Taxing by price ≠ Taxing by potency

A criticism of taxing marijuana by weight is that it should incentivize more potent product, while a price-based tax should not.  Critics have suggested that customers will pay much more for an ounce of potent product – which would bear the same tax as a weak ounce.  Taxing by price, they say, will avoid that incentive.

But new data shows that  potency and price are not tightly related.

Dr. Caroline Weber of the University of Washington sent me this chart:  https://newtax.files.wordpress.com/2018/11/table_for_pat_oglesby.pdf.  It comes from her and from two University of Oregon economists, Ben Hansen and Keaton Miller, and considers about 60 million retail transactions.

If price followed potency directly, if a gram of 10-percent THC cannabis sells for $7, a gram of 15-percent THC cannabis would sell for $10.50 = $7 (15/10).

But in fact, in those 60 million transactions, a shift between 10 and 15 percent potency typically increases the price of a gram by much less than the 50 percent increase in potency.

In Table 1, the regression coefficient of THC concentration for the tax-inclusive price of cannabis in Washington State is 0.188, if I have the terminology right.

Using Table 1: If a gram of 10-percent THC cannabis sells for $7, a gram of 15-percent THC cannabis would sell for $7.94 = $7 + ((15 – 10) 0.188).

Meanwhile, using Table 2: If THC increases by one percentage point, price increases by 2.05 percent. So if a gram of 10-percent THC cannabis sells for $7, a gram of 15-percent THC cannabis would sell for $7.75 = $7 X (1.0205 to the 5th power)).

Now the sophisticated weight-based schemes in place in Alaska, California, Colorado, Maine, and Nevada, all tax multiple categories of product to tax.  Potent bud is typically taxed at about three times the rate per ounce used for less potent bud.  These weight based taxes may reflect potency better than price-based taxes.

In any event, price is not a very good proxy for potency.

 

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Official 280E revenue cost — $5 billion over 10 years

Click on 370531229-Senator-Gardner-280E-Score-12-04-2017 for a letter from Joint Tax Deputy Chief of Staff Robert P. Harvey to Senator Cory Gardner (R-CO) indicating that repeal of the section 280E limitation on tax deductions for state-legal marijuana sellers would cost $5 billion over 10 years.  That letter, dated December 1, went out before Massachusetts voted to legalize.  The estimate could go up over time.

I do a speculative analysis, independent of the Joint Tax analysis, at https://newrevenue.org/2017/02/02/5119/.

Price doesn’t follow THC content closely

Dr. Caroline Weber of the University of Washington sent me this chart:  table_for_pat_oglesby.  It comes from her and from two University of Oregon economists, Ben Hansen and Keaton Miller, and considers about 60 million retail transactions.

The regression coefficient of THC concentration for the tax-inclusive price of cannabis in Washington State is 0.188, if I have the terminology right.

A shift between 10 and 20 percent potency would only increase the price of a gram by much less than a doubling.