Taxing Stated Marijuana Potency (a Book Income Analogy)

A new and fresh idea came up while talking yesterday with Beau Kilmer of RAND.  (Thanks, Beau.)  In addition to the primary tax on marijuana plant material, maybe based on weight, jurisdictions could add on a little tax calculated on basis of weight-adjusted potency (in terms of THC content) claimed by the seller.

I’ve opposed taxing marijuana plant material on the basis of potency, because potency there can’t be replicably measured.  (Concentrates, unlike unprocessed marijuana plant material, are fungible enough to yield replicable potency testing results.)  Beau is interested in labeling marijuana so consumers have more information, and no one is stopping marijuana sellers from having marijuana plant material tested and then reporting the results to consumers.  Some jurisdictions may require potency testing.  However accurate those tests may be, relatively high stated (reported) THC levels may tend to entice consumers to buy.

A tax on the potency that sellers claim (accurate or not) could work like the short-lived minimum tax preference item of book income reported to shareholders — a tax consequence for a claim that helps the company with stakeholders.  The book income preference had its detractors, and I don’t say it’s a good idea.  But taxing stated potency creates a healthy tension for marijuana sellers who look to soup up the results of potency testing by shopping for a lab that will report undue concentration of THC.

I’d be reluctant to rely too heavily on stated potency – shrewd sellers could write claims for potency that bypass stated THC content.  So I’d make it an add-on rather than the primary tax.  But it’s an arrow in the tax quiver.

We have a long way to go.  We haven’t even fleshed out all the options.

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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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