Very stiff taxes: Cigarettes in Europe? Yes. Marijuana in Colorado? No.

Colorado Governor John Hickenlooper says, “The [marijuana] industry was a great supporter of our very stiff tax rates; generally they’ve been supportive of our pretty stiff regulation,”  Colorado marijuana tax rates — relatively — aren’t very stiff at all:  Whatever assumptions you use, those taxes add up to less than 20 percent of the after-tax retail price.  That’s less than Colorado taxes cigarettes.  European cigarette taxes almost always account for over 75 percent of the retail price;  often, over 85 percent.

How can a 15 percent wholesale tax, a 10 percent retail tax, and a 2.9 percent sales raise less than 20 percent of the final price?  Because the base of the wholesale tax is so small – the wholesale price is very small compared to the retail price.  The Governor’s estimates (more ambitious than the Legislature’s  when it comes to taxes) call for the first full fiscal year of recreational marijuana sales to bring in $125,008,337 in total from the three taxes, and $612,785,960 in pre-tax price.  The wholesale tax is estimated at $45,958,948.  The estimated retail tax of $61,278,598 and the 2.9 percent sales tax of $17,770,793 add to that pre-tax price of $612,785,960 for a total after-tax price of $691,835,351.  Total taxes, $125,008,337, are just over 20 percent of the $612,785,960 pre-tax price, and just over 18 percent of the $691,835,351 after tax price.  In percentage terms, that’s less than the combined federal ($1.01) and Colorado  ($0.84) excise taxes per pack of  cigarettes, which sell there, after tax, for about $6 a pack.

To see what “very stiff tax rates” look like, look at Europe’s rates on cigarettes.  Official chart linked here and copied at European tobacco taxes 2014: Table column 8 on page 6 shows total taxes as a percentage of WAP – weighted average price. In the United Kingdom, taxes are 87.5 percent of that retail price.  The government gets 87.5 percent; the entire private sector supply chain, from farm to retail store, gets 12.5 percent.  And the U.K. is not an outlier:  Greece gets 87.45 percent; Poland gets 85.01 percent.  Of the 28 countries in the Union, only little Luxembourg has a rate below 75 percent.  Those countries don’t burden the marijuana trade with anything like our Federal Tax Code section 280E, but the Governor’s point was about rates.

Looking at it another way, in the U.K., the state gets 87.5/12.5 of what the private sector gets, or 700 percent.   That’s stiff.

Europe has stiff cigarette tax rates.  Make taxes too stiff and you allow bootlegging problems.  That’s a good reason not to have stiff taxes at first, especially at first.  And stiff tax rates would simply not allow recreational marijuana to compete with Colorado’s tax-free medical marijuana.  But for recreational marijuana, Colorado is not  yet dealing with “very stiff tax rates.”

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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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