Superseded by this (http://thehill.com/blogs/pundits-blog/economy-budget/327694-marijuana-legalization-grows-closer-with-senate-tax).
Congressional advocates for marijuana legalization, led by Oregon’s Congressman Blumenauer and Senator Wyden, introduced three bills to advance the process. (Dividing the package allows Committees to consider parts simultaneously, rather than one after the other. That may be wishful thinking.)
Here’s an off-the-cuff preliminary reaction to the tax parts of the package. I’ll work to refine the analysis.
For tax, the package has strengths and weaknesses.
One bill has no tax provisions, but does restrict advertising some. Text at https://www.finance.senate.gov/imo/media/doc/(6)%20Responsibly%20Addressing%20the%20Marijuana%20Policy%20Gap%20Act%20(SIL17269).pdf
A second bill, S.780, the Marijuana Revenue and Regulation Act, imposes new taxes. It will show up eventually at https://www.congress.gov/bill/115th-congress/senate-bill/780/text?r=21. The text is temporarily at https://www.finance.senate.gov/imo/media/doc/(7)%20Marijuana%20Revenue%20and%20Regulation%20Act%20(GAI17183).pdf
There’s a lot to like there.
A big advance over many state laws is the way the tax bill treats medical marijuana. While many recreational states give medical marijuana a lower rate, and a few recreational states don’t tax it at all, the only tax break in the bill is exemption for product “which has been approved by the Food and Drug Administration for sale for therapeutic purposes and is marketed and sold solely for such purpose.” That sounds just right. It’s really hard to know who is sick. Tax Notes, Jan. 24, 2011, https://newtax.files.wordpress.com/2014/08/laws-to-tax-marijuana-published-version-in-state-tax-notes.pdf, starting at 271. This is the best medical marijuana tax language I’ve seen.
Another good provision is that the bill would eventually tax concentrates (liquids that are used in liquid form or that are put in “edibles,” as when baked into cookies) by the amount of THC, the active intoxicant. That makes sense. THC can be measured in liquid form, but not in raw green plant matter.
So the tax-imposing bill eventually would tax raw green plant matter by weight, which is probably the best we can hope for. No jurisdiction taxes tobacco by tar or nicotine content – they are too tricky to measure meaningfully.
But “eventually” is a long time from now. The bill taxes by percentage of price for five years. Taxing by price can open the door to transfer pricing shenanigans that have made our international tax system, as Ed Kleinbard puts it, “unadministrable.” Taxing by price definitely means that when the pre-tax price goes down, taxes do, too. But, and this is a big but, the bill’s tax rate goes up year by year. That increasing rate feature appeared in Congressman Bluemenauer’s bill last year, and it makes sense.
It’s hard to criticize the rates in the bill, because no one knows how the market will play out. But federal taxes need to be high.
This is from State Tax Notes of January 23:
as more states legalize, interstate tax competition will open the door to interstate retail tax arbitrage, as with tobacco taxes. Already, Washington is seeing evidence that low-taxed marijuana in Oregon is hurting Washington sales.95 Unless federal taxation dominates, a race to the bottom may put every competing jurisdiction’s marijuana taxes at risk. Marijuana is enormously more valuable by weight and volume than tobacco. Therefore, the economic incentive to buy low-taxed cigarettes at retail in Virginia and to resell illegally in New York may be dwarfed by the incentive to buy marijuana at retail in a low-tax state to resell in a high-tax state. A high federal tax, high enough to dominate the field, would address that problem.96 A credit for state taxes paid might leave state tax burdens in place.97 A more likely scenario is that states would need to adjust by scaling back. https://newrevenue.org/2017/02/20/marijuana-taxes-present-and-future-traps-from-state-tax-notes/
A third bill calls for total repeal of 280E. https://www.finance.senate.gov/imo/media/doc/(5)%20Small%20Business%20Tax%20Equity%20Act%20(GAI17198).pdf.
That’s a big revenue loser, if you believe the industry. https://newrevenue.org/2016/11/17/5052/
And 280E denies deductions for advertising and marketing expenses. That sounds like a pretty good marijuana tax rule. The First Amendment commercial free speech doctrine may protect advertising, but it doesn’t protect tax deductions. Deductions are a matter of legislative grace. Lobbying expenses aren’t deductible under 280E is constitutional.
The marijuana consumer lobby NORML would reform 280E rather than replace it. So consumer interests and industry positions don’t match up, for once. NORML points out that advertising is a red flag to opponents of legalization, who worry that the little children will be attracted to the drug. https://newrevenue.org/2017/02/16/5139/.
NORML also worries that allowing a deduction for ads subsidizes Big Business, which can afford ads. Small businesses can use free word-of-mouth marketing. 280E is overbroad, denying deductions for anything that’s not cost of goods sold. So legal and accounting fees are nondeductible. Still, keeping current law treatment – nondeductibility – for advertising and marketing expenses has a lot to recommend it. So I think total repeal of 280E goes too far. Amortizing advertising deductions is a staple of tax reform base broadener lists. But advertising is a tough political issue, with media defending their revenue stream. (If President Trump figures out how much the media love advertising deductions for their customers, watch out!) In the old days when print media predominated, the saying went, “Don’t pick a fight with someone who buys ink by the barrel.” You might look at a proposal for outright repeal of 280E as a marker that puts the issue on the table.
The Center for New Revenue 