Starting in late 2009, I tried to be the world’s expert on cannabis tax policy, but now, at 75, I haven’t needed to try for a while, because first-rate tax policy scholars have been looking at and writing about marijuana revenue. They cheer me up. Here are writings, roughly in reverse chronological order, showing why I have been easing up.
Lots of drug policy scholars look at cannabis revenue policy too, and plenty of interested industry people do, but my own background in tax leads me to appreciate especially the tax policy specialists who have taken up this work. There’s plenty still to do, and our wide variety of state experiments will help Congress figure out what to do eventually.
A greater need now for me is to follow not just licensing revenue but the whole licensing process, where policymakers are flailing. Nothing works – on the merits, lotteries, social equity – all end with arguable unfairness and time-consuming appeals.
In my state, North Carolina, the State Senate has passed, with negligible debate, a huge medical cannabis bill, SB711, licensing only 10 vertically integrated marijuana sellers, who will be well-heeled investors. We can do better. So watch this space.
After spending weeks writing an article warning of the dangers of interstate commerce or federal legalization for states that (1) tax marijuana by weight (Alaska, California, Colorado, Maine, and Nevada) or (2) collect pre-processing (Canada; Alaska, California, Colorado, Illinois, Maine, and Nevada) and publishing it in Tax Notes, I remembered that New Jersey did both.
Yesterday, I posted a hope that the Dormant Commerce Doctrine does not apply to federally illegal cannabis.
My friend Rob Mikos, a law professor at Vanderbilt and probably the leading expert on marijuana federalism, graciously responded to an email copying that post, writing, “I agree with the policy argument, but not the legal one.”
He points out that the Dormant Commerce Doctrine is old and settled law, operating in the face of the 10thAmendment for centuries. He’s the expert, so I’ll back off from any hope that as a practical matter the 10th Amendment will come to the rescue of state freedom here.
The Dormant Commerce Clause cases that force states to accept out of state owners for local cannabis licenses strike me as wrongly decided.
Congress’s faint, implied, “dormant” display of intention to open markets in an illegal substance to all comers seems dwarfed by the 10th Amendment’s express and overriding reservation of power to the states to do whatever the heck they want. “The powers not delegated to the United States by the Constitution, nor prohibited by it to the States, are reserved to the States respectively, or to the people.” The Constitution doesn’t prohibit states from regulating commerce – Congress can allow them to regulate commerce, though it rarely does.
“Studies [the link is to an article with an impressive number of authors] have shown that the THC:CBD ratio also influences the level of psychoactivity experienced by cannabis consumers. For infrequent cannabis consumers, when CBD is present at much higher levels than THC, intoxication is reduced compared to THC alone. Conversely, consumption of THC (8 mg) together with half as much CBD (4 mg) enhances the intoxicating effect, but only for infrequent consumers. In people who frequently consume cannabis, the intoxicating effects of THC don’t change much when combined with CBD. This indicates that the psychoactive effects of cannabis can change based on the THC:CBD ratio in a way that depends on your level of consumption experience.”
Here is an edited transcript of part of Stanford Professor Keith Humphreys’s appearance on North Carolina Attorney General Josh Stein’s Webinar series on medical cannabis in North Carolina: 13’16” mark of https://www.youtube.com/watch?v=aXRI3txu-R4.
. . .
[A] goal a lot of people have is equity — if they want to create an industry, they want to make sure that all groups can participate equally. One point about that is that if you go forward with any type of legalization, medical or recreational, to consider the option of a state retail monopoly — and you will know what those are because you live in North Carolina. I grew up in West Virginia; we had a state retail monopoly in alcohol. North Carolina does as well.
In general retail monopolies (that’s where the industry still produces the product; the state sells it) have a better record of hiring diverse employees than do private companies. I mean that’s one of the striking things I’ve noticed. I live out here [in California] next to a lot of venture capital firms that finance this industry. They talk a lot about racial equity but it’s remarkable how almost uniformly white the people who run that industry are. But state retail monopolies do better than that and that might be a way to promote more equitable employment
The second point is that our experience with alcohol, of which we have a lot, is that retail monopolies reduce consumption and related problems. The states that have ABC stores have lower rates of youth binge drinking, automobile accidents involving alcohol, and so on. So if you decide to go forward a retail monopoly could give you some public health protections as you move the system out across the state.
The last point is that the incentives of profit retailers are to promote a lot and have two for one sales and hype the product and so on, but you don’t have that in a state retail monopoly, so that’s another way to — if you want to go forward — not have some of the costs that come when the when a drug gets linked to the pursuit of profit.
And here is the unedited transcript of the entire session, with Dr. Humphreys followed by Dr. Steve Wyatt, a board certified psychiatrist and the current chairman of the North Carolina Psychiatric Association’s Addiction Psychiatry Committee, and Eric Sweden, a DWI Program Specialist at the North Carolina Department of Health And Human Services:
Whatever we think of judge-made law attempting to read Congress’s unexpressed mind, allowing states to restrict commerce in something the federal government expressly refrains from legalizing (because it doesn’t know how ) helps the goal of allowing states to run experiments, even bad ones, with all the freedom we can muster , as we try to figure out how to legalize federally. Let the Labs of Democracy percolate.
And wouldn’t Congress opposed to marijuana applaud any restrictions states might put on?
“Legal weed producers and sellers in Washington and Colorado have a better chance at capturing market share than they do in other states. That’s not just because of lower taxes and regulations. It’s also because those two states have been open for recreational and adult use the longest.”
The casual reader would think that cannabis taxes in Washington are low, but they are the highest in the world.
When I look at cannabis writing, I search for the tax part to judge the whole thing. Since the authors are off-base on what little I’ve seen from them on taxes, I won’t bother reading this book.
My old friend Maurice Foley from Senate Finance staff days has risen to become Chief Judge of the U.S. Tax Court, and is teaching a class at the University of San Diego Law School. I’m to make a remote guest appearance June 21 on marijuana taxation.; here are the slides for that appearance.
I’m having to miss a conference in Seattle starting tomorrow on federal legalization of cannabis in connection with taxes, pricing, and illegal markets. Here are notes for what I hoped to say.
States fall into 4 categories:
7 states with weight-based taxes or producer taxes that will be eviscerated by interstate commerce in products like imported edibles: Alaska, Colorado, Illinois, Maine, New Jersey, and Nevada – and California, unless its Legislature acts. [Those states could use a separate small session.]
2 states, New York and Connecticut, whose potency taxes may be tested locally by imports that haven’t been tested in-state.
For any state with taxes, federal legalization brings problems and maybe opportunities:
Federal legalization and elimination of the federal prohibition premium would probably make pre-tax prices lower, leaving more room for state taxes, but new federal taxes might crowd out state taxes.
Federal taxes might bring standardization of measurement and piggybacking opportunities – like tobacco taxes today, where the federal government’s blessing of the weight of a pack of cigarettes means states don’t have to weigh packs independently. Federal weight or potency standards could make state weight or potency taxes just peel off.
Interstate commerce could bring a race to the bottom on marijuana taxes, as we have today with tobacco taxes, as the Eric Garner case shows. Now some states may want to race to the bottom, and become marijuana tax havens, but Congress could solve that problem in advance, by giving a capped rebate, or a credit against federal marijuana tax for state taxes paid. So if the federal tax rate is $10, they could give states a credit up to say $8. If the state tax is zero, the federal tax is $10. If the state tax is $5, the federal tax is $5. If the state tax is $8, the federal tax is $2. If the state tax is $9, the federal tax is still $2, because the credit is capped at $2. States would have no incentive to race to the bottom. If the states get together, Congress will listen. We’re still at the starting gate.
Medical marijuana passed the North Carolina Senate, 35-10, after this hearing in the Rules Committee, where I speak at the 36’45” mark — mostly about how state retail sales are safer, more lucrative, and maybe faster than issuing licenses to just 10 vertically integrated corporations.
My two-minute appearance starts this way: “Thank you, Mr. Chairman, I’m Pat Oglesby, a lawyer with the nonprofit Center for New Revenue.Marijuana is coming. Iit makes people nervous but we’re gonna have it and the patients are gonna be getting their medicine — and I like to think about where the money goes. And right now [under SB711] you’ve got these 10 corporations set up. Antitrust? [Maybe] you can’t bring an antitrust action for selling a federal illegal product. But the antitrust policy of not concentrating all this economic power in these 10 companies: It’s the same policy.”
California’s illegal cannabis market is thriving because state taxes there are too high, says a Reason article to which my friend Dr. Dale Gieringer, head of California NORML for decades, recently wrote a Foreword. Dale points out other causes, too, like costs of regulation, lack of licenses, local taxes, and a huge legacy market.
I wrote Dale to say that weak enforcement of laws against tax evasion, too, must be a major problem in California, and that no tax burden is low enough to marginalize the illegal market if marijuana tax evasion is winked at, as in California, where the crime is a misdemeanor, and the only penalty to fear, apparently, is a $500 fine (or getting water and power cut off). What, I asked, about the statutory penalty of six months in jail – is that actually happening?
Here’s Dale’s reply, which he authorized me to quote:
With regards to what’s happening in California, no one is going to jail for pot. But they’re not going to jail for robbery and assault either.
There are so many illegal dispensaries in LA that the cops rarely try to bust them. And if they do, there’s not much they can forfeit. The culprits rarely have much money with which to pay fines.
There are bills in the legislature to raise the penalties for illegal cultivation, but I wouldn’t expect them to have much impact. We’ve been there before. The state tried unsuccessfully for forty years to end the trade that way.
Sharing marijuana wealth may not amount to much, but it’s a start.
Sharing wealth is ordinarily extremely hard, because it involves taking wealth away from rich people, who are inordinately influential. Sharing cannabis wealth in the move from illegality to legality is much easier, since no one owns the wealth yet.
Start with state sales, as North Carolina does with liquor, not just to share the wealth, but to temper the profit motive for selling a tricky drug.
Our boldest and most risk-tolerant capitalists and entrepreneurs envision unlimited upside if they stoke demand for weed. Let’s nudge them to work on other tasks.
The federal government is threatening to confuse a confused state marijuana tax scenario even further. Here are some 4,000 dense words warning of uncertainty and traps ahead. After the first version with footnotes, there’s a link to a different version with endnotes.