A Way Past The Marijuana Dilemma — Federal Taxation

Posted here: http://www.huffingtonpost.com/pat-oglesby/a-way-marijuana-dilemma_b_2490720.html:

Pat Oglesby

Tax lawyer; Founder and president, Center for New Revenue

A Way Past the Marijuana Dilemma

Posted: 01/16/2013 5:51 pm

 

November’s votes to legalize marijuana in Colorado and Washington have stuck the executive branch with an awkward choice — attack state-legal activity, or ignore it. So the administration is dodging the issue as best it can. The legislative branch, though, is not limited to “Just Say No” — or Just Say Yes. Congress, and only Congress, can calibrate a thoughtful response — through the taxing power.

The problem for the federal government is not so much what folks in two states out West might smoke; the real problem is cheap, state-legal marijuana flooding the country, especially from Colorado, where marijuana taxes are minimal. Legality allows economies of scale that will bring pre-tax prices crashing down.

An executive branch “Yes” to state legalization makes the threat of cheap marijuana nationwide obvious. But saying “No” might not work. Saying “No” would isolate the federal government, because it can’t legally make a state return to banning possession. To enforce federal marijuana laws, a new federal police force would have to be brought into a state, and the cost of that single-purpose federal policing, in money and personnel, would be huge. Saying “No” would also shut down useful state regulation and taxation. And juries might hesitate to convict their neighbors who are prosecuted by the federal government while explicitly obeying state law.

But there’s a middle ground. A strong federal marijuana tax could prevent cheap, legal product from spreading into the other 48 states. A high federal tax could give full rein to state taxes. That is, states could tax first and fully: That’s what happened under the old “soak-up” federal estate tax credit for state inheritance taxes, when the federal government gave the states the right to a set amount of death tax, to take or leave. (They took it.) A cautious Congress could also add protective regulations to whatever Colorado and Washington come up with.

Marijuana legalization is not going away. The victories in Washington and Colorado made the headlines, but November also saw 46 percent of voters in Oregon support a ridiculous monopoly scheme that would have put all revenue and regulation in the hands of a Cannabis Commission controlled by growers and processors. The closeness of that vote proves that the tide has turned. More sensible plans are coming in other states. Soon.

How many billions of tax — federal and state — could the marijuana market bear? The official estimate for the new Washington state law is $564 million per year, or about $82 per resident — not per consumer. Maybe that’s off, but extrapolated nationwide, that would work out to about $26 billion. That figure is roughly in line with a $30 billion national marijuana retail market and a tax take of 80 percent of the retail price — the burden of taxes on cigarettes in Europe. While $24 or $26 billion may not be the yearly tax inflow – who knows? — marijuana revenue is nothing to sneeze at.

The administration’s awkward dilemma — and Congress’s likely inaction — may confirm the popular view that the government of the United States is, as Richard Nixon put it, “a pitiful, helpless giant.” But as voters in Colorado and Washington have shown, the political ground can shift overnight.

Patrick Oglesby is a former Chief Tax Counsel of the U.S. Senate Finance Committee.

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Author: patoglesby

From 1982 to 1990, I worked in tax policy for Committees of the United States Congress. In recent years, I was Adjunct Lecturer at UNC-Chapel Hill's Business School and then Adjunct Professor at its Law School.

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