Mechanics of stated THC tax on marijuana

A cannabis flower tax could be imposed as the greater of a weight tax or a stated THC tax (using the THC figure the seller claims on packaging or in selling). The tax could be the greater of (1) $x per gram of product weight or (2) $Y per gram of stated THC weight.

Here are very rough notes on how such a tax might work (supplemented by comments from my friend Jon Caulkins at the end).

Example 1:

Say x = 2

Y = $20

1 gram of bud with stated THC of 15%:

Tax is greater of $2 per gram of product weight or

$20 per gram of stated THC weight;

Weight tax = $2

Stated THC weight = .15 gram

Stated THC tax = $3

Greater of $2 or $3, so $3.

 

Example 2 (same rates):

Say x = 2

Y = $20

1 gram of bud with stated THC of 5%:

Tax is greater of $2 per gram of product weight or

$20 per gram of stated THC weight;

Weight tax = $2

Stated THC weight = .05 gram

Stated THC tax = $1

Tax is greater of $2 or $1, so $2.

 

Example 3 (new rates):

Say x = 2

Y = 30

1 gram of bud with stated THC of 15%:

Tax is greater of $2 per gram of product weight or

$30 per gram of stated THC weight;

Weight tax = $2

Stated THC weight = .15 gram

Stated THC tax = $4.50

Tax is greater of $2 or $4.50, so $4.50.

 

Example 4 (same rates as Example 3):

Say x = 2

Y = 30

1 gram of bud with stated THC of 5%:

Tax is greater of $2 per gram of product weight or

$30 per gram of stated THC weight;

Weight tax = $2

Stated THC weight = .05 gram

Stated THC tax = $1.50

Tax is greater of $2 or $1.50, so $2.

 

++++

 

Year 2:

Greater of $2x per gram of THC stated or

$2y per gram of weight

+++

 

A measured (as opposed to stated) THC tax on bud is years away, at best. Weight tax with stated THC alternative minimum could happen in months – at negligible incremental cost, in jurisdictions with track and trace.

 

+++

 

In any event, there would need to be authority to defeat work-arounds by taxpayers, like “This strain now features 10% THC – but it’s the strain that once tested at 18%.” So the THC tax could be on any level of THC associated with the product – not just what is currently claimed. Taxpayers will try anything. So something like the bolded language, from Internal Revenue Code section 1502, could be adopted:

 

“The Secretary shall prescribe such regulations as he may deem necessary in order that the tax liability of any affiliated group of corporations making a consolidated return and of each corporation in the group, both during and after the period of affiliation, may be returned, determined, computed, assessed, collected, and adjusted, in such manner as clearly to reflect the income-tax liability and the various factors necessary for the determination of such liability, and in order to prevent avoidance of such tax liability. In carrying out the preceding sentence, the Secretary may prescribe rules that are different from the provisions of chapter 1 that would apply if such corporations filed separate returns.” http://uscode.house.gov/view.xhtml?req=granuleid:USC-prelim-title26-section1502&num=0&edition=prelim

 

++++

 

My friend Jon Caulkins suggests targeting flower with high (stated) THC more harshly. The rest of this post comes from him:

 

So with [that] scheme, the tax is based on weight if x / Y > stated THC % and based on stated THC if x / Y < stated THC %.

 

In a way, this gives producers something of an incentive to produce at (stated) potency x / Y.  Or, to be a little more precise, their disincentive to increasing potency is purely horticultural up to a potency of x / Y, but once they go beyond that, each increment in potency is both harder to achieve on the production side (so more expensive) and pushes up the tax.

 

So we’d expect this to temper the “competition” to one-up other producers by having the highest THC.

 

You could increase that (possibly beneficial) incentive effect if with a more complicated tax on stated THC that is in excess of some benchmark potency, such as THC.  Then for any given “breakeven point” (where the two taxes would be the same) the “slope” of the increased tax for higher stated THC would be steeper.

 

[That is, an] alternative . . . is just to make the $Y apply to stated THC weight above and beyond some proportion, say 10%, of total weight.

 

Thus, the THC-based tax [viewed as an add-on to the weight-based tax] would be 0 for any product with THC % < 10%, but thereafter increase more sharply for any given break-even point.

 

Here are some numbers.

First, your basic approach.  Suppose you had

X = $2

Y = $10

And we’re taxing 1 gram of 20% THC bud.  That’s $2 in tax because $2 * 1 and also $10 * 1 * 20% = $2.

Now suppose that manufacturer pumped up the THC content to 30%, their tax would rise to $3 because $10 * 1 * 30% = $3.

 

Example 5:

 

But suppose we increased the Y to $20, but applied it only to THC in excess of 10% of total weight.

 

Then with the original 20% product, the tax would still be $2 because that’s the max of $2 * 1 and $20 * 1 * (20% – 10%).

 

But now when the manufacturer pumps up THC to 30%, their tax would rise to $4 not just $3 because $20 * 1 * (30% – 10%) = $4.

 

By adding a (negative) “intercept” we can make the “slope” of the THC-penalizing tax steeper.

 

+++

 

Thanks to Jon Caulkins for all that additional thinking – aimed more precisely at flower with high stated THC content.

 

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Author: patoglesby

From 1982 to 1990, I worked in tax policy for Committees of the United States Congress. In recent years, I was Adjunct Lecturer at UNC-Chapel Hill's Business School and then Adjunct Professor at its Law School.

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