How a weight base for marijuana taxes is less arbitrary than beer taxes

A friend objects to a weight base (X cents per gram) for taxing marijuana. “Crop quality varies enormously,” he says, “so it would be arbitrary to assess the same tax per weight for all of it.”

(For a look at an alternative — taxing by seller’s claims of THC — here is a link: https://newrevenue.org/2015/07/14/swifts-sex-tax-and-stated-thc/.)

But I still like a weight base (except if we can tax concentrates by potency).  Any tax will distort the market, one way or another.  A weight base is not perfect, but a price base is worse.

Take the beer tax. It’s based on volume only – barrels, or gallons.  Volume for a liquid is like weight for a solid.

The federal beer tax is $18 per 31-gallon barrel. State beer taxes are based on gallons, too. All these taxes apply regardless of price, or alcohol content – or quality.

Folks worry that a cannabis tax based on weight will create an incentive to make each gram as potent as possible.

But that same incentive is present with beer.   A chart labeled “Which Beer Gets You The Drunkest The Cheapest” shows that you can pay over five times as much for the same amount of alcohol in beer. But folks still buy beer that’s less potent that the most powerful. (You can pay three times as much per ounce of beer itself – without even getting into boutique brands.)

Those beer taxes are . . . arbitrary!   Guilty as charged. Beer taxes bear little or no relation to perceived quality, if price reflects perceived quality.  But beer is easy to measure, so beer taxes are easy to  collect.  The scandal with beer taxes is not that they create an incentive for potency, but that they are not indexed for inflation.  Rates have decreased by more than 50 percent in real terms since 1991.  That’s a huge tax cut.

Still, I’m all for taxing beer by potency, because we can measure the alcohol content of beer.  We can’t measure THC in bud accurately enough to prevent the formation of a testing industry focussed on manipulating test results.  (Concentrates may be homogeneous enough for reliable, nongameable results.)

Now for marijuana, or cannabis: The prices for bud I’ve been looking at online are in the range of a 2 to 1 or 3 to 1 ratio.

Weedmaps, http://www.priceofweed.com, at 8:07 am EDT April 28, 2014, gave these less dramatic ratios:

California, United States

High Quality: $242 / oz. (n=17895)

Medium Quality: $189.01 / oz. (n=21312)

Low Quality: $180.69 / oz. (n=1202)

(“n” is the number of reports Weedmaps received.)   So a weight tax for bud, where price doesn’t vary so much with “quality,” may be even less arbitrary than beer taxes.  A per barrel tax on beer is arbitrary, but we live with it.

Taxing bud and trim at separate rates, as Colorado does, and as Oregon and Alaska are about to, eliminates a huge amount of arbitrariness.

A weight base for bud and a separate potency base for concentrates might shift some lower quality bud into concentrates. That’s a market distortion, but not a disaster.

Perfection is not to be had. It’s not that a weight base is so good, it’s that a price base is so horrible, as Chapter 5 of the RAND Report indicates. A price base works so poorly that Colorado abandoned it for marijuana.  Beyond Colorado’s problem, you’ve got sweetheart deals, free pot with pipe purchase (banned in WA as of February), discounts for employees and shareholders, and more gaming.  Price manipulation is how U.S. companies have stashed $2.1 trillion overseas.  That’s $2,100,000,000,000.  “Transfer pricing” is the name of the game.

[An earlier version of this post looked at liquor prices in my state of North Carolina, where we have a liquor monopoly, and can buy only from state stores. Liquor prices per ounce of alcohol vary even more than beer prices do. Then I got some questions and comments from Brett Stone, who helpfully aggregates news about marijuana at https://groups.yahoo.com/neo/groups/mmjnews/conversations/topics, or click here.  Mr. Stone pointed out that liquor prices are more complicated, especially when different states are involved. So, to make it simple, I switched to writing about beer.]

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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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