The Tax Foundation finds fault with many excise taxes (tobacco, e-cigarettes, sugar, airline services, medical devices, you name it – though, to be fair, the Foundation puts gasoline taxes on the table). So it’s no surprise that it proposes very low federal excise taxes on marijuana. Its federal marijuana tax would be a nickel a gram — compared to the $1.76 per gram tax on the books in Alaska. That is supposed to bring in just $500 million a year nationwide. That looks like chump change.
The Foundation doesn’t mention what happens to the anti-marijuana-advertising rule of Tax Code section 280E, which is bringing in lots of revenue, according to the complaints of retailers. Any modification of 280E would offset other revenue gains. It could wipe out all the revenue from the chump change excise tax.
OK, the Foundation puts forth an alternative federal tax that would raise more — but doesn’t include that higher tax in reaching a $28 billion revenue estimate for marijuana taxes annually, at first. Here are excerpts from the Foundation’s recent report, http://taxfoundation.org/article/marijuana-legalization-and-taxes-federal-revenue-impact:
“A federal excise tax on marijuana similar to that of cigarettes, approximately $23 per pound of product, would raise approximately $500 million in additional revenue. A 10 percent sales surtax, similar in nature to those adopted recently by Colorado and other states and proposed in recent legislation by Rep. Earl Blumenauer, would raise approximately $5.3 billion in additional revenue; higher excise tax rates would raise proportionately more.
“Business income from marijuana production would initially raise almost $5.5 billion in federal revenues and an additional $1.5 billion in state and local revenues. These revenues are expected to fall as more businesses enter into the market and drive down profit margins. Individual income tax and payroll taxes from labor in the marijuana industry, which would be reported after legalization, contributes $1.5 billion in federal revenue and an additional $1 billion in state and local revenues.”
Meanwhile, it fails to reflect the first thing you need to know about the marijuana tax burden – that it needs to be phased in. That is, the initial burden needed to defeat the black market is lower than the ultimate long-run phased-in burden the market can bear. Percentage-based taxes, which the report calls for states to use, go down with pre-tax prices,which is exactly the wrong direction.
Representative Blumenauer’s bill in fact calls for increasing rates, with a five-year phase in. “This tax is initially set at 10% and rises over time to 25% as the legal market displaces the black market.”
In fact, the Foundation’s report shows revenue declining in the out years, thanks to lower profit margins (and presumably lower after tax prices). The Foundation does not even explicitly mention indexing its ultra-low per pound tax rate.
So how much federal revenue is possible?
My friend Jon Caulkins points out that state tax differentials won’t stand once federal legalization happens. “Without a revolution in public attitudes about enforcement and penalties for tax evasion, interstate price differentials of even $1 per gram are likely unsustainable. That effectively means the federal government will have to be the primary taxing authority.”
If the total federal and state tax is $28 billion, as the Tax Foundation suggests, the federal government will need to take the vast majority of that. But envisioning a scenario with a federal take of $500 million a year? No way.