gradually, accelerate the decline illicit market, and allocate the proceeds to other sectors of the economy.

CHAPTER 4. Evaluation of the economic effects of legalisation in Italy

The emerged analysis has highlighted the excellent relationship that already exists between the economy and the consumption of drugs. We have seen that aspects linked to society and politics play the game that can have a more or less substantial impact on the economy and, in particular, on a country's income. The object of our study remains to estimate the current drug use in Italy. Firstly, since it - together with prostitution - has already been calculated regarding the Italian GDP for some time. We will understand why the repression of its use and the fight against its cost. In particular, what has been theorised so far will be empirically analysed based on the Italian model. For example, the competition between the lawful and the illicit market: the second enjoys a clear advantage over the first, given the more straightforward availability of liquids. We will attempt to provide a solution to the dichotomy between prohibition and legalisation, also addressing the concept of legalisation. Nevertheless, as will be shown, even in Italy the prohibitionist resistances are giving way, time will prove it. First of all, let us see what attitudes our country has revealed to have in dealing with the issue of drugs (public and political opinions). What drug consumption is in Italy today, with particular reference to cannabis for recreational use. Whether we are talking about prohibition or legalisation, what we take into consideration when we try to tackle this debate remains the impact - on society, on the economy, on politics - linked to the criminalisation or decriminalisation of drugs themselves.

4.1 The Italian position on the use of drugs

Let us first analyse the current national scenario in the field of drugs. Referring to the latest document presented in parliament by the Association for Anti-Drug Policies in Italy, let us see what the drug market looks like today. A first analysis reveals that a national trend turns out to be relatively stationary. In particular, there is an increase in the number of hospitalisations associated with overdoses and drug use in general. Another wake-up call is an increase in the number of late AIDS diagnoses. The cocaine market is also growing, with data revealing a high availability in the area.

It is possible also to observe an increase in hospitalisations and related deaths. For example, overdose deaths amounted to 373 cases (+ 11%) in 2019. As for the cannabis market, it - together with the products derived from it - is the most widespread illegal substance. Despite that, 2019 saw a decrease both in the State Police operations number (-6.6%) and in the quantities seized (-60%). This aspect could point to potential changes in cannabis black market goals and strategies. According to the latest data, consumer spending currently amounts to 6.3 billion euros. There is an increase in the average percentage of active principle of 15% in hashish; that of marijuana remains unchanged (Mandruzzato, 2014). Despite 79% of the reports concerning cannabis, the trend of complaints about crimes related to cannabis (Articles 73 and 74 D.P.R. n. 309/1990) and those relating to possession for personal use (violation of Art. 75 D.P.R. n. 309/1990) are down. Cannabis consumption among minors is on the rise (16%). Its consumption is not associated with the intake of other illicit substances. A particularly critical aspect is about the situation of prisons. This aspect requires substantial social costs. Although it has been said earlier that reports for crimes related to cannabis and its personal use, the pending criminal proceedings for drug-related crimes have been growing slightly but steadily over the past four years, the same thing goes for those currently incarcerated for drug-related offences. As for the possession of narcotic substances for personal use, in 2019, there were around 38,500, mostly attributable to cannabis. Criminal sentences on drugs were 21,213 in 2019, about a third of the prison population. More than a quarter of the inmates are drug addicts. However, in order to implement a policy, public opinion is essential. The Department of Anti-Drug Policies (DPA, 2011) addresses the issue of drugs by focusing on the non-convenience of potential legalisation. The document mentions the Italian Constitution, wherein Articles 32 and 3 the Republic guarantees to protect the health and interests of the individual. Based on this aspect, legalisation would not be in line with the Constitution. Furthermore, according to the document, legalisation would allow a reduced perception of the risk regarding the dangerousness of these substances, especially among young people, and that the use of these substances could influence the social rituals and beliefs of the youth phase. The document admits that legalisation would again have to tackle the contradiction with the sale of tobacco by the state, a substance that has the highest number

of addictions and deaths in the world. Furthermore, the document indicates a disadvantage related to the lack of specialised companies in the sector, or in any case tools for assessing the safety of drugs. It believes that the formulation and potential implementation of a drug policy would represent a cost that consumers are unwilling to bear. Another delicate element is the potential birth of online markets that would significantly increase the existing offers. Again, the health risk is in the foreground. In general, public opinion considers the drugs argument immature and weak in terms of benefits.

4.1.1 The political opinion on drugs

The law on cannabis n. 242/2016 and the spread of commercial establishments promoting cannabis and derivatives, the issue of legal cannabis returns to be present in the political debates. As we have seen, even today public opinion is still wary of the legalisation of soft drugs, in several respects. A noteworthy element is that there is still much misinformation about the issue and related legislation. We are somewhat in the middle, in a political stalemate: there is no total prohibition or total legalisation; this creates confusion, especially about what are the permitted uses. With the term legal light cannabis or legal hemp, we mean that type of cannabis which has an active ingredient lower than 0.6%. According to Italian law 242 approved in December 2016, its production and marketing are legal in Italy if cannabis has a T.H.C. content (i.e. the principle active) that does not exceed 0.2%. The law, nowadays, allows for different uses of legal cannabis: for example, its seeds can be used to create numerous foods such as oil, bread, pasta and biscuits. The fibres can be used for both clothing production than in green building, given the high insulating power of this material. Recreational use is not mentioned, that is, known and previous health laws prohibit it. Legal light cannabis can be safely bought both in dedicated stores and on the internet, as long as it is the weakened one. Precisely for this reason on the Italian territory, many specialised physical and digital businesses are springing up precisely in this type of sale. The cultivation of Legal marijuana is no longer banned and does not need any authorisation.

4.1.2 Analysis of current tax laws regarding marijuana use: the Italian regulatory framework

The Italian regulatory framework has always classified the illicit production, sale and trafficking of drugs as a crime. With regard to consumption, however, the legislation has evolved over the years, with policies that are also very different from each other. The numerous changes and updates have fueled doubts and uncertainties in this regard. The first law issued by the Italian State on drugs is Law 396 of February 18, 1923. This law prohibited the consumption of drugs, considered as a personal vice and a danger to society. This law provided for penalties for the consumer and short periods of detention in case of sale, administration, and possession of such substances (Law February 18, 1923, n. 396). Subsequently, the Republic issued Law no. 1041 of 1954 on the subject of "Discipline of the production, trade and use of drugs" (Law 22 October 1954, n. 1041). We are witnessing a strengthening of criminal penalties for those who possess drugs, ignoring a distinction between personal use and commercial use. This law was probably the result of the decisions taken by the Geneva Convention of 1936, which provided for harsh penalties even for those who occasionally came into contact with drugs. At the turn of the 1960s and early 1970s there was a significant increase in drug use, especially among the youngest. Thus, with the law n. 685 of December 22, 1975 (Law December 22, 1975, n.685) on the subject of "Prevention, treatment, and rehabilitation of related drug addiction states", the legislator places the need to tackle the problem from a new perspective, seeing the consumer not as an individual to be rejected and isolated from society but as a person in need of help. Therefore, the Law recognizes the role of medical communities in providing recovery and assistance to drug addicts, extending this "privilege" to anyone intending to voluntarily undergo rehabilitation operations at medical and hospital facilities (while preventing forced hospitalization by the Judicial Authorities in appropriate cases). Since then, a fight against drugs began, thanks to greater control exercised by public and private bodies, by the police, together with prevention, treatment and rehabilitation activities. Despite this, the 1980s saw a further increase in drug use. The negative effects of this phenomenon include an increase in deaths from overdose, or in any case from other pathologies connected to drug use (AIDS, hepatitis). In addition, there is also an increase in crime linked to the black market of these substances. In 1984, the National Coordination Committee for Anti-Drug Action, with the desire to exercise greater control over the drug phenomenon, set up an organized laboratory (a Permanent Observatory) to collect, study, process, and disseminate all data relating to

production, sale, and consumption of drugs in Italy. However, the phenomenon did not stop and the number of drug users increased even in the 1990s. In those years, Law No. 162 of 26 June 1990 was enacted. Basically, this law replaced the concept of "modest quantity" (Law No. 685 of 1975) with that of "average daily dose" (Article 15, Law No. 162, 1990). This law provides for the establishment of the so-called Public Services for Drug Addiction (Ser.T.) at medical and hospital facilities arranged for the prevention and treatment of drug addiction. In 1990 the State issued the “Consolidated Law on Discipline drugs and psychotropic substances, prevention, treatment and rehabilitation of the related states of drug addiction ", more commonly known under the name of D.P.R. 309/90 (Presidential Decree 9 October 1990, no. 309). The most interesting and significant changes can be summarized as follows: • Greater duties at the National Coordination Committee for Anti-Drug Action, which actively carries out operations of prevention, repression of the production and trade of drugs, and of health care for drug addicts. • Definition of the powers and obligations of the Central Drug Service (Article 10 of Presidential Decree no. 309/90). • Attribution of greater tasks to the police (for example undercover activities) and definition of the destination of the seized assets (Article 100 of Presidential Decree no. • Creation of the National Intervention Fund for the Fight against Drugs, for projects aimed at the prevention and social reintegration of drug addicts (Article 127 of Presidential Decree no. 309/90). Basically, the objectives of the D.P.R. 309/90 were: • A law enforcement action aimed at limiting the spread of these substances. • Always report the use of drugs for personal and discretionary purposes as illegal. • Replace the "moderate amount" with the "daily dose" as a distinction between criminal and administrative sanctions. The referendum of April 18, 1993 (which was followed by the Presidential Decree of June 5, 1993, n.171) eliminated the content of the Presidential Decree 309/90, leaving the judicial body with greater discretion in the application of sanctions, creating not a few differences in application. The question mark was placed on the limit of quantity held: it was not clear when it was for personal use rather than dealing. Usually, it is up to the consumer to demonstrate personal use; the burden of proof remained with the prosecution.

As for the latest regulatory interventions, it should be noted that the legislation is constantly evolving. The Italian regulation on cannabis is mainly supported by: • Framework Decision 2004/757 / GAI of 25 October 2004, which establishes the minimum standards relating to the constituent elements of the offenses and the penalties applicable to illicit drug trafficking. • The Legislative Decree n. 309 of 1990 (i.e. the Consolidated Law on narcotics). • Law no. 242 of 2016, which allows cultivation within certain limits. • The Ministerial Decree of 9 November 2015 which regulates the production and use for therapeutic purposes. The Italian law of reference on the regulation of the production and consumption of Cannabis is Law 242 of 2 December 2016; this law considers marijuana as an agricultural and industrial plant. However, regardless of its T.H.C. content, it is classified as a drug plant, according to the Consolidated Law on Narcotic Drugs (D.P.R. 309/1990); an exception is made for hemp destined exclusively for the production of fibers or for other industrial uses permitted by European Union legislation (Article 14). Since its enactment, this law has raised many doubts and perplexities regarding the lawful and illegal uses of the plant. On the one hand, Law 242 supports the existence of permitted varieties (such as that for industrial use) that do not "fall" within the scope of the Consolidated Law on Narcotic Drugs. A natural interpretation would suggest a possible cultivation, transformation and marketing of the plant (or of some parts, such as leaves, flowers, seeds), respecting the intended uses (food, cosmetics). On the other hand, however, the Consolidated Law on Narcotic Drugs recognizes the exception only "for the production of fibers or for other industrial uses permitted by European Union legislation". Nevertheless, the latest ruling of the Court of Cassation (2020) excludes the "application of the criminal law, for small-scale cultivation activities carried out in the home, which [...] appear to be exclusively intended for the personal use of the grower "(Court of Cassation, 2020).

4.2 Estimates of cannabis use in Italy 4.2.1 The Miron’s model applied to Italy

The previous sections have compiled a cost-benefit analysis by comparing a drug tax market with one where the law prohibits the use of drugs. Let us now analyse the model of Jeffrey A. Miron, an expert in legalisation, which he used about the U.S. but which we will apply it to Italy. Thanks to his study, Miron (2010) estimated that legalisation in America would have generated revenues of 34 billion dollars a year, 6.42 of which came from the legalisation of cannabis alone. The table below indicates the revenue from legalisation. Table 5: Effects of drug legalization in USA Cannabis Cocaine Heroine Others Total Drug consumption value 13.3 48.6 15.5 11.9 89.3 Price decrease (%) 50 80 95 95 Assumed elasticity -0.5 -0.5 -0.5 95 The decrease in expenses with legalisation 25 40 47.5 47.5 160 (%) Consumption value with legalisation 10 29.15 8.1 6.2 53.5 Consumption value with the "sin tax" 12.5 36.4 10.2 7.8 66.9 Tax revenue with the "sin tax" (50%) ($) 4.17 12.14 3.4 2.6 22.3 Consumption value with standard taxation 7.5 21.8 6.1 4.7 40.2 Tax revenue with standard taxation (30%) 2.2 6.6 1.8 1.4 12.1 ($) Total tax revenue ($) 6.4 18.7 5.2 4.01 34.4 Source: Miron (2010) We also consider the cost savings associated with legalisation. In particular, expenses for arrests, trials and prisons. Table 6: Cost savings on public spending due to legalisation. Cannabis Cocaine+ Others Total Heroine Police charges for arrests 2.85 2.08 1.25 6.44 Court and judicial expenses 3.88 6.10 2.56 13.69 Prison expenses 3.79 5.95 2.49 13.37 Total savings on public spending ($) 33.5 Source: Miron (2010) We illustrate the method used to apply it to Italy subsequently. Miron's model also mentioned in the previous sections, showed up that the savings deriving from the legalisation of drugs mainly linked to three elements: reductions in police expenses given by a reduction in the number of detentions for possession or drug dealing, reduction of court and judicial costs given the decrease in drug trials, and the reduction of prison expenses due to the decrease in drug-related offences. In order to obtain a correct

estimate, the percentage of drug complaints should be multiplied by the state budget allocated to the police forces. This calculation is also repeated for the other two elements: the percentage of drug convictions for the state budget financed for carrying out legal or criminal trials, and the percentage of incarceration for the state budget for prisons. Once these data are obtained, they add up and obtain the overall reduction in state expenses, which translates into savings in terms of costs associated with the legalisation of drugs. However, in addition to cost savings, legalisation has a good chance of making tax revenues; a tax called "sin tax", or the standard taxation applied to sales. Available numbers of current drug spending show the same expenditure estimated by assuming a legal context (considering, however, the decrease in price and elasticity of demand). It proceeds by calculating the tax revenue by applying both forms of taxation on the amount of the estimated expenditure. Miron's model assumed an almost halved selling price of cannabis in legal markets, compared to that found on the black market in the US. The other substances, on the other hand, revealed a much higher price in the legal market than in the illicit one: 80% for cocaine and 95% for heroin. However, the key is the elasticity of demand. In his model, Miron assumes an elasticity level of -0.5, as shared by other economists. In calculating consumption values in a legal market (CLM), Miron takes into account both a potential price drop and the level of price elasticity of drug demand ($). With -0.5 of elasticity, if the product price falls by 1%, there will be a less than proportional increase in the demand for that good (0.5 units). The elasticity produces effects on the quantity demanded, and it cannot compensate for a drop in prices concerning the initial value. Thus, it is shown that the value of consumption in the legal market is lower than the current consumption (CIM). In analytical form: CLM=CIM*(1+ Δconsumption) (1)

Δconsumption=Δprice*$ (2)

The "sin tax" mentioned by the professor referred to a specific tax (an excise duty) which, by nature, should tend to discourage the consumption of certain products. It is the tax typically applied to alcoholic beverages and tobacco. Miron assumed a level of taxation equal to 50% of the retail price. The value of drug use (Csin) is calculated with the application of the sin tax (excise tax), and the value of the expected tax revenues deriving from legalisation (Rsin) is obtained. The following formula applies:

Csin=CLM+(CLM*d) (3) And, d=’sin tax’*$ (4)

To complete the estimate, Miron applies the same tax to alcohol and tobacco in the US and projects net revenues for the state on total consumer spending on the same. It turned out a value of 33%. Rsin=Csin*0,33 (5) Even applying regular sales tax will generate tax revenue. Miron's experiment sets the tax rate at 30%, which will be applied, post-legalisation, at 75% of the value of consumption. An increase in drug prices following the "sin tax" imposition with a rate of 50% and elasticity of -0.5, will mean a decline in consumption of 25%; therefore, the expenditure will be 75% of the pre- "sin tax" expenditure. In particular, the professor thus calculates the tax revenues generated by standard taxation (Rst): Rst=[CLM*0,75]*0,3 (6) The estimate will derive from the sum of the last two formulas. Let us now try to apply this method to Italy, intending to estimate the tax revenues and economic benefits potentially deriving from the legalisation of drugs, in particular cannabis. Table 7: Public expenditure attributable to drug prohibition (millions of euros) Total (2000-2005) Annual average Police 5.763 961 Judiciary 1.077 179 Penal institution 5.952 992 Total Expenditure 12.792 2.132 Source: Ministry of the Treasury (2005) Let us take the period from 2000 to 2005. The website of the Ministry of the Treasury provides data on the costs deriving from the prohibition in Italy. The data shown in the table suggest public spending for those years, with an average annual expenditure of 2.1 billion euros. Table 8: Breakdown of the Italian expenditure on substances (million euros) Total (2000-2005) Annual average % of the total Cannabis 5.656 943 44,2 % Cocaine 3.688 615 28,8% Heroine 2.886 481 22,6% Other drugs 562 93 4,4% Source: Ministry of the Treasury (2005) The table shows the public expenditure subdivided for drugs; the most extensive part

derives from cannabis (44.2%). For estimating the tax revenues from legalisation, it is first necessary to know the value of the current expenditure of drug users. The UNODOC [United Nations Office on Drugs and Crime] reveals this data: Table 9: Value of the current expenditure of drug users. Cannabis Cocaine Heroine Users (thousands) 4.345 814 310 Amount consumed (Tons) 1.72 33 9 The quantity consumed (EUR million) 7.617 2894 613 Source: UNODOC (2007) The table (8) shows the number of users, the amount of drug consumed, and the total expenditure in the selected period, therefore under the prohibitionist regime. Rossi M. (2009) reveals some potential effects in the variation in expenditure due to legalisation: on the one hand, a decrease in the prices of drugs in a legal market, in which the costs associated with prohibition would be avoided (complaints, arrests, fines). On the other hand, there could be a reduction in cost reductions in a legal market, because suppliers would have to start facing other types of costs related to market policies. Analysing the data present in the World Drug Report (UNODOC, 2012), we observe a diversity of prices for the same drug between different countries. For example, in the Netherlands, where cannabis can be bought legally in coffee shops, the price of cannabis / per gram is 60% of the price of cannabis in Italy. The same goes for cocaine and heroin, even if the difference in heroin is much lower (around 10%). In order to obtain a forecast about drug consumption expenditure after potential legalisation, this study assumes a cannabis and cocaine price decrease by 40% and heroin by 10% (using the values in the table). Wanting to apply Miron's model, we assume an elasticity of -0.5. The consumption value is calculated using the formula. The result is shown in the table below. In the "sin tax", a rate of 75.5% is assumed, based on the tax applied to the sale of tobacco in Italy (Law 23/12/05, n.266). The formula is used, and we find the value of drug use in Italy. Furthermore, potential legalisation, despite the excise duty, also provides for tax revenues from standard taxation. A 22% rate is - therefore - assumed as that of VAT (value- added tax). The 22% rate is applied to 62.25% of the value of the quantity consumed in the presence of a legal market. With an elasticity of -0.5, there will be a drop in drug spending of 37.75%. 0.6225 of the value of consumption with legalisation (CLM) is considered to calculate the consumption value with the application of standard taxation (Cst). The value of the tax revenues generated by the "sin tax" (Rsin) is a part equal to 50%

of Csin. We assume a 50% value (approximately 2/3 of the sin tax) given the lack of data on the alcohol and tobacco consumption in Italy. The ratio represents that expressed by Miron, who had obtained a value of 33% using the data relating to alcohol and tobacco consumption in the USA with a "sin tax" of 50%. Earnings from standard taxation (Rst) are obtained by applying the rate of 22% (VAT) to Cst. The total will be the result of the sum of Rsin and Rst. The following table illustrates the calculations and the results of the assumptions made so far. Table 10: Value of tax revenues generated by the “sin tax” and the general taxation (results of previous calculations) Cannabis Cocaine Heroine Total Drug consumption value 7,617.00 2,894.00 613.00 11,124.00 Price decrease (%) 40 40 10 Assumed elasticity -0.5 -0.5 -0.5 The decrease in expenses 20 20 5 with legalisation (%) Consumption value with 6,093.60 2,315.20 582.35 8,991.15 legalisation Consumption value with the 8,393.93 3,189.19 802.19 12,385.31 sin tax Tax revenue with the sin 4,196.97 1,594.59 401.09 6,192.65 tax (75.5%) Consumption value with 3,793.27 1,441.21 362.51 5,596.99 standard taxation Tax revenue with 834.52 317.07 79.75 1,231.34 standard taxation (22%) Total tax revenue 5,031.49 1,911.66 480.85 7,423.99 Source: UNODOC (2012) It can be concluded that the total estimated revenue deriving from the "sin tax" and from the standard taxation amounts to 7.4 billion euros, for the period highlighted. To this figure must be added the 13 billion euros of public spending required by the costs of prohibition. Therefore, in Italy in the years 2000-2005, legalisation would have generated tax revenues of 20.2 billion euros. Furthermore, it is possible to deduct the fiscal cost of prohibition: by taking an annual average, this cost would have been equal to 3.4 billion. It is undoubtedly a significant figure if we consider that it would have represented 0.24% of the national GDP for 2005 (In 2005, Italy's GDP was 1,429 billion euros - Istat, 2009). By making a breakdown of the cost per substance, 10.7 billion euros of economic well-being deriving from legalisation emerge, of which 5 billion of tax revenues generated by legalisation and the other part of savings in prohibition costs.

Table 11: Breakdown of the tax cost by type of drug (millions of euros). Total Annual average Public expenditure 5.656,00 942,67 Cannabis Tax revenue 5.031,49 838,58 Total 10.687,49 1.781,25 Public expenditure 3.688,00 614,67 Cocaine Tax revenue 1.911,66 318,61 Total 5.599,66 933,28 Public expenditure 2.886,00 481,00 Heroine Tax revenue 480,85 80,14 Total 3.366,85 561,14

4.2.2 Economic forecasts deriving from the implementation of a taxation system in Italy

An analysis of the possible socio-economic effects of potential legalisation of soft drugs in our country is provided. In order to conduct this analysis, let us briefly consider the models of Portugal and the Netherlands (countries that already foresee decriminalisation of soft drugs) regarding the trend in drug use. It starts with an analysis of drug use trends, in order to underline the impact of decriminalisation on it. The National Prevalence Surveys reveals the following data, with constant 4-year intervals, starting in 1997. Table 12: % of drug users in the Dutch population aged 15-64 for years 1997, 2001, 2005, 2009, divided between first consumption and consumption in the last year. First consumption Consumption in the last year 1997 2001 2005 2009 1997 2001 2005 2009 Cannabis 19,1 19,5 22,6 25,7 5,5 5,5 5,4 7,0 Cocaine 2,6 2,1 3,4 5,2 0,7 0,7 0,6 1,2 Ecstasy 2,3 3,2 4,3 6,2 0,8 0,8 1,2 1,4 Meth 2,2 2,0 2,1 3,1 0,4 0,4 0,3 0,4 LSD 1,5 1,2 1,4 1,5 - - 0,1 0,1 Heroine 0,3 0,2 0,6 0,5 0,0 0,0 0,0 0,1 Source: Van Laar & Cruts (2012)

The data reported show an increase in drug users; however, considering regular consumers, these remain constant, with a slight downward trend in 2005.

Among young people, these consumption data emerge: Table 13: % of Dutch students aged 12-18 who have tried substances for the first time 1988 1992 1996 1999 2003 2007 2011 Cannabis 8,6 15,2 21,6 19,5 18,7 16,7 17,4 Cocaine 1,2 1,6 3,0 2,8 2,2 1,7 1,7 Ecstasy - 3,4 5,8 3,8 2,9 2,4 2,6 Meth - 2,2 5,3 2,8 2,2 1,9 1,8 Heroine 0,7 0,7 1,1 0,8 1,1 0,8 0,6 Source: Van Laar, M., & Cruts, G. (2012) Table 14: % of Dutch students aged 12-18 who have used drugs in the last month 1988 1992 1996 1999 2003 2007 2011 Cannabis 3,7 7,8 11,1 9,3 8,6 8,1 7,7 Cocaine 0,4 0,4 1,1 1,2 0,8 0,8 0,8 Ecstasy - 1,0 2,3 1,4 1,2 0,8 0,9 Meth - 0,6 1,9 1,1 0,8 0,8 0,6 Heroine 0,3 0,2 0,5 0,4 0,5 0,4 0,2 Source: Van Laar, M., & Cruts, G. (2012) The data reported suggests a steady decrease in drug use among Dutch youth, in both cases. Ecstasy and cannabis are somewhat of an exception, recording a slight increase in 2011. Let us look now at the drug use in Portugal: Table 15: % of drug users in the Portuguese population aged 15-64, divided between first consumption, consumption in the last 12 months and consumption in the last 30 days. First time consumption Last 12 months Last 30 days 2001 2007 2001 2007 2001 2007 Cannabis 7,6 11,7 3,3 3,6 2,4 2,4 Heroine 0,7 1,1 0,2 0,3 0,1 0,2 Cocaine 0,9 1,9 0,3 0,6 0,1 0,3 Meth 0,5 0,9 0,1 0,2 0,1 0,1 Ecstasy 0,7 1,3 0,4 0,4 0,2 0,2 LSD 0,4 0,6 0,1 0,1 0,0 0,1 Source: Santos, A. S., Duarte, O., & Maia, E. (2012)

Despite the decriminalisation, even in Portugal, there are no particular increases in the use of drugs; only exception for cannabis and cocaine, which increased by 0.3%.

What about the situation in Italy? Figure 9: % of drug use in Italy, in the last 12 months, regarding population aged 15-64 years (2001-2012 period) (Serpelloni & Genetti, 2012):

The graph shows the trend of drug use in Italy about the last 12 months preceding the survey on a population aged 15 to 64, in the period 2001-2012. It shows an increase in cocaine and cannabis consumption up to 2008, followed by a drop below the national level. The other substances remained virtually unchanged in consumption.

Figure 10: Drug use, in the last 12 months, in the age group population 15-19 years (period 2003-2012) (Serpelloni & Genetti, 2012):

This graph, on the other hand, shows youth consumption, taking into consideration the age group from 15 to 19 years. There is a constant downward trend in consumption; a slight turnaround was recorded only around 2011. Cannabis consumption went from 17.91%

in 2011 to 19.14% in 2014 (Serpelloni & Genetti, 2012). Analysing the situation at the European level (of a population between 15 and 64 years old), the EMCDDA [European Monitoring Centre for Drugs and Drug Addiction] (2010) reveals that Holland has 4% of frequent consumers, Portugal 2%. An exciting point reveals that Italy, together with Spain, boasts 7% of declared habitual consumers. If we analyse only the youth population (15-19 years) we find the following data: the Netherlands passes from 14% to 15% in 1999, Portugal from 5% to 6% in 2007, Italy from 14% to 13%. Another element of assessment is related to the costs of drug violations. The EMCDDA also indicates that the expenditure, in 2010, relating to violations of the Netherlands' Opium Act is 766.3 million euros (485 spent on hard drugs and 281 on soft drugs). This figure would indicate 6% of national security spending and a share of 0.096% of national GDP. Table 16: National costs differentiated by the type of crime for the year 2010 (Netherlands): Type of crime Total (mln Prevention Investigation Lawsuits Judgments Executions Others eur.) Robberies 5,946.2 3,293.4 5,810.1 187.0 89.4 618.8 228. 6 Abuse, violence 2,241.8 599.2 263.2 164.7 55.5 1,011.0 148. 2 Vandalism 2,003.3 1,292.2 411.1 61.4 30.5 128.9 79.3 Road offences 857.5 121.7 501.6 49.5 34.9 49.2 100. 5 Financial crimes 176.1 23.7 91.5 17.1 10.3 2.9 30.7 Drugs crime 766.3 405.4 55.2 42.3 16.0 211.3 36.1 Others crime 224.2 59.7 65.9 30.2 12.1 21.3 35.1 misdemeanour 500.4 15.0 41.2 147.7 67.1 229.3 - Total 12,715.7 5,810.1 2,958.4 699.9 315.8 2,272.7 658. 7 Source: Van Laar, M., & Cruts, G. (2012).

Crimes related to the Opium Act rank fifth in national security spending. In Portugal, it is equal to 0.03% of the national GDP. Let us compare the EMCDDA data for Italian public spending, where in 2010, the total cost of drug use was 0.015% of the national GDP.

Table 17: Social costs related to the use of drugs for the year 2010 in Italy. Cost category Costs [unit] Percentages Individual costs 22.574.221.857,14 72,31% Costs due to loss of production capacity 4,680,632,520 14,99% Costs of law implementation 2.209.981.956,57 7,08% Welfare costs 1.754.553.208,56 5,62% Total 31.219.389.542,87 100,00% Source: Serpelloni, G., & Genetti, B. (2012) The largest part of the expenditure is due to the cost of purchasing the substances, which represents 72% of the total social cost. Therefore, we have considered Countries consumption trends - such as the Netherlands and Portugal - which have already decriminalised drugs and have presented a stationary trend in consumption. Indeed, in the Netherlands, there was a slight decline. The same applies to public drug spending. In Italy, drug use appears to have been decreasing since 2008; however, it excels at European level for the habitual cannabis user number (about 7%, out of a population between 15 and 64 years). In terms of drug-related crime, a favourable situation is observed, with a decrease in violations from 2004 to today. 75% of them relate to cannabis. The weak point appears to be public spending. Only the implementation of the law requires 0.14% of GDP. If we consider the total social costs related to drug use (costs of purchasing substances, costs of loss of production capacity, costs of implementing the policy and social costs), the share of public expenditure required is 2% of GDP, obviously higher than that of the Netherlands. With these data, it is possible to say that potential legalisation would not lead to unexpected or undesirable effects at the level of consumption and at the level of violation of the law. Thanks to the examples of Portugal and the Netherlands, it has been observed that the level of crime and substance use is not risky and that it is, therefore, possible to decriminalise drugs. Furthermore, looking at the economic effects, legalisation in Italy would generate total tax revenues of around 838.58 million euros per year. These revenues, added to the savings in public spending of 942.67 million euros, would generate a profit of approximately 1.78 billion euros per year. This income would fully cover the costs of implementing the policy, allowing investments in preventive actions and assistance to drug addicts.

CONCLUSION

The analyzed socio-economic context revealed a reluctance towards abandoning the prohibitionist system, linked - mainly - to a possible increase in consumption and, consequently, an increase in crime. However, in the course of this analysis a lack of correlation was highlighted between the decriminalization of the legislation on soft drugs and their increase in consumption. As we have seen in the case of Portugal and the Netherlands, consumption has not increased over time but has remained constant. Speaking of crime, the number of complaints for drug law violations in the Netherlands has tended to steadily decline in recent years. Portugal recorded a slight increase from 2007 onwards. All these data must be read in the light of the respective regulations in force. Portugal does not provide for imprisonment in the event of possession beyond the limits of personal use; the Netherlands allows the sale of soft drugs in so-called "coffee shops", which follow state legislation to respect its limits. This possibility of selling cannabis by commercial businesses represents a sort of legalization of cannabis: those who want to consume these substances go to these special places, safely and without incurring penalties and, above all, without looking for other ways to obtain the substances. Therefore, a relationship of loyalty is created on the part of the consumer, who is encouraged to buy safely and with the necessary guarantees. In these terms, a legalization of this type would be a great contribution in removing criminal organizations from the market or - in any case - limiting them significantly. Legalization is more efficient than simple decriminalization in the fight against organized crime. Speaking of Italy, to understand what effects a legalization - of cannabis, in particular - could have, we saw the need for a joint effort by both citizens and institutions towards a less conservative orientation. However, in recent years and - as we saw in the first chapter - especially starting from 2021 after the recent declarations of the WHO, the debate is becoming increasingly heated. In general, there is a general desire to change Italian legislation towards a possible legalization. The possible legalization of soft drugs - in particular cannabis - in Italy would mean a decrease in crime, greater control over the quality of substances, and would bring significant economic benefits. As we have seen with the application of the Miron model, the fiscal prohibition of soft drugs involves an expenditure of 3.4 billion euros and that - considering only soft drugs - the economic benefit in terms of tax revenues would be equal to 1, 78 billion euros. 943 million in savings on public spending, 838.58 million in tax revenues following a tax on

sales. The legalization of soft drugs, in Italy, would generate a total benefit of 1.78 billion euros, 0.13% of GDP. In my opinion, Italy should start adopting a new point of view and stop pointing to drugs as a social problem. A point that is particularly sensitive to me is about the social exclusion often generated by those who use these substances. Many use drugs unconscious of the risks connected to them because perhaps they come from precarious situations in which one cannot afford to receive an adequate education. Alternatively, those who want to use it could find themselves in dangerous situations due to a lack of knowledge and safety of the product. Indeed, removing large sums of money from organized crime, which - moreover - in our country is and has always been well-rooted, could be a reason for economic recovery or social growth, adequately informing about the risks and proposing to respect the will of the Constitution on the protection of citizens' health. Protection is, first of all, knowledge and information.

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