Superseded by https://newrevenue.org/2015/05/26/oregons-wrong-direction/, link here.
Earlier iteration: See UPDATE May 25, near the end of this post, for a somewhat more developed analysis. Still thinking this through. THIS WILL CHANGE.
Jeff Mapes at the Oregonian writes:
SALEM—Oregon legislators on Monday unveiled a proposed retail sales tax for marijuana that would replace the harvest tax approved by voters.
The proposed sales tax was one of the major provisions included in a new 104-page amendment aimed at implementing the marijuana legalization initiative approved last November by voters.
. . .
The sales-tax proposal didn’t include any specified percentage. Legislators said staffers are still trying to figure out how much to charge so it raises about as much as a harvest tax.
Legislators on the House-Senate marijuana committee said a sales tax has several advantages over the $35-an-ounce tax on marijuana flowers and $10-an-ounce tax on leaves contained in the Measure 91 initiative.
Prozanski said a sales tax would better accommodate fluctuations in the price of marijuana. He said that marijuana flowers – the most potent part of the plant – have dropped in price recently and that a set-in-stone tax of $35 an ounce could make legal marijuana uncompetitive with the black market.
In addition, Prozanski and other legislators said a sales tax would more readily allow the sale of medical and recreational marijuana by the same retailer, who could simply exclude medical marijuana patients from having to pay the tax.
Trying to think this through:
Take the argument that a percentage-based tax will solve the problem of price fluctuations. That’s true only if black market prices move in tandem with legal prices, right?
But why should they? To meet competition. But low prices to meet legal competition will hurt the black market – which is the point.
High prices by the legal industry need more help in beating the black market than low prices.
Enforcement is essential to keeping black market prices up.
Lots to think about.
UPDATE MAY 25, 5:03 P.M. EDT:
To beat the illicit cannabis market, you need some combination of law enforcement and low taxes. So set tax rates low to start. Then, as the industry matures, and pre-tax prices come down, you can phase in higher tax rates. You need a tax burden that leaves the after-tax price competitive with the black market price. Most folks will prefer the legal product just because it’s legal. Testing and packaging add value, too. So your aim for an after-tax legal price could be roughly at the black market price. As it changes from day to day.
But what rate do you start with? Maybe even zero, a tax holiday – as a transition measure. If that won’t fly, a new and fresh proposal to beat the black market that has surfaced in Oregon: Switch from taxing by weight to taxing by percentage. Here’s the story: “[Senator] Prozanski said a [percentage-based] sales tax would better accommodate fluctuations in the price of marijuana. He said that marijuana flowers – the most potent part of the plant – have dropped in price recently and that a set-in-stone tax of $35 an ounce could make legal marijuana uncompetitive with the black market.”
But the black market price may be, as in Oregon, a moving target. There, reportedly, the black market price has fallen. Why? One likely reason is that enforcement is not so fearsome. With legalization getting approval from Oregon’s voters, maybe the oomph has gone out of the effort of busting sellers. Other reasons that come to mind seem less plausible. One is willingness of sellers to take lower profits – all of a sudden. The other is lower costs that sellers incur. If economies of scale are kicking in for the black market, that means enforcement is weak. Another way of saying that enforcement is weak is that the prohibition premium has gone down in this twilight time between voter approval and licensed sales.
But even if the black market is a moving target, a percentage of price tax base does not seem to way to hit it – or match it. That’s because the legal pre-tax price should be moving, too, independently of the black market price. Whatever direction the black market price moves, the legal pre-tax price should move down over time as the prohibition premium disappears, as businesses move out the learning curve, and as supply comes on line. The RAND Report for Vermont makes that case. So taxes should (meaning normatively ought to, not in the sense of a prediction) eventually go up, not down, as pre-tax legal prices go down.
I won’t cast any aspersions on the folks in Oregon. I first thought about it their way, in a posting last revised in 2012:
Basing a tax on sales price has one unique advantage. This article dwells on the necessity of letting government authorities adjust the tax burden nimbly, so as to respond quickly to competition from bootleggers. A price tax base provides some automatic response to bootleggers. If bootleggers cut prices, prices should fall in the legal market to compete. With a price base, a price cut by legitimate operators will result in a bigger immediate tax cut – which will put more pressure on bootleggers by putting less pressure on legitimate operators.
But I didn’t think enough about how pre-tax legal prices will be going down. You just need an ultra-low rate at first.