Colorado freezes marijuana tax rates

Colorado just avoided a 50-percent hike in the rate of tax on flowers or bud, from 62 cents a gram to 95 cents.  An administrative tax increase was squarely on the table, put there by a finding of fact by Colorado’s Marijuana Policy Group.  But the Department of Revenue rejected that finding and held rates steady.

Background:  Colorado imposes a 15-percent tax on wholesale sales of marijuana. Supposedly. In fact, a taxable “wholesale” price, an “average market rate,” has to be imputed because vertical integration involves no actual wholesaler.  For the first six months of 2014, the “average market rate” for bud (flowers) was $1,876 per pound. So the 15 percent tax on flowers was $281.40 per pound, or 62 cents per gram.That rate is to be reset every six months, so a new rate was due for the second half of 2014.

Colorado’s Marijuana Policy Group recently indicated that the “average market rate” for bud (flowers) had risen to $2,865 per pound from $1,876 per pound. That would mean the 15 percent tax on flowers would be $429.75 per pound, or 95 cents per gram, instead of the January-to-June rate of $281.40 per pound, or 62 cents per gram.

The Department of Revenue didn’t accept that proposed tax increase. It didn’t supply numbers of its own, but did not think there was enough information to change the rate, so it concluded that “DOR will not be adjusting the market rate at this time.” So the “wholesale” tax flowers bear will remain 62 cents per gram for the rest of 2014.

Keeping marijuana tax rates low until the legal recreational market can undermine the black market and the fake-medical market makes sense, I think.  Colorado is in the early days of establishing a legal recreational market, so low tax rates probably make sense there still.

I don’t know the facts on the ground, but my guess is that the Department of Revenue is making the best of a bad situation – a wholesale tax imposed in percentage terms by the Constitution. If the facts warrant or demand a tax increase, it’s hard to think anyone will have standing to sue the Department for not raising taxes enough.

UPDATE August 31:  The Policy Group imputed a wholesale price by trying to figure retail price and subtracting an estimated markup.  (Lots of guesswork.)  Despite all the guesswork, if the target is 15 percent of the future price — and that should be the target — the Department of Revenue’s number may well be more accurate than the Policy Group’s, even if the Policy Group reflected the facts on the ground during the January to July period. That is, the Policy Group is looking to the past.  Let’s say its number for the past is right.  The number for the future is likely to be lower.

There was a spike in prices in early 2014 as supply was short in the early days of legalization. Novelty purchases may have boosted prices from the demand side, but no doubt had less of an impact than short supplies.  As time goes on, prices will come down.

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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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