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For one national marijuana tax policy expert, effective marijuana taxation is all about how it’s applied to make sure a state rakes in adequate revenue from legalization to cover administration costs, deter illegal sales, and fund other parts of the state budget. It’s a delicate balance.
Pat Oglesby is the founder of the tax policy nonprofit Center for New Revenue and former chief tax counsel of the U.S. Senate Finance Committee. He said Question 4’s price-based 10 percent sales and excise tax on marijuana and the state’s absence of a tax on medical marijuana present some specific challenges to effectively taxing the product under legalization. It’s lower than both Colorado’s and Washington’s tax rates.
In those states, taxes are quite high — 27.9 percent on price and weight in Colorado and 43.5 percent on sale price in Washington for recreational pot. Medical marijuana is taxed at 2.9 percent in Colorado, while Washington recently raised medical marijuana excise taxes to 37 percent.
$100M for state coffers?
Still, Question 4 proponents estimate Massachusetts stands to make about $100 million off a marijuana industry if the referendum passes.
Without a tax on medical marijuana, Oglesby said, people who want to use marijuana have the option to seek a prescription — which he noted can be done with varying levels of ease depending on the state’s regulatory structure — to avoid paying the taxes required of recreational adult users.
“Some states have tight rules. California is wide open,” Oglesby said. “A tax that’s based on whether you’re sick or not is not much of a tax. There are definitely people who use medical marijuana and it’s medicine for them, but trying to figure out who’s in that category and who’s a fun-seeker — getting a doctor’s note has proved easy in some cases. It’s a slippery subject.”
He said Massachusetts’ relatively low proposed 10 percent state tax makes tax evasion less of a problem.
“Are people going to say ‘Wow, I’m going to beat this tax by getting a prescription?’ If you add up the cost of that, you’d need to be a pretty heavy user to beat it at a 10 percent level,” he said.
2% local tax
The ballot question includes a provision for an additional 2 percent local tax.
Oglesby said the base of the tax is also important in its own right. Under the ballot question’s proposed law, marijuana would be taxed based on sales price. Washington also taxes based on price, but Colorado taxes based on both price and weight.
Oglesby recommends the latter. Though any fledgling industry carries a substantial start-up cost associated with launching a business and a related high sales prices at first, prices tend to drop after the industry becomes established. When that happens, revenues will inevitably drop, too, if the tax is based only on price, he said.
Blow to black market?
“Day one of legalization, companies producing legal product are going to have lots of fees and start-up costs,” Oglesby said. “The black market is still going to have an incumbent advantage, but over time legal market prices will go way down. Ten percent may be OK for the first three months, but prices will come down as they get economies of scale and experience.”
At that point, Oglesby said black markets will become much less appealing, and that, coupled with stronger enforcement of illegal sales, could make the proponents’ promise of undercutting black markets more of a reality.
“It’s absolutely clear a low price will beat the black markets,” he said. “If enforcement efforts are high, no one is going to use the black markets. It won’t make economic sense — anyone would pay a premium for a packaged product, and if it’s wrong you can take it back or sue if it’s mislabeled. On the street, all you can do is not buy from them again.”
Both Colorado and Washington have seen significant revenues from the legal pot industry. Colorado’s collected more than $135 million in taxes and fees for marijuana sales in 2015, while Washington raised more than $67.5 million in the first year of sales and is expected to bring in close to $150 million this year, according to a state report from September.
“It’s not a flood of revenue, but it’s more than a trickle,” said Oglesby. Some of the money has been directed toward school building in Colorado and other social programs, while other dollars go toward bolstering law enforcement activities and administrative costs, he said, while Washington has used it for drug education and other programs.