Editor’s note: This commentary is by Pat Oglesby of Chapel Hill, North Carolina, who is the director of the nonprofit Center for New Revenue, a former chief tax counsel of the U.S. Senate Finance Committee, and an independent co-author of the RAND marijuana report for Vermont. The views presented here are only his own.
[P]assing a law that shares wealth may be controversial. But what if the wealth doesn’t exist unless the law is passed?
Think of the wealth a government creates when it legalizes a drug. There’s legal commerce, and legal wealth, that didn’t exist before. In a pure free marijuana market, all that previously illegal wealth would go to capitalistic businesses. In a pure state monopoly, from seed to store, it would all go to the people – or, at least to their representatives.
Between the extremes, there’s a hybrid: Private growers could sell to liquor-like state-controlled stores. State stores put the legal wealth from retail marijuana marketing in public hands. Critics say the black market can outmaneuver any bureaucracy, but private suppliers could provide flexibility.
When it comes to growing, limits on growing rights can share the wealth, as the FDR-New Deal agricultural model did. It limited each farmer’s cultivation area, and spread growing rights, for tobacco and other commodities, among many, many small farmers.
Taxing early allows you to get your arms around product and identify what is legal. … Taxing late helps you trace product through channels.
Another way to share wealth is through taxes — on production, distribution, and sale. Wait — won’t marijuana taxes be regressive – the opposite of sharing the wealth? Well, even if consumers bear the tax, legalization as a whole will avoid regressivity, so long as the total price of taxed legal marijuana is no higher than current black market prices. And if businesses bear the tax, the regressivity argument goes away.
At first, taxes might be aimed low, to make black-market products scarce. One option is a tax holiday, with taxes starting at zero and phasing up over time. But later, RAND’s report for Vermont on legalization predicts “a maturing industry will achieve innovations and economies of scale that sharply reduce the price.” The black market, if law enforcement pushes it into the shadows, as it should, will be left behind. Then the tax can go up.
Where, when and what to tax? Taxing early allows you to get your arms around product and identify what is legal. Some Humboldt County, California, growers have asked for a Day 1 canopy tax on grow area – progressively taxing bigger operations at a higher rate. Colorado collects a weight-based tax from growers, and Alaska is preparing to collect the weight-based tax already on its books. Taxing late helps you trace product through channels. Washington and Oregon tax at retail, and Colorado taxes there, too. Like Colorado, California’s major, funded 2016 initiative would tax producers by weight, and then retailers by price.
Taxing THC, the main intoxicant, directly, might be ideal, but measurement is impractical. That’s why no government taxes tar and nicotine in tobacco directly – they are too hard to measure accurately.
Taxing as a percentage of price presents two problems. The smaller problem is rigged prices, like employee discounts, and free-pot-with-pipe deals. The second problem is the real deal killer. When pre-tax prices go down, taxes go down, too. That’s the opposite of where they should be going. Marijuana is likely to get very cheap – it’s just a plant. If taxes collapse along with prices, revenue will go down, and marijuana may become too easy for youth and abusers to buy.
Taxing by weight tends to incentivize high-THC plants, but, for now, it’s the obvious answer. Taxing by weight is the gold standard – it’s how the federal government taxes tobacco (and alcohol, too, where volume is like weight).
For folks who want to accumulate the new marijuana wealth for themselves, sharing it has no appeal. But legislatures and voters with a different view can choose among several ways to spread that new wealth around.
