One of the central arguments in favor of legalizing drugs is that it eliminates the black market for drugs. At first blush, it sounds reasonable. If you can buy your fix at a legitimate store, there’s no need to go to the street dealer. That drives out the street dealer, the street crime, gang wars and so on and so on. It all makes sense, which is why everyone and his brother is carefully watching what is going on in Colorado. All of these arguments are being put to the test.

This story from the Guardian is interesting.

In these, the curious, infant days of Colorado’s legalisation of recreational marijuana, of shiny dispensaries and touch-screen ordering and suburban parties where joints are passed like appetisers over granite countertops, no one would notice the duplex. Plain brick, patchy grass behind chain link, it appears weary, resigned to what the tenant calls “the ‘hood” and others might call left-behind Denver, untouched by the frenzy of investment that has returned to downtown.

The front door of the duplex stays closed. Sheer white curtains cover the living room window. A basement filtering system vents air scrubbed of the sweet funky smell of the pot growing in the basement. The tenant keeps his grow operation here small. It’s his home. That’s his grandson upstairs watching TV with strict instructions not to open the door if someone knocks. Should the cops inquire, they’d find a frail-looking, middle-age Latino with diabetes and heart problems, talking about his pension and his Medicaid and waving his medical marijuana registry card.

The red card – part of the state’s legal landscape since 2000 when voters approved the sale of marijuana for medical use – allows the grower to cultivate a doctor-prescribed 16 plants. It does not allow him to sell what he does not consume to the underground market. It does not allow him a second grow operation in another rented house where he and a partner grew 55 plants until the landlord grew suspicious. It does not allow him to run his own little corner of a black market that still exists in the state with America’s most permissive legal pot sales.

The grower says he recently sold more than 9kg of his weed – Blue Dream for the mellow, Green Crack for the perk – to middlemen who flipped it for almost double the price.

“I try to keep it legal,” he says, “but sometimes it’s illegal.”

Camouflaged amid the legal medicinal and recreational marijuana market, the underground market thrives. Some in law enforcement and on the street say it may be as strong as it’s ever been, so great is the unmet local and visitor demand.

That the black market bustles in the emerging days of legalisation is not unexpected. By some reckonings, it will continue as long as residents of other states look to Colorado – and now Washington state – as the nation’s giant cannabis cookie jar. And, they add, as long as its legal retail competition keeps prices high and is taxed by state and local government at rates surpassing 30%.

I’m inclined to support these experiments in marijuana legalization. I don’t know the right answer, but discovery through trial and error is the way we have sorted these things out for 15,000 years. That said, I find it hilarious that people thought it would eliminate the black market. A highly regulated and taxed legal product will always be more expensive than an unregulated and un-taxed product. Unlike cigarettes or booze, there already exists an efficient and sophisticated black market.

“I don’t know who is buying for recreational use at dispensaries unless it’s white, middle-class people and out-of-towners,” said Rudy Reddog Balles, a longtime community activist and mediator. “Everyone I know still has the guy on the street that they hook up with.”

Obviously, legalizing weed was an upper middle-class novelty cause. It was the pseudo-libertarians from SWPL-ville who pushed it through in Colorado. Even a “longtime community activist and mediator” should get that.

This black market boom, the state argues, is a temporary situation. As more legal recreational dispensaries and growers enter the market, the market will adjust. Prices will fall. The illegal market will shrink.

Actually, it will probably grow. Quasi-legalization makes it nearly impossible to police the black market. If you can’t bust a guy for holding, you can’t squeeze him for his dealer, which means you can’t squeeze small dealers for the bigger dealers. Then you have the race angle. Busting the black guys in the hood for smoking reefer is not going to go over well when Kendall and Dylan are buying it at the mall with mom’s credit card.

In any case, these first curious months of the legal recreational market have laid bare a socioeconomic faultline. Resentment bubbles in the neighbourhoods where marijuana has always been easy to get.

The resentment goes something like: we Latinos and African Americans from the ‘hood were stigmatised for marijuana use, disdained and disproportionately prosecuted in the war on drugs. We grew up in the culture of marijuana, with grandmothers who made oil from the plants and rubbed it on arthritic hands. We sold it as medicine. We sold it for profit and pleasure.

Now pot is legalised and who benefits? Rich people with their money to invest and their clean criminal records. And here we are again: on the outskirts of opportunity. A legion of entrepreneurs with big plans and rewired basements chafes with every monthly state tax revenue report.

Sing it brotha! Sing it!

Ask someone who buys and sells in the underground market how it has responded to legalisation and the question is likely to be tossed back with defiance. “You mean, ‘Who’s been shut out of the legal market?’” asks Miguel Lopez, chief community organiser of the state’s 420 Rally, which calls for legalisation of marijuana nationally.

“It’s kind of like we made all the sacrifices and they packed it up and are making all the money,” says Cisco Gallardo, a well-known gang outreach worker who once sold drugs as a gang member. For the record, he does not partake. It rattles him a little, he says, to see the young people with whom he works shed their NFL and rapper dreams for the next big thing: their own marijuana dispensary.

In this light, taxation is seen as a blunt instrument of exclusion, driving precisely the groups most prosecuted in the war on drug further into the arms of the black market. In one Denver dispensary, a $30 purchase of one-eighth of the Trinity strain of cannabis includes $7.38 in state and local taxes – a near 33% rate. As Larisa Bolivar, one of the city’s most well-known proponents of decriminalising marijuana, puts it: that $7 buys someone lunch.

“It’s simple,” she says. “A high tax rate drives black market growth. It’s an incentive for risky behaviour.”

It’s not hard to see where the logic is going. The thing is, legalization does nothing for Red Team or Blue Team. Red Team is going to be the tax collectors for the weed industry. The Blue Team will go the social justice route demanding free weed and subsidies for the poor. Two decades ago, the ruler passed welfare reform which was supposed to start kicking loafers off the dole. Today, one third of the population is collecting. How long before they are giving away free weed in the ghetto?