New tax provisions in MORE Act — some improvement

The MORE Act, legalizing marijuana, has been amended before a House vote this week, with a little improvement in the tax provisions.  Here is the new text: https://docs.house.gov/billsthisweek/20201130/CP-116HR3884RH-COMPARED-RCP116-67.pdf

Here are some quick reactions:

1.  The tax rate inches up over time, instead of being frozen at a permanently low rate.  This increase follows the old Blumenauer–Wyden bill, https://www.finance.senate.gov/imo/media/doc/(7)%20Marijuana%20Revenue%20and%20Regulation%20Act%20(GAI17183).pdf, but with lower rates, capped at 8 percent ad valorem, instead of 25 percent in Blumenauer–Wyden.  The tax then switches from ad valorem to weight after year five, but still works with a look-back to price.  If you keep looking back, why bother?  That’s a switch that makes no sense to me. But increasing rates have been suggested since at least RAND-Vermont, https://www.rand.org/pubs/research_reports/RR864.html.

2.  The tax kicks in right away, as near as I can tell, instead of being delayed.

Old MORE Act section 4(c) :

Effective Date.—(1) IN GENERAL.—Except as otherwise provided in this subsection, the amendments made by this section shall apply to articles manufactured or imported in calendar quarters beginning more than one year after the date of the enactment of this Act.

New:

(f) Effective date.— 

(1) In general.— Except as otherwise provided in this subsection, the amendments made by this section shall apply to removals, and applications for permits under section 5922 of the Internal Revenue Code of 1986 (as added by subsection (b)), after 180 days after the date of the enactment of this Act. 

The bill doesn’t necessarily contemplate sales before 180 days after the date of the enactment of this Act.  I’m not sure, but it’s an improvement over the one-year-plus tax holiday in the original MORE Act.

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Most of the criticism of the original bill here (https://newrevenue.org/2020/10/22/problems-with-the-more-act/) still obtains. For instance, the Act still favors advertising and disfavors Mom & Pops by repeal of 280E, and it still requires transfer pricing adjustments, but there has been a little improvement.  So good.

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On a non-tax issue, I think this is new:

Packages.— All cannabis products shall, before removal, be put up in such packages as the Secretary shall by regulation prescribe. 

Calaveras’s smart marijuana tax move?

On Election Day, Calaveras County, California, reportedly repealed its weight-based tax on marijuana and replaced it with a square footage tax.

Now inferior jurisdictions’ taxes on production make no sense if the consumption level is the wellspring of any negative externalities (DUI, kids) that might justify taxation, so that taxing production would only drive production to lower-tax jurisdictions, competing for industry.  (So states tax cigarette consumption by the pound, but place no special taxes on growing or manufacture, excise or otherwise.)

But for production, some say there is a negative externality, odor, which is so difficult to measure that proxy taxes are necessary.  Doesn’t Calvaras’s shift from weight-based tax to area create a better proxy for smell?

Mj podcast, and questions

Duke Law School Professor Kim Krawiec and I talk marijuana legalization on a 62- minute podcast. 

http://www.buzzsprout.com/1227113/6317080

https://podcasts.apple.com/us/podcast/taboo-trades/id1529173759

After we finished, she forwarded some questions from her students.  Here are the questions, and some quick reactions.

— Is it true that the tax revenue from legalized marijuana has gone towards improving public schools in states like Colorado?

Yes.  Initiative drafters have chosen to dedicate revenue to this, that, and the other – whatever they think the public would applaud.  Legislatures have followed suit.

— Has the legalization of marijuana in various U.S. states substantially affected the black markets for marijuana? If so, what does the data say about how black markets have responded?

Yes, black markets are down, though they can hardly be measured. People in Washington and Colorado say the black market is marginalized now.  In the podcast, we discuss California, with legacy overhang in Humboldt County and environs and slow licensing more responsible for the continuation of the black market than taxes.  Anyway, the optimal rate of crime is not zero. https://newrevenue.org/2015/05/29/optimal-amount-of-crime/

— What are your thoughts on the new wave of legalization and decriminalization of marijuana and other drugs in different states in this election?   

The prohibition game is nearing an end.  Like the lottery, marijuana will sweep the nation.

— As the first two states to legalize recreational marijuana in 2012, what are some of the policy successes and failures in Colorado and Washington’s legalization of marijuana? What can other states learn from them?

Scholars disagree.  My take is:  watch out for the medical marijuana tax loophole, and be careful about how you allow home growing.  But those are just tax lessons, and there are many more lessons.

— What are the pros and cons of blanket decriminalization of recreational drugs (e.g. the Oregon model)?  

I’d need another hour. This kind of state-by-state experimentation is a great advantage for America.

— Would federal regulation, as opposed to state regulation, of the marijuana industry be better?   

I’d let the laboratory of the states play out for now.  We could ask the same Q for alcohol, where there’s a patchwork now. But there are federal standards for purity and safety now for alcohol; without the same for weed, there could be a race to the bottom to help local industry export. 

— Does decriminalization of marijuna “go far enough?” In other words, does decriminalization alone achieve the outcomes you are seeking?.  

The DC model, which stops arrests for possession but disallows legal commerce, allows flagrant illegal commerce in DC.  Now decrim is what we did with alcohol in Prohibition.  That didn’t work, either.

Kevin Sabet’s Decrim Bill

Kevin Sabet, America’s most prominent marijuana prohibitionist, suggests a decriminalization option – possession of a very small amount would not be a crime, but it would involve penalties.  His plan is included in a bill in New Jersey.

The penalties seem to be $150 for the first offense, $200 for the second, $500 for the third — the first penalty waivable upon completion of “a substance abuse assessment by a professional.” 

Here’s the bill:

2018 Kevin Sabet Rice bill 1926_I2

Illegal weed market? It’s the impunity, stupid.

It’s the impunity, stupid.

The marijuana industry says taxes keep the illegal market alive.  At the margin, maybe taxes drive some transactions away from legal sellers.  

But analogy to illegal logging in the rain forest of the Brazilian Amazon offers another answer, explained by the Wall Street Journal.  

The success of legal, licensed loggers, operating “concessions” with constraints designed for sustainability, “depends on the government’s ability to crack down on illegal logging.  Since they pay no taxes and make no effort to protect certain species or invest in restoration, illegal loggers can charge $431 per square meter of lumber, compared with $1,511 per square meter of legally logged timber, concession operators said.  ‘It is like having a regular, taxpaying shop competing with lots of tax-free peddlers right in front of your door,’ said Jonas Perutti, owner of Lumbering Industrial Madeflona Ltda., which also operates concessions in the Amazon.”

. . . 

“Illegal logging is thriving in part because the Bolsonaro administration has cut environmental protection budgets. Here in Rondônia, a state the size of Michigan, there is only about one patrol agent from the Ibama environmental agency per 540 square miles. ‘What makes these loggers continue in the forest? It’s the certainty of impunity,’ said a government official.” 

California’s illegal market in retail marijuana is not due to taxes, whose burden is lower than that in Washington and maybe comparable to that in Colorado.  A lack of licensesand an overhang of supply from entrenched growers are not helping.  But a key factor is the open and flagrant operation of illegal storefronts, whose operators keep dodging what law enforcement there is. Legitimate sellers are frustrated by lack of enforcement.

Look, you’ll never eliminate the illegal market.  You’ll only marginalize it.  The optimal amount of crime is not zero.  But a knee-jerk blaming of taxes doesn’t complete the analysis.

How much revenue can law enforcement bring?  Here’s an old take:

“The President’s budget for fiscal year 1991, for example, proposes adding 3,600 staff to examine more tax returns, collect more unpaid taxes, and do other tax enforcement jobs. IRS estimated that with this additional staff, it would generate about $500 million of additional revenue in 1991 and about $6.5 billion by the end of fiscal year 1995.” http://www.gao.gov/assets/150/149315.pdf (GAO report questioning those numbers and suggesting other methodologies).

That old take gives little about quantification today — how much enforcement could help with marijuana tax collections, or with protecting the Amazonian rain forest.  But enforcement should not be overlooked.