Work in progress. Comments welcomed. This is a draft of slivers of a bigger work on the discontinuous THC ad valorem tax in Illinois and its implication.
Last Update 11:04 a.m. 5 October 2019
A tax on THC may serve two goals. First, it may be an acceptable way to tax cannabis intoxication. Public health scholars tend to view a nudge against high-THC products as good policy. In that view, some marijuana are consumers too THC-centric for their own good. You hear that some consumers routinely want the most THC they can get. Taxing THC might lead them to consume less.
Second, cannabis growers and sellers deplore the arms race among growers to distort plant genetics to get the highest possible THC readings. Natural genetics are said to contribute to an entourage effect. (See Ethan Russo’s work on the Entourage Effect.)
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So a direct tax on THC – generally one cent per milligram — is already in place in Canada for cannabis oil. Canada will extend its penny-per-milligram tax to edibles when they become legal. Meanwhile, for raw plant material, which is harder to sample for THC, Canada taxes by the gram (or by 10% of wholesale price if that’s greater). Flower is generally taxed at $1 per gram, while trim is taxed at $0.25 per gram. https://www.canada.ca/en/revenue-agency/services/tax/businesses/topics/excise-duties-levies/collecting-cannabis.html
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Another way proposed to tax THC is to establish ranges to govern tax rates, like these (ad valorem taxes are ill-advised, but we use them for simplicity):
Low range: 0.3% to <10% THC — 10% of price;
Medium range: ≥10% to <20 % THC — 20% of price;
High range: ≥20 % THC — 30% of price.
The higher the range, the higher the tax. One argument for such a range-based tax it that it would make consumers less able to shop for the biggest THC amount. They won’t know what they are getting. That is, a tax range might “blind” consumers to actual THC content.
If anything over 20% is simply in that one category, consumers won’t say, “I’ll pay more for 27% flower than for 21% flower.” Instead, the consumer who wants the most THC, will be limited to a less precise desire: “Give me strongest stuff you’ve got: something in the 20 range.” She’ll never know.
“Ranges” with discontinuous tax rates – those with marginal rates over 100% — have long been a bête noire of the Center for New Revenue. Search this website for “”discontinu” to see why.
Once customers they are blinded to precise THC differences they may look at CBD and terpenes. Taxing by ranges would be great, the argument goes, because tax ranges will entail commercial blinding.
But how could they?
That “blinding” argument has several weaknesses.
First, many state regulations require point THC labeling, so consumers would not actually be blinded to point THC numbers if taxes changes but regulations didn’t.
Second, let’s say regulations that are designed to inform consumers changed so as to show only the tax range (say over 20%). Nothing would prevent sellers from showing the point THC number to the consumer. Most State Constitutions provide some protection for commercial free speech, and sellers might be expected to challenge in court any regulation that prevented them from labeling product with a true statement like this: “The contents of this package were part of a batch tested on September 15, 2019, by XYZ lab that produced reported THC of 19%.”
Third, although point (precise, single-number) THC results are only so accurate, they are the best information the consumer can get about THC content. Ranges make information less accurate. In a grocery store, what label helps a consumer more?
- “This cake was baked between September 15 and September 22.”
- “This cake was baked between September 8 and September 15.”
- “This cake was baked on September 15.
The answer is 3. To be sure, point estimates of THC content in cannabis are imprecise, but the imprecision is typically described by a bell curve. A sample that tests at 19% is more accurately described as (for example) “between 14% and 24%” than as “between 10% and 20%.” Pre-set ranges are arbitrary.
Fourth, one might say “ranges are inaccurate, but blinding the consumer is more important.” Blinding seems of questionable propriety. It may be unethical — even if data is imprecise. That is saying, “We know this point number is not precise, and that there is a margin of error. To emphasize our number’s imprecision, we will give you less information than we have. And we won’t show the margin of error we know about. That’s our way of protecting you from yourself if all you care about is high THC numbers.”
If you blind the consumer a little, why not a lot? Some have suggested eliminating THC content labeling altogether. That would remove the temptation for naïve consumers to gravitate toward high THC labels, because there would be no lable. That would mean a total change in regulatory rules that could accompany a tax by categories, like flower, dabs, vapes, edibles, etc. Blinding medical users is an especially dubious goal. They may underdose – or take too much.
Ranges with Discontinuities are usually bad tax policy. They create cliffs, where a tiny difference in something (like THC) makes an enormous difference in somebody’s tax bill. And — the point here — they won’t solve the problem of the consumer who wants the most THC.
If you think THC should be taxed, and if you think you can measure it well enough to tax it, just go on andtax it directly. Discontinuous ranges may provide an illusion of simplicity, but they make things more complex [as illustrated elsewhere in this article I’m working on].
 Illinois has a price-based tax that looks at THC for smoked products. It will tax smokeable products this way:
THC under 35%: 10% of price;
THC 35%: or more: 25% of price.
The Illinois tax scheme looks like a mechanical way to try to tax raw plant material less than concentrates.