Cannabis Canopy Taxes – Smooth or Spiky?

Say you wanted to tax marijuana, and you wanted to big business more than small business. Say the tax base you chose was canopy of grow area. There are two good reasons to tax canopy – first, it’s easy to measure (not manipulable); second, you collect up front (no leakage).

You could make your taxes spiky or smooth.

Here’s how to make them spiky:

The tax rate is $1 a square foot if your farm is 5,000 square feet or smaller, and $2 a square foot if the farm is bigger than 5,000 square feet.

Then, if you have 5,000 square feet under cultivation, your tax is $5,000. If you have 5,001 square feet, your tax is $10,002. That’s a marginal rate of $5,002 per square foot for that one extra square foot. That’s a discontinuity (or a “cliff”), and it looks awkward.

Here’s how to make them smooth:

The tax rate is $1 a square foot if your farm on the first 5,000 square feet, and $2 a square foot for area over 5,000 square feet.

Then, if you have 5,000 square feet under cultivation, your tax is $5,000. If you have 5,001 square feet, your tax is $5,002. That’s a marginal rate of $2 per square foot for that one extra square foot. That’s defensible.

Smooth is more sensible than spiky.  The same anti-spiky principle can apply to taxes that apply to production (like the small wine producer rules) or to potency.

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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.

1 thought on “Cannabis Canopy Taxes – Smooth or Spiky?”

  1. We choose smooth for those same reasons and separated it into three tiers, but then stratify that assessment by offering rates at a 5:3:1 ratio (indoor:greenhouse:outdoor) to account for production differences and the average amount of harvests per year in each type of environment.

    For instance, indoor production on average provides 5.45 harvests per year (rounded down to 5 for simplicity) and outdoors has 1 harvest per year. Therefore, 1,000 square feet indoors is taxed per square foot at $2.50/sq.ft/year, whereas 5,000 square feet outdoors is taxed at $0.50/sq.ft/year. In the end, both the indoor and outdoor grower would be more fairly taxed on grow space given the expectations of usage of that type of space.

    Read more on page 40/41: https://www.oag.ca.gov/system/files/initiatives/pdfs/15-0052%20(Marijuana%20V3).pdf?

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