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.