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April 24, 2013

States seek to find right tax formula for newly legal recreational marijuana

This notable New York Times piece, headlined ""Colorado Ponders the Economics of a Marijuana Tax," highlights the challenges of fuguring out the best state tax structure and rates for legalized marijuana. Here are excerpts:

If marijuana is legalized and properly regulated, its proponents have long said, it could generate millions of dollars in state tax revenue.  But how the drug should be taxed has proved to be a thorny question.

In Colorado, where voters approved a measure in November legalizing small amounts of marijuana for recreational use, officials have been grappling with this issue for months as the state works to forge a cohesive regulatory code.

This week, legislators here will consider excise and sales taxes on marijuana of up to 30 percent combined.  The proposal emerged from a task force of health officials, representatives of the state’s rapidly developing marijuana industry and others that was commissioned last year to help develop rules for marijuana.

The goal, task force members and lawmakers say, is to set taxes high enough to finance the administration of new laws, but not so high that customers are driven back to the black market.

“We should see a financial benefit as a state that can help pay for enforcement and other fundamental issues,” said Christian Sederberg, a Denver lawyer on the panel whose firm helped draft Amendment 64, the measure legalizing recreational marijuana.  “The other side is that if you tax something too high, then you simply crowd out the regulated market.  We’re confident we’ll find the right balance.”

Under the proposal, the first $40 million collected from a 15 percent excise tax would be used to build public schools.  Revenue from a 15 percent sales tax imposed, in addition to the state’s 2.9 percent sales tax and any local sales tax, would be apportioned to local governments and for enforcement....

State Representative Jonathan Singer, a Democrat from Longmont and the bill’s sponsor, said finding the right tax rate was also a matter of public safety.  “The big thing is that we want to make sure we’re able to put the appropriate safeguards in place so that marijuana doesn’t end up in the hands of kids, criminals or cartels,” he said.

Not everyone is certain that a tax is a good idea.  Michael Elliott, executive director of the Medical Marijuana Industry Group here, said he feared that too heavy a tax could make it hard for any marijuana business to survive, because Colorado’s black market is so entrenched....  “Higher taxes on the legal, commercial model will prevent the transition to a legitimate market from happening and keep more people buying it illegally,” he said....

In Washington State, where voters in November passed a similar measure legalizing small amounts of marijuana for personal use, taxes will be levied in three tiers of 25 percent each on producers, processors and retailers.  Those taxes were laid out in the initiative that voters approved, and passing on the costs will result in an effective rate for consumers of 44 percent, according to the state’s Liquor Control Board, which will administer marijuana regulations....

Jeffrey Miron, an economics professor at Harvard University and a senior fellow at the Cato Institute, a libertarian group, cautioned that while both states’ approaches seemed reasonable, he doubted the taxes would create a substantial windfall.  Dr. Miron, who supports legalization, said that as long as federal marijuana laws continued to be unsettled, collecting taxes would be challenging.  Moreover, he said, there is no way to predict how many customers would continue to buy on the black market.

After Prohibition ended in 1933, states levied taxes on alcohol, in part because they were desperate for revenue after the Great Depression.  But that shift, Dr. Miron noted, was undertaken with the full support of the federal government.  “It’s easy to get a little overexcited that legalizing marijuana is going to solve the world’s budgetary problems,” Dr. Miron said.  “But the question for the tax revenue part of this will be how much the federal government allows these markets to come completely above ground.”

April 24, 2013 at 01:47 PM | Permalink

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Comments

Cigarrette taxes are around two to three hundred percent. I doubt that a forty percent excise tax will force anyone into the black market. I think the tax authorities underestimate "the grow your own" movement. Unlike, tobacco which is a pain in the ass to grow and prep for smoking, it is really easy to grow pot in a sunny window or on the patio. I am not saying that I because I grow any, but I know about people who do, and it's really, really easy.

Posted by: Jardinero1 | Apr 24, 2013 5:21:38 PM

You would almost think it were considered a weed or something.

Posted by: Soronel Haetir | Apr 24, 2013 6:41:50 PM

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