Reforms of existing drug policies has achieved a greater deal of attention in recent years due existing literature highlighting that drug prohibition policies cause significant negative spill-overs within society (Nadelmann, 1989; Block, 1993; Costa, 2008). As countries around the world, especially within the Western hemisphere, seek to liberalize existing drug prohibition policies, studies that address the impact of such legislature on local economies is lacking. As the push for legal recreational marijuana is a recent trend, especially within the United States and Canada, recent studies have predominately focused on the drug legalization process in these two countries.
However, countries such as the Netherlands, Portugal, and Uruguay semi-legalized the usage of recreational marijuana before the current trend. These countries provide an example on what policies can work and the potential issues with implementing, enforcing, and negative spillovers that they might create.
In this literature review, I will briefly highlight the benefits of recreational marijuana by recent studies focusing on the United States and the Netherlands to highlight how the recreational mari-juana industry can benefit the local economy. Afterwards, I will present the issues associated with drug tourism within the Netherlands as it has allowed recreational marijuana to exist within the country since the 1970s after introducing its harm reduction model to emphasize the safety and health of the public and drug user.
The United States has been a country that since the 1950s has criminalized the production and consumption of marijuana eventually accumulating in its ”War on Drugs” policy. However, with the passing of Amendment 64 in 2010 for the State of Colorado legalizing commercial and recreational drug usage within the State, the United States seems to be going into a different direction policy wise. Colorado State charges a 15% excise based tax on the average wholesale market rate, 10% state tax on retail marijuana sales, 2.9% state sales tax plus additional local taxes. Original estimations for the generated tax revenue as a result of marijuana legalization was 70 million (Henchman, 2014).
The Colorado Department of Revenue (CDOR) releases an annual report on taxes, licenses, and fees that it collects within Colorado. After the passing of Amendment 64 in 2010, it authorized several projects that would divert the taxation collected from marijuana into these project with the intent of improving the community.1 Report by CDOR (2016) the CDOR collected $ 15 million in fees and licenses, an increase of approximately $ 1 million compared to the year prior. In terms of the sales tax collected on marijuana products, CDOR reported that it was able to collect $ 31 million, which was an increase of 40% compared to the year prior. As for the retail marijuana tax, CDOR collected approximately $ 67 million, an increase of $ 59% when compared to 2015.2
Tax revenue presented by Reed (2016) shows that the tax revenue from commercial activities related to the marijuana industry presents 0.95% of all tax revenue collected by the Colorado state.
The excise tax revenue collected from commercial activities in the marijuana industry was diverged to state funds such as the public school construction assistance fund reaching $35 million in 2015 rising by 163% compared to the budget in 2014. Taxes derived from the marijuana industry to local governments increased by 89%. Besides, the tremendous tax revenue for the public sector, the marijuana industry in Colorado also provided a boost to the private industry in Colorado. The number of business with activities within the marijuana industry from a total of 1752 to 2766, an increase of 57%
1These project consist of funding public education, supportive housing, funding for public health officials, and so forth.
2According to the Colorado Department of Revenue, the legalization of recreational marijuana led to the concept of drug tourism as 44% of the purchases are related to out-of-state identification card (Henchman and Scarboro, 2016). However, the problem with classifying the impact of drug tourism is due to the scarcity of empirical studies (Kang et al., 2016).
Report published by the Light et al. (2016) on the effects of legalizing marijuana revealed that the regional economy, public health and safety, and education have improved since the legalization of marijuana.3 In 2016, 28,847 individuals had valid occupational licenses that allowed them to work within the marijuana industry. In addition, the employment growth spilled over into other industries such as engineering, security, legal, insurance, real estate, and retail. Estimates on job growth in terms full-time equivalent jobs revealed that the legalization of marijuana resulted in 14,209 jobs in 2014 and 18,000 job positions in 2015. Public polling survey indicates that 28% of the respondents had a friend, family member or acquaintance working directly or indirectly with the marijuana industry. Colorado tourism increased by 30% and tourist spending increased by 14% in comparison with 2012 (Blevins, 2014; Basu, 2014; Smith, 2017).
Washington State followed shortly with the passing Initiative 502 in 2012 and recreational marijuana sales began in 2014.4 The Washington state collects tax from different points in the supply chain within the marijuana industry. It charges 25% on sales from producers to processors, 25% from processors to retailers, and another 25% from retailers to customers. Additionally, Washington State has a Business and Occupation gross receipts tax and a state sales tax of 6.5%
which results in an effective tax of 44% (Henchman, 2014). Between 2014 and 2015, there were a total of 1,164 active marijuana licenses for marijuana producers, processors-, and retailers. These retail stores were averaging $1.9 million in sales a day in July 2015 (Blake, 2016; NWHIDTA, 2017).
Marijuana legalization provides the state with an attractive tax revenue stream as governments can deposit the revenues in public government institutions and budgets as done by Colorado and Washington state. Washington state established the Dedicated Marijuana Fund in 2012 that disperses the tax revenue collected from commercial marijuana activities where among others 50%
goes to the Basic Health Plan Trust Account, 19.7% to the State General Fund, 15% to Department of Social and Human Services Division of Behavioral Health and Recovery, 10% to the Department of Health, and so forth.
The Netherlands adopted a policy of tolerating the production and consumption of marijuana after implementation the revision of the 1970s Opium Act in order to separate the different type of drug users based on prior research and recommendations by Cohen (1970). According to Cohen (1970), an important method to reduce the issue of rampant hard drug usage among drug users was to ensure that the governmental authorities not only guarantee the health and safety of the public but also that of the drug users within society. Since adopting the harm reduction model in the 1970s, the recreational marijuana industry has flourished to an extensive extent mainly due to the factor of drug tourism as other countries around the world at that time still enforced drug prohibition policies.
Existing literature defines drug tourism as the leisure activity of traveling abroad with the main intent of accessing drugs for consumption that are by definition illegal in the tourist’s place of departure (Valdez and Sifaneck, 1997). The concept of drug tourism has been known to the Netherlands since its introduction of the 1979 Opium Act that severely decriminalized drug usage and established a legal channel for drug users to purchase soft drugs through so called ”‘coffee shops”’. Hammersley et al. (2001) provided a framework on why people consumed cannabis linking to the person’s identity and usage. It was additionally associated with changes in the social norms and responsibilities. The number of tourists and the change in their perspective on drugs has been steadily changed as drugs and drug usage has become more normalized over time within the Western hemisphere partially due to the recent liberalization of drug policies across the world (Korf, 2002; Uriely and Belhassen, 2005).
The drug tourism and the coffee shop industry has become increasingly lucrative for the Dutch government with tax revenues derived from coffee shops and drug tourists. It has grown to such an extent that a major metropolitan such as Amsterdam are partially dependent on these tourists.
According to a report by the Amsterdam Tourist and Congress Board in 2008, as much as 350,000 tourists come with the primary motivation of experiencing soft drugs. Nijkamp et al., (2008) investigated the effect of coffee shops for the municipality of Maastricht in the province in Limburg found that coffee shops led to an increase of 140,9 million euro and resulted in 1,617 full-time jobs.
Nationally, the coffee shop industry provides the Dutch government with a reliable tax revenue
3Constitutional Amendment 64 introduced a statewide drug policy that allows the commercial cultivation, man-ufacture, and sale of marijuana.
4Initiative 502 allows businesses to have a license to grow, produce, and sell marijuana for recreational purposes.
based on the purchase of drug related items by foreign and domestic consumers.5 Based on a survey done by Intraval with a sample of 30 coffee shops in 2013, they found that coffee shops earned approximately between the 875 million- and 1,25 billion euros.67
Though the recreational marijuana industry provides the governments with a growing stream of revenue, it is not without its issues. Prior studies on the nuisance associated with the establishment of coffee shops and growing trend of drug tourism had significant negative impacts on local com-munities. Drug tourists, while they tend to understand the legal and medical risks associated with drug usage (Uriely and Belhassen, 2005), recent events have shown that there may be sizable gaps in their risk assessment. The issue with faulty risk assessment when it comes to the purchasing and consumption of drugs can have fatal outcomes as seen in 2016 and 2017 leading to the deaths of several drug tourists within the Netherlands. Drug tourists under the influence of drugs might also increase nuisance that can reduce neighborhood quality such as loitering, wrongful parking, noise pollution, and increase illegal street dealing (Schaap et al., 2006; Bieleman et al., 2007; Benschop et al., 2015; ; van Ooyen-Houben et al., 2014).
To combat the negative excesses of caused by drug tourists and coffee shops, the government introduced the AHOJ-G regulations in order to regulate the coffee shop industry within the Nether-lands. The AHOG-J stands for the A criteria states that there will be no advertisements of soft drugs or soft drug related products, the H criteria bans any sales of hard drugs, O criteria states that there should be no nuisance, J indicates that coffee shops cannot sell to minors, G states that sales of marijuana shall be no more than 5 grams per person per coffee shop per day.8910
Prior to 2012, the then Minister of Justice, Ivo Opstelten, wanted to introduce two additional criteria to the existing AHOJ-G regulations which were a closed club membership system desig-nated as B and sales restriction to local registered inhabitants as I (TK 24077, 2011). The closed club membership system detailed that a coffee shop could have a maximum membership of 2,000 members within one calendar year for which the coffee shop owner would be responsible. The sales restriction to registered inhabitants restricted the purchase of coffee shop products required inhabitants to register within a municipality within the Netherlands. Residency would have to be shown through an extract from the Municipal Basic Administration. However, since 2012, the closed club membership system has been abandoned.
Benschop et al. (2015) investigated the issue of drug tourism in connection with coffee shop and the crimes associated with drug tourism to map the geographical distribution. Their study used nationwide crime data in combination with interviews of local informants, municipal-, and police officials with knowledge on the soft drug market. Their sample included 31 coffee shop munici-palities dispersed over 11 judicial regions across the Netherlands. Their findings revealed strong geographical variation in the crimes associated with drug tourism and coffee shops. Municipalities close to the Southern border area ranked the levels of soft drug tourism, coffee shop nuisance, and illegal soft drug dealing as moderately to high levels. Five municipalities in the Southern border regions that restricted coffee shop access to non-residents resulted into drug runners and street dealers recruited tourists for illegal soft drug purchases. This was reflected in the high number of police reported soft drug incidents and prosecutions of soft drug crimes.
Report on the same topic by van Ooyen-Houben (2014) on the relationship between coffee shops, drug tourism, nuisance, and the illegal sales of soft drugs. They did an in-depth survey in five coffee shop municipalities with three of them located within the Southern provinces. Their survey results revealed that residents in the three Southern coffee shop municipalities experienced nuisance from traffic, sound, loitering, and ”shady characters”. According to their survey, 40 - 50%
of respondents answered that traffic and parking were significant problems. Large portion has seen drug usage on the street but only a small percentage (7%) experienced it as nuisance. Respondents in three Southern coffee shop municipalities experienced the problem of drug runners - However, only a small percentage experienced them as a significant nuisance. Dealers were also frequently
5There is no VAT on soft drugs due to a ruling by the European Union’s Court of Justice which disallowed VAT over banned substances with the European Union (Zorge, 2005).
6There is no actual recorded government information on the earnings of coffee shops as the Dutch IRS does not classify coffee shops and hospitality firms differently in the Standard Business Index.
7An earlier report by KRO Reporter in 2008 estimated that the IRS collected around 400 million euros.
8Nuisance covers traffic, parking, loitering, littering, and sound / noise levels around the coffee shop.
9Previously, the G criteria allowed 30 grams instead of the current 5 grams, reason for this change was the increasing nuisance correlated with the increase in the number of drug tourists in the 1990s. Korf et al. (2002) indicated that this change in the AHOJ-G criteria did not reduce the drug tourism taking place.
10If any of the AHOG-J criteria is violated, the municipality has the ability to fine, suspend, or prosecute the coffee shop business.
sighted on the street and a larger percentage of respondents experienced these as nuisance. In total, coffee shop and soft drug tourists were experienced as a nuisance by 4 and 8% by respondents.
These studies identified that excessive nuisance by drug tourist and coffee shops reduces and several municipalities introduced their own policies to mitigate the spill-over effect by incorporating limited opening hours, relocation of the coffee shop to other areas within the municipality, and temporary or permanently close coffee shops depending on the severity of their infraction with the municipal drug policy. However, while the link between drug tourism, coffee shops, and the effect on the local community has been extensively studied, few studies that have analyzed the impact of excessive drug tourism on the local economy. Prior studies that focused on this issue were Schaap et al. (2006) and Snippe et al. (2006).
Schaap et al. (2006) focused on the municipality of Roosendaal and Bergen op Zoom located close to the border of Belgium and the Netherlands within the province of Noord-Brabant and became a hotspot for drug tourism in the early 2000s. Schaap et al. (2006) focused on the impact of drug nuisance partially attributed to drug tourism on the profitability of retail firms located within both municipalities. Retail firms that were located in areas with a concentrated degree of drug nuisance reported that they experienced a reduction in revenue in comparison with firms that were located within regions with no or relatively low nuisance. Additionally, the issue of concentrated drug nuisance within the municipality had an negative spill-over effect to other areas of the municipality. Firms outside areas with a high degree of drug nuisance were equally negative as their counterparts on the issue of neighborhood quality.
Snippe et al. (2005) focused on the issue of drug tourism and the associated nuisances that can cause issue for the local community. They focused on the municipality of Venlo, located within the province of Limburg on the border of Germany and the Netherlands and is an attractive place to visit for young German tourists which fuels the legal and illegal drug trade. To address this issue, the governmental authorities designed Project Hektor with the objective to reduce the issue of nuisances associated with drug tourism by focusing on the enforcement of existing drug policies, real estate, and the coffee shop policy. To measure the effectiveness of this project in combating the associated nuisances with drug tourism, part of the study was focused on the issue that firms within the municipality of Venlo. To measure the impact, Snippe et al. undertook a survey with a 92% response rate (110 respondents out of 200) located within two areas within the municipality of Venlo and compared the reported profitability of firms in neighborhoods with a high degree of nuisance associated with drugs and adjacent parts of the municipality to understand the impact of nuisance on profitability over three years from 2001 to 2004.
Snippe et al. found that 57% firms within areas with a high degree of drug nuisance reported a reduction in their revenue in 2001 when compared to their financial performance in 1999 while in comparison 34% of firms in other areas reported a reduction in revenue. In 2003, Snippe et al.
measured the revenue of firms within the municipality of Venlo again and found that the number of firms with a reduction in their revenue went from 57% two years prior to 33% whereas other firms had went from 34% to 25% indicating that the initiatives of the governmental authorities were having an effect. Between the period of 2004 and 2005, Snippe et al. also found that the number of firms registered within an area with a high degree of drug nuisance was by 11% according to the municipal registry in comparison to other areas where the number of firms rose by 3%.
Studies such as Schaap et al. (2006) and Snippe et al. (2005) showcase similar findings with regards to firm profitability indicating that while the increase in drug tourism may increase po-tential firm profits, evidence suggests that the pollution of drug usage can cause significant harm to a local economy through lowering the attractiveness for firms to remain due to pollution of the local environment and reducing the potential profitability of existing firms. Though prior studies provide a perspective that while the recreational marijuana industry can be extremely lucrative for coffee shop owners, studies such as Schaap et al. (2006) and Snippe et al. (2005) highlight that the profitability of coffee shop owners come at the cost of others.
The situation that unfolded in the Netherlands provides an unique opportunity to study the potential effects of when prior drug liberalization policies are further constricted to combat the issue of drug tourism and its associated nuisances. By limiting the purchasing of recreational marijuana to municipal residents only, the question is whether the severe reduction of drug tourist will significantly affect the profitability of firms located within Southern coffee shop municipalities.
Because few studies are available on this issue and are limited to qualitative methods, few assump-tions can be made on how the implementation of the 2012 drug policy will affect the profitability of firms within Southern coffee shop municipalities.
This chapter can thus provide several contributions to existing literature. First, this will be the first research conducted on this issue within the Netherlands since 2006. Second, while Schaap et al. (2006) and Snippe et al. (2006) provided an insight, the scope of their study was limited to primarily to one or two municipalities within the province of Limburg. This chapter will take a more holistic approach by taking into account all municipalities within provinces that adopted the 2012 drug policy. Third, the addition of the findings of this chapter to existing literature would provide on whether sales restriction of recreational marijuana significantly affects the local economy.