The notion that marijuana flower is best taxed by measuring its THC content refuses to die. Illinois backed into a THC tax on flower with a rule that smokeable marijuana with THC over a certain percentage (35% or so) is taxed at a higher rate ad valorem – 25% versus 10% for less potent stuff.
Why didn’t Illinois tax by THC directly? To answer a different question, no jurisdiction in the world taxes tobacco by tar nicotine content. ($50 prize for first person to identify such a current tax.) THC in flower is impractical to measure, so a wide “range” of up to 35% should cover it all. Flower rarely exceeds 35% THC; most smokeable concentrates do.
Leaving aside the weakness of ad valorem taxes, why didn’t they just tax raw plant material at one rate and smokeable concentrates at another? The rush of getting legislation to move, according to one report, without getting into the fine points.
So there’s a notch. 34.999% hits you with one tax bill; 35.001% hits you with a tax bill 150% higher. (Gaming possibilities, are listed in the BOTEC report for the Washington State Liquor and Cannabis Board, like spraying flower with concentrates to land comfortably below 35%.)
Notches, or discontinuities in tax rates producing marginal rates over 100%, are usually suboptimal. Some may be unavoidable, like the UK VAT threshold. With 499,999 pounds sterling in turnover, there’s no VAT. With 500,001, you owe VAT on each transaction. Now that’s awkward, and calls for prediction (if it’s not based on the previous year’s numbers,) but how else could you work it? To have identical transactions taxed differently would be weird. One customer sneaks tax free in before the 500k threshold, but the next customer in line that day pays the tax.
But discontinuities for excise taxes may not be necessary. They used to be. They began, I think, with the liquor tax. Higher proof spirits weigh less than weak ones, so weighing the batch reveals the alcohol content. But digital scales weren’t invented when the United States (for instance) started taxing liquor, so they HAD to tax by ranges with discontinuities. The old Scales of Justice scales, which operated by adding weights “only one at a time,” were all they had – with an alcohol adaptation called “Dicas’s hydrometer.” So they had six ranges – unavoidable then, for differentiation, but at least internally accurate, and unbeatable by sampling.