Caulkins on marijuana taxes

My friend Jon Caulkins has a useful and thoughtful article on marijuana taxation here. Jon and I were among the co-authors of the RAND Report, “Considering Marijuana Legalization: Insights for Vermont and Other Jurisdictions.”  I don’t agree with all of Jon’s new article, but I agree with a lot.  (Some of it is line with my recent article in thehill.com.)

Here are some excerpts from Jon’s article:

“Marijuana prohibition is tottering, and procrastinating on doing the hard work of thinking through tax principles will more or less ensure a bad replacement.”

“The states leading the legalization charge have enacted primitive taxes that will fail as marijuana prices fall because they are computed as a percentage of value.”

“Most jurisdictions simply tax marijuana as a percentage of value, such as Washington state’s tax of 37% of the retail price. Such ad valorem taxes will decline over time as prices fall — and that’s exactly the wrong direction. If 37% of $10 per gram is close to the ‘right’ tax level, then 37% of $1 per gram is not. Furthermore, taxes on value can be dodged by ‘bundling’ (e.g., using a cover charge to subsidize a bar’s sale of low-priced marijuana) or using marijuana as a ‘loss leader’ to attract customers. (Convenience stores could sell cheap marijuana to boost sales of gas or corn chips. Restaurants could even give away free marijuana — the way bars offer patrons salty nuts — to induce customers to order more food.) Standard discounts for employees or for quantity would also reduce tax costs. An ad valorem tax may therefore be a perfectly natural ‘starter tax’ for early-legalizing states. It would not, however, be adequate as the main tax after national legalization.”

“Taxes would need to be nearly uniform across states; they would need to cover a wide variety of products; and they would need to increase dramatically over time.”

After federal legalization, “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.”

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I don’t reach this argument that Jon makes: “A fourth, non-traditional but important argument is to control ‘internalities’ — the harms users inflict upon themselves.” To me, as a tax design architect, that argument doesn’t do much to influence the decision of what taxes should be in place. It only suggests, if you buy it, that taxes should be higher. So I don’t sign on to the negative internalities argument.

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Finally, I’m glad to see Jon reveal an understanding of how our tax system is broken: “Tax increases focus pain on a well-defined, often well-organized, and typically well-heeled constituency, whereas the benefits are diffuse. Even today, Congress fails to tax many things that need taxing. It can’t summon the nerve to tax the income that Apple shifts to tax havens — leaving that to the European Union — or even to close the gaping carried-interest loophole that lets hedge-fund promoters turn ordinary income into low-taxed capital gains.”

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Here’s the link: http://www.nationalaffairs.com/publications/detail/a-principled-approach-to-taxing-marijuana