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.
The North Carolina Department of Justice is producing marijuana webinars, the first one March 18 at 1 p.m., featuring Keith Humphreys of Stanford, one of the world’s top drug policy experts. Thanks to Attorney General Josh Stein for leading the charge as we try to figure out what to do.
I get to appear for 15 minutes on the second one on Friday, March 25, at 1 p.m.
Open to the public; registration required. There are two more sessions the next two Fridays.
I support a lot of marijuana taxes, even the wildly unpopular 280E Selling Expense Tax, because it favors small business over Big Marijuana, and it keeps the noise down some so as not to irritate fence-sitters on legalization, as explained here: https://newrevenue.org/2021/04/15/280e-is-a-bastard-so-what/.
But pre-consumer taxes in subordinate jurisdictions don’t make sense to me, so when I read that Humboldt County was reconsidering that kind of tax, I puffed myself up and intruded with this email:
Dear Members of the Humboldt County Board of Supervisors:
While I do not belong to your community, I had a delightful visit to Humboldt County in 2015 when I was on then-Lieutenant Governor Newsom’s Blue Ribbon Commission on Marijuana Legalization, and enjoyed meeting lots of people there then. I was co-chair of the Regulatory and Tax Structure Working Group of the Commission, and have consulted on tax policy for various governments.
I don’t envy you your task. I write to you from Theoryland, without a sense of the facts on the ground, but with some analogies to provide.
It’s natural to want to put a local tax on marijuana growers, but conditions conspire against that tax, and against amy tax imposed by a “subordinate jurisdiction” on production of a good that faces competition from producers in other jurisdictions. Examples of a subordinate jurisdiction are a state in a nation with legalized tobacco and a county in a state with legalized marijuana.
So my state of North Carolina has tobacco farmers and tobacco manufacturing, but we don’t put any special tax on them. We understand, for instance, that our farmers have competition in Kentucky, and our manufacturers have competitors in Virginia, and those states don’t tax our people’s competitors. We can deplore this race to the bottom, but there is. Now a state-wide California tax on square footage of cannabis grow area could be as workable as any other state tax, but a county tax on square footage of cannabis grow area is hard to sustain. Here is a more detailed explanation: http://thehill.com/opinion/finance/372396-how-tax-competition-can-threaten-marijuana-revenue
Allegations of problems with cannabis aim at its consumption, which some say causes negative externalities. Production is not a big source of negative externalities. There may be perceived negative externalities from growing rather than consumption beyond odor, but odor is the one externality where taxes rather than regulations might need to be relied on. (Environmental impacts seem easier to handle with regulations rather than with taxation.) And the negative externality of odor seems trivial, if it’s a problem at all.
How you make your budget work in light of these conditions, I don’t know, but I wish you the best. I see only one piece of the puzzle. Please take this for what it’s worth. And please contact me if I may be of any help.
The Ohio State University’s Drug Education and Policy Center and and the Center for New Revenue sponsored a webinar January 26 on marijuana tax policy.
My co-panelists were Ulrik Boesen of the D.C. think tank Tax Foundation, Tax Professor Ben Leff of American University Law School, and prominent California cannabis lawyer Hilary Bricken. Shaleen Title of the Parabola Center moderated.
A video link to youtube is
Here’s a searchable transcript, uncorrected and without slides or polling, from
Solving the Cannabis Tax Puzzle: Approaches for an