Here are three big issues that I overlooked in “Laws to Tax Marijuana,” printed in State Tax Notes on January 24, 2011. The three biggest I’ve discovered so far, anyway. And a few small mistakes.
1. The high probability that collapsing prices will gut a percentage-of-price tax base. The 2105 RAND Report on Vermont puts it this way: “An ad valorem tax is administratively simple but has the disadvantage that it will fall as market prices fall; if the goal is to keep the after-tax price at some target level, ad valorem taxation is not the way to go.” I just missed the issue in 2011, though I went on and on about the pros and cons of tax bases (price, weight, potency, square feet).
Beyond the price collapse, there other problems with an ad valorem tax, which it took me a long time to figure out:
A. Actually calculating a producer price when there is vertical integration, or when buyer and seller are related parties. That’s why Nevada has converted its producer price (15%) to weight. Colorado converts except in arm’s-length transactions.
B. Actually calculating a price in cases of bundling – Heres’ a pipe that costs $35, and it comes with a free 1/8 of an ounce.
C. The weakening of the tax as a public health tool when standard, legitimate discounts (e.g., for quantity and to employees) are given; and extra difficulties arising from such a wholesale tax in the case of vertical integration.
Colorado and Nevada, with per-unit taxes that apply to 7 categories of product each, show that per-unit taxation is not untenable, as the right-leaning Tax Foundation suggests.
2. The revolutionary importance of concentrates. Laws to Tax said this: “A seal or stamp could also mark packages of infused brownies, sodas, olive oil, chewing gum, or whatever policymakers allow sold.” But when it came to taxing by potency, I thought only about homogenizing dried plant matter in 2011, not about concentrates at all.
3. The technicality threatening the deductibility of state excise taxes under section 280E of the federal income tax. I’m not sure I focused on this problem before late 2014, when folks in Washington State were trying to fix it. UPDATE. STRIKE THAT. A summer 2015 IRS ruling made it clear that Washington State didn’t need to change its law at all. https://newrevenue.org/2015/08/02/whats-next-for-280e/. So Washington’s law change was in large part a wild goose chase.
The point of this list is to raise the possibility that more unforeseen consequences will turn up, no matter how hard we think. The inspiration for this list came from an outfit involved in funding the RAND Report. GiveWell’s list of its own shortcomings appears here: http://www.givewell.org/about/shortcomings.
[UPDATE March 2015: A fourth mistake:
I wish I hadn’t written: “The theory behind medical marijuana is hard to reconcile with local option, at least for possession.” Some of the current practice of medical marijuana in California, though, is a joke. Once recreational marijuana is legalized, separate treatment for medical marijuana loses its moral appeal. It retains only financial appeal. Localities might well decide independently how to respond to financial claims.
And a fifth, to get dates right that I got wrong: “The tax increases that the framers of the 1934 tax envisioned were indeed gradual at first. Congress increased the 1934 rate on liquor, $2 per proof gallon, to $2.25 per proof gallon in 1938 and to $3 in 1940. Then World War II changed everything. In 1941, the rate rose to $4; in 1942, to $6; in 1944, to $9. That increase was 450 percent (414 percent in real terms) within 12 years.”