How Marijuana Taxes Are Not Like Cigarette Taxes — Yet

On Sunday’s MSNBC’s Up with Chris Hayes, Tony Dokoupil said, “Canada had to repeal a tax that was $5 an ounce in the nineties – because of evasion.”  So he reasons that marijuana selling at retail for $100 an ounce pre-tax cannot bear a $25 retail tax.  I think that’s way wrong.

Sure, people may not pay $5 per ounce extra a for tax-paid cigarettes when a reliable competing product comes hermetically sealed in a recognizable branded package, designed by a deep-pocketed manufacturer to prevent counterfeiting and having borne tax payment somewhere.  Virtually all the evasion of tobacco taxes in the developed world involves tax-paid product crossing jurisdictional borders.

For marijuana, there is no analogy to the pack of Lucky Strikes bought in North Carolina and trucked to Canada — not yet, anyway.  Cheaters have only two options.

One way to charge close to the legal marijuana price is to counterfeit the package and fool the customer.  (Counterfeit Viagra is a problem for Pfizer – more on that in the “Gangs” article around footnotes 60 and 61.)  But counterfeiting is very expensive.  Maybe a good counterfeit could bring the taxed $125 price, but much of the counterfeiter’s gross income would be spent on the expense of counterfeiting.

Loose, unbranded, untested weed will not be any cheaper than it is today (if regulations work).  So post-legalization, unless legal prices skyrocket, why would anyone buy loose product for $120 an ounce when branded, certified legal product is available for $125?  And will criminals take such a low price for activity that is still criminal?

That false analogy is hindering the debate.  Evasion will be a huge problem, maybe an intractable problem, but it won’t involve branded, tax-paid product at first.

For more:

Tobacco tax discussion around footnotes 58 and 59:  “Gangs, Ganjapreneurs, or Government: Marijuana Revenue up for Grabs,” State Tax Notes, Volume 66, Number 4, pages 255-269 (October 22, 2012), online at http://ssrn.com/abstract=2165864 and https://newtax.files.wordpress.com/2012/10/gangs-ganjapreneurs-or-government-marijuana-revenue-up-for-grabs.pdf

Tobacco tax discussion around footnote 115, plus or minus 5:  “Laws To Tax Marijuana,” 59 State Tax Notes 251-280 (January 24, 2011), downloadable at http://ssrn.com/abstract=1741735 and https://newtax.files.wordpress.com/2011/01/20-may-2011-taxing-marijuana4.pdf.