By Jonathan Kaminsky
OLYMPIA, Washington, May 15 (Reuters) - Key officials helping to create Washington state's potentially lucrative recreational pot market say its success may hinge on preventing consumers from choosing to get high on readily available medical cannabis because of low and sometimes nonexistent taxes on it.
The officials say it may be necessary to raise taxes or impose more stringent rules on medical pot to avoid undercutting the new recreational market and the tax dollars it is expected to inject into state coffers. Many "patients," they say, are in reality heavy recreational users who fake or exploit their maladies.
The idea of changing the rules for medical marijuana alarms some patients and providers of the drug as medicine.
Under current state law, a range of medical professionals, including naturopaths and even some nurses can recommend marijuana for health problems ranging from cancer to persistent pain. While Washington state has no patient registry for the drug, officials in Colorado, which also has medical marijuana, have said the overwhelmingly male and relatively young demographics of their patient population line up with statistics for recreational consumers of the drug.
The higher tax rate for recreational marijuana would effectively create two markets - an example of the type of obstacle officials must navigate as they work to allow sales of pot to recreational users 21 and older, something no state has done.
"We as a state will fail unequivocally at a well-regulated and well-taxed system if we don't treat it as one market," said state Representative Reuven Carlyle, a Democrat representing Seattle and chair of the state House Finance Committee. "I appreciate and acknowledge the sensitive position that medical marijuana patients are in, but there are ways to support them without providing a blanket exemption from all taxation."
On Thursday, Washington state is set to release proposed rules on who can grow, process and sell the drug, and on how to obtain licenses.
Voters in Washington state and Colorado in November became the first in the nation to approve ballot measures legalizing recreational weed. The federal government considers cannabis to be an illegal narcotic, and U.S. officials say they are studying how to respond to the moves by the two states. Washington state has allowed medical marijuana since 1998 and Colorado followed suit in 2000.
Because the medical marijuana industry in Washington state exists in a legal gray area, many storefronts selling the drug pay no taxes, while the recreational-use industry faces a voter-approved mandate to tax the drug at a rate of 75 percent, in addition to standard state and local sales taxes.
The state's marijuana consultant, Mark Kleiman, and other observers, including some state lawmakers in Washington and some of the other 17 states with medical marijuana, say that many people treated as patients are actually recreational users.
Most pot will likely continue to be consumed by a minority of price-conscious heavy users, so their ability to buy significantly cheaper medical cannabis will make it hard for the recreational market to take hold, he said.
Kleiman, a professor of public policy at the University of California, Los Angeles, said that in his view one approach to solving the threat posed to the recreational market would be to raise taxes on medical marijuana.
"Another would be limiting medical marijuana to people who are actually sick," said Kleiman, who was appointed to his position with the state in March and has been popularly dubbed the state pot czar, a term he dislikes.
Kleiman is the co-author of the book "Marijuana Legalization: What Everyone Needs to Know" and has also written about crime policy and incarceration.
NO SALES BEFORE 2014
Last year, the Washington state Office of Financial Management estimated that taxes on the drug sold for recreation could generate up to $532 million in fiscal year 2015, the first full year legalized sales could occur.
Marijuana legalization backers touted the potential windfall for the state, but Kleiman has cautioned that, largely because of the availability of cheaper medical pot, actual tax collection could be less than half that projection.
Sales of the drug to recreational users are not expected to occur before March 2014.
Brian E. Smith, spokesman for the state's Liquor Control Board, the agency tasked with overseeing the recreational pot industry, agrees that competition from medical pot will pose "a challenge" to the viability of the new system. Washington's medical marijuana industry, which has its roots in a 1998 voter-approved measure, is among the most lightly regulated in the country.
There is no provision under the law allowing for the sale of medical marijuana, but dispensaries collect "donations" from authorized patients of about $10 per gram of the drug.
Estimates vary for how many medical-pot storefronts exist statewide, but in Seattle alone officials estimate they have over 150 such storefronts.
Some Washington state dispensaries have sought to gain legitimacy and lessen the chances of authorities shutting them down by following state Department of Revenue instructions to pay taxes. As a result, the department reports collecting $1.2 million from 52 providers of the drug in fiscal year 2012, mostly in the form of sales taxes.
But because of the gray zone in the law that medical marijuana occupies, Department of Revenue spokesman Mike Gowrylow said some dispensaries were not paying taxes on the advice of their lawyers.
State lawmakers are considering legislation to direct the Liquor Control Board to recommend ways to create a single marijuana market with defined tax rates for medical pot.
State Representative Chris Hurst, a Democrat, calls the state's medical cannabis industry "a sham" that he predicts will not long survive once recreational-use stores open. He anticipates that federal or state authorities will crack down on unlicensed dispensaries.
"All you have to do is make examples of five or six people and the entire industry collapses almost immediately," Hurst said. "You have to have something to replace it, and that's what the recreational market is."
Such talk horrifies many medical marijuana providers.
"Legalization (of recreational use marijuana) will be exactly what we were afraid of," said Steve Sarich, a medical marijuana entrepreneur who helped lead the campaign against the November ballot initiative. (Editing by Alex Dobuzinskis and Prudence Crowther)