“We have found in applying the income tax that where you were conservative in the upper brackets you received more money than you did where you put a real high tax in those brackets.” John J. Cochran, Member of Congress from Missouri, December 14, 1933.
Some of the opponents of marijuana legalization, I call them the Just Say Never crowd, remind me of Graham Martin, the U.S. Ambassador to South Vietnam at the time of the fall of Saigon. Martin appears in “Last Days in Vietnam,” http://www.lastdaysinvietnam.com/, a documentary by Rory Kennedy. He refused to contemplate the possibility that Saigon would fall. He rejected any and all attempts to plan for defeat. So, instead of huge aircraft or naval vessels being brought near the capital and the Embassy to do the evacuating, we saw the spectacle of desperate folks clinging to helicopters. The Ambassador reminds me of the Just Say Never crowd — they would be better off dealing with reality. Instead of abandoning the debate of How to legalize to the fans of marijuana, they might adopt the tactic of trying to figure out a middle ground (limiting advertising, keeping prices from collapsing, whatever they might think makes sense).
But by refusing to face the prospect that their position will turn out to be untenable, the Just Say Never crowd may be turning a manageable situation into a rout.
Could the nation collect $35 billion in marijuana revenue? Drug policy expert and my friend Mark Kleiman says:
“Producing [a year’s supply of] cannabis and distributing on the legal market might cost you $5 billion — but only if you did it clumsily.
. . .
“I don’t know what it would cost to run those dozen farms [needed to produce a year’s supply] but not a lot of money. Then you’d have to cure it and process it and test it and package it and label and distribute it and market it. Still, a couple billion dollars. The rest of the $40 billion plus whatever the spending is by the new users is available as tax.”
Tax collections (or monopoly profits) of $35 billion ($40 billion less $5 billion) reflect just the current market — no new use. But collecting that large amount requires political will, national uniformity, wholesale conversion of the medical marijuana market to taxed recreational use (as Ethan Nadelmann predicts), and a determined effort to beat the black market.
UPDATE 23 July 2018: The cannabis market seems likely to exceed $40 billion Kevin Murphy, the CEO of the company that John Boehner joined, predicted $100 billion before long. But the government take won’t likely get to more than half of the total after-tax price. Europe collects only 80 percent of the consumer price of cigarettes in taxes (80 for government, 20 for all sellers in the supply chain. RAND-Vermont, https://www.rand.org/pubs/research_reports/RR864.html, page 80 — 400 percent of the pre-tax price, though it doesn’t operate that way). Cannabis will not bear such a high tax burden. https://newtax.files.wordpress.com/2014/08/laws-to-tax-marijuana-published-version-in-state-tax-notes.pdf, page 258.
Click for PDF: Oglesby, Pat, Ace in the Game – Revenue from Legalized Marijuna, April 16, 2014 (earlier version pasted below and at Oglesby, Pat, Ace in the Game – Revenue from Legalized Marijuna, April 14, 2014). This paper is on the “Programme” for the International Society for the Study of Drug Policy meeting in Rome in May, http://www.issdp.org.
The formatting in the PDF above is better than this:
The Ace in the Game: Revenue from Legalized Marijuana By Pat Oglesby, M.B.A., J.D.* April 14, 2014
After marijuana is legalized, the costs of producing and selling it will collapse. A windfall economic gain will be up for grabs. Policymakers might allow that gain to go to consumers (encouraging use) or to cannabusinesses (encouraging production). Or, through revenue measures, they might direct the gain elsewhere, or to society as a whole. New revenue for government does not justify legalization of marijuana. New revenue may not cover the costs that legalization creates, and a revenue stream gives government a permanent stake in intoxication. Revenue is only one card in a large deck of drug policy options. But it is the most powerful card.
How to play it? The safest, correctable way to distribute an intoxicant is government monopoly, Uruguay style. Retail-only monopoly can match or beat bootleggers’ wares. But monopoly breeds cronyism and corruption, unless power is spread around and transparent. In the United States, states might need to tweak the monopoly model to keep state control over location and price while assigning sales concessions to businesses.
A riskier plan is taxed commercial distribution, Colorado and Washington style. In the inevitable price war, bootleggers will act in a New York minute; Legislatures will not. That is a handicap. And no tax is perfect. Taxing by THC potency is theoretically appealing, but unworkable. A price tax base has several pitfalls. Even a weight base is problematic.
Three other models are possible: auctioning licenses, collective farming, and sales by non- profits.
Since no one really knows how to legalize, flexibility to change course is of the utmost importance. Continue reading “The Ace in the Game: Revenue from Legalized Marijuana”
Tom Chorneau of Cabinet Report, an education journal, has a thoughtful article hitting the main issues here. Excerpts:
(Colo.) In a development that might have seemed unthinkable only a few years ago, cash-strapped school officials nationwide can rightly anticipate the next big windfall in state and local tax revenue – legalized marijuana.
. . .
“One approach is for schools to jump in and say, ‘Yes, let’s tax it and get the revenues,” explained Pat Oglesby, an attorney and former Congressional tax staffer, who has written extensively on the issue of marijuana and taxation.
“Another approach is to say, ‘Let’s tax it and deter or discourage use,’” he said. Continue reading “Sin tax for schools? Cabinet Report”
Here’s how Colorado’s 15-percent wholesale level marijuana tax is actually a tax of 62 cents a gram for flowers and 10 cents a gram for trim. Continue reading “Colorado’s Marijuana Tax: 62 Cents per Gram of Flowers”
The City of Oakland enacted, a while back, an annual fee of $211,000 for each of four “marijuana factories.” Other schemes to raise revenue through licensing at all levels of commerce are numerous. Requiring licenses for everyone in the supply chain conforms with evolving international standards for tobacco. Making licenses expensive or otherwise restricting them narrows the supply chain at a possible choke point. Consumer licenses have been suggested,  and correspond to cards issued to medical marijuana patients.
Auctioning licenses could let government share the proceeds of legalization. An annual license auction might be optimal. After the first year, the incumbent might be able to outbid others because of intangibles it developed from the first year’s license. (Entrenched incumbent sellers are not necessarily a good thing.)
So what if the incumbent had to outbid competitors by a compounding excess? Say 10 percent. So the second year, the incumbent would have to pay 110 percent of the next bid; in the third year, 121 percent, and so on. After ten years, the incumbent would have to bid some 2.5 (1.1 to the 10th power) times the next bid to prevail. That rule could spread the wealth and power around — or finance spending, allow tax cuts, or reduce debt. Continue reading “Auctioning marijuana licenses — exponentially”