Marijuana Law, Policy & Reform

Editor: Douglas A. Berman
Moritz College of Law

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Sunday, October 20, 2013

Hoping lots of tax policy experts will engage with on-going natural pot experiments

This past week in my Marijuana Law, Policy and Reform seminar, two students did a wonderful job focusing the class readings (assembled here) and the class discussion on tax issues.  I came away from the experience not only once again impressed by how effectively law students can deliver complicated legal content to fellow law students, but also truly fascinated by the array of tax policy issues and questions that legalized state marijuana regimes necessarily engender.   Pat Oglesby (a former Congressional tax staffer) has put together this commentary for the Huffington Post, titled "Taxing Marijuana: Four Questions," which highlights just a few of the challenging policy issues that a legal marijuana industry is now creating:

Marijuana legalization brings tax questions: Whether to tax, how much, for whose benefit, and by what measure.  None of the answers is obvious....

American consumers today reportedly spend around $30 billion a year for marijuana. That's a pot of gold. Where will that money go?....  Ganjapreneurs — producers and sellers of legal marijuana — are lining up to share in that $30 billion (or whatever the number turns out to be).  But tempering the profit motive may go a long way toward building public support — and toward addressing concerns of worried parents.  Colorado's successful 2012 initiative enticed voters with taxes for school construction; Washington's helped a laundry list of programs.  Marijuana revenue could go into the general fund, or allow cuts of unpopular taxes.  There will never be a "right" way to split up the money....

So far, taxes have been based on percentage of sales price.  That's easy to calculate: It requires no weigh stations or product testing.  But a percentage base is easy to get around.  Free Joint Giveaways, like those designed to boost opposition to taxes in Colorado, would be tax free, since any percentage of zero is always zero.  And how would anyone figure the tax on hotel stays bundled for one price with free marijuana? When the seller winks at the buyer when selling something for below its fair market price, it's hard for auditors to figure out its "real" price — that's how Google, Starbucks, GE, and other multinationals make a laughing stock of international tax rules.

Price-based taxes will swing wildly up and down as an industry starts up and prices find equilibrium.   That's not good.  If we look for analogies, price is not the base for any federal alcohol tax.  Taxes on liquor and wine depend on alcohol content; beer taxes depend on volume.

Taxing marijuana by weight would solve some problems, but powerful ounces would be taxed the same as weak ounces.  Still, the choice for marijuana plant material is either price or weight: Taxes based on content of psychoactive THC (tetrahydrocannabinol) won't work.  Test results are not replicable because the material is not fungible enough — not consistent in THC content....

Still, percentage-based taxes don't require indexing for inflation.  In real terms, unindexed Federal alcohol taxes have shrunk dramatically since the last increase, in 1991....

Taxing marijuana is no easy matter, but tax-free marijuana could cause a voter backlash -- or intervention from a federal government worried about leakage to other states and underage users....  A state monopoly would be the most cautious approach to legalization, but states have steered clear of selling through state stores, which would directly violate federal law. We are not even at the end of the beginning of figuring out the revenue issues -- and many more things -- around legalized marijuana.

This effective new Time magazine article highlights an important reality that was also stressed by my students in this week's class: there are significant differences in the tax rates and approaches being adopted in Colordo and Washington as they become the first two states with a legalized and regulated recreational marijuana marketplace.  And though a range of factors are sure to impact the "success" of new pot policies in these states, there are good reasons to believe tax policies may be the legal factor that has the most tangible and consequential impact on how the marijuana marketplaces emerge and evolve.

Because I know very little about tax policy, especially at the state level, I am certain I will be unable to follow closely and with sophistication the tax policy debates and developments that will continue to unfold as marijuana laws get reformed and marijuana markets transform in the months and years ahead.  But as the title of this post highlights, I think this is an important and fertile arena for the work of tax policy experts.

http://lawprofessors.typepad.com/marijuana_law/2013/10/why-tax-policy-experts-should-engage-with-natural-pot-experimentation.html

Recreational Marijuana Commentary and Debate, Recreational Marijuana State Laws and Reforms, Taxation information and issues | Permalink

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