Month: August 2010

Two recent examples in the news prove that drawing reasonable lines in taxation is not child’s play.  New York taxes sliced bagels at 9 percent, as it taxes bagels with cream cheese spread by the seller, and exempts unsliced bagels.  Federal tax on loose cigarette tobacco is about 10 times that on pipe tobacco.

In the New York case, the answer seems to me to be to exempt bagels that are simply sliced.   They are more like a loaf of bread than they are like a sandwich.  More transformation than just slicing, like combining (as with cream cheese) or heating should be required for a change in tax categories.  The answer should definitely not be to create a new category and tax it at 4.5 percent.  Fairness is the enemy of simplicity.

In the tobacco case, I don’t know about the differences in the kinds of tobacco, but roll-your-own smokers are now happy to put pipe tobacco in their cigarettes.  The 10-fold difference is way out of whack, it seems.

This line-drawing comes up all the time.  It produces weird and embarrassing results for those of us who support some kind of taxation, but it’s manageable.

What’s not manageable is different excise tax rates based on hidden characteristics of the purchaser.   No one I know suggests having the rich and poor pay different sales taxes when they buy the same item, like shampoo (we may get some progressivity anyway if the rich buy costlier stuff).  But some proponents of medical marijuana contend that when marijuana is legalized for all, medical users should pay no or less tax.  That would be weird.

(For a more comprehensive discussion of this issue, go to http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1741735.)

The process of initiative and referendum that California and other, mostly Western, States use is a weak instrument for creating a new system of taxation and regulation .

California’s Proposition 19 reflects the wishes of the powerful forces in the marijuana community.  For instance, it doesn’t even tax marijuana:  it allows localities to tax or not tax.

This one-sided drafting is a recipe for backlash.  In a deliberative process, by contrast, if marijuana becomes legal, opponents of marijuana won’t necessarily be convinced it’s OK, but some of them may cut a deal if they see enough benefit from the revenue gain.

The American way of the Founders is not the victory of one faction over another, but accommodation.  Meaningful taxation of marijuana is the middle ground we may get to one day.

Proposition 19’s  revenue is so speculative and ephemeral that even if it passes, all the tax thinking remains to be done.