Center for New Revenue Tax of the Year: New Jersey

Time magazine has a person of the year; the Center for New Revenue is inaugurating a tax of the year.  For 2020, it’s New Jersey’s new marijuana tax, which goes up as prices go down, stabilizing after-tax prices – a good idea, because pre-tax prices vary widely in the early years of legalization, and the legal market gets a tax break as bootleggers get marginalized during the roll-out of product in the early days of low supply and high demand .

Details about the tax are herehttps://newrevenue.org/2020/12/18/new-jerseys-ground-breaking-marijuana-tax/.  An unfortunate detail is that the new law has not been signed yet.

Federal illegality doesn’t stop states from selling marijuana

When I was the only lawyer working on the RAND report on marijuana legalization for Vermont, my non-lawyer colleagues told me that state sales were unrealistic, since they would be federally illegal.  A recent report out of Virginia echoed that notion.  “If a state government became involved in marijuana distribution or retail, it would become an active participant in a federally illegal enterprise, instead of just acting as a regulator.” http://jlarc.virginia.gov/pdfs/reports/Rpt542-6.pdf

But subnational governments are already “active participants” in American marijuana sales.

The State of Louisiana is possessing medical marijuana for eventual sale.  “As of July 29, 2019, the Louisiana Department of Agriculture and Forestry (LDAF) is in receipt of medical marijuana final product from Louisiana State University’s (LSU’s) sub-contractor GB Sciences of Louisiana, LLC (LSU-GBSL).”  https://www.ldaf.state.la.us/medical-marijuana/

Here is some lore about what happened in Louisiana:  The Legislature provided that LSU and state land-grant Southern U. would be the sole growers of medical cannabis.  There were worries that LSU and Southern, as publicly funded institutions would be entering a legal gray area that could risk their federal research funding.  https://www.nola.com/article_2f71f884-569e-552e-aa70-293fba75820a.html

Now, here they are as owners and possessors of the illegal drug.  Those universities decided to contract out the actual growing to private parties, reportedly (I heard this 3d-hand) because federal agencies that fund the universities big time were uncomfortable with the universities growing directly themselves – though the universities “touch the plant” by having title to the marijuana and profiting from its sale.  In any event, government marijuana sales in Louisiana are rolling merrily along.

Meanwhile, municipal government sales have been ongoing in Washington State since early 2015.  The Washington municipality that led the way in federally illegal marijuana sales, North Bonneville, transferred its operations to a neighboring locality, Stevenson, WA.  The retail store, advertised on twitter as “America’s 1st municipally owned pot shop,” https://twitter.com/420EvergreenDr, was reportedly expecting sales of over $1 million in 2019. I couldn’t find a website, but I called 509 427 4393, a number I found for 420 Evergreen, and spoke to a person identifying himself as Jason, who assured me that indeed the municipality of Stevenson owns it.  

So about that Virginia report: I’m intrigued by this statement, in light of Louisiana’s state production monopoly of medical cannabis:  “Unless marijuana is legalized federally, any state that attempts this approach takes on additional risks of federal intervention and new legal challenges from residents and neighboring states.”  And this: “More information about government-controlled distribution and retail is included in Appendix J

There is no Appendix J. Maybe there’s a separate document hiding somewhere?

There are good arguments against government marijuana sales (and for them), but federal illegality is an argument that can be handled. https://www.huffpost.com/entry/marijuana-under-president_b_8207864

WA marijuana tax collections soar

Cannabis revenue per capital in Washington for fiscal 2020 was $61.23:  That’s $468,810,000 in revenue for a 2020 population of 7,656,200. https://dor.wa.gov/sites/default/files/legacy/docs/reports/2020/Tax_Statistics_2020/Table1.pdf; https://www.ofm.wa.gov/washington-data-research/statewide-data/washington-trends/population-changes/total-population-and-percent-change.

I once wondered “can any state get $43 per capita, like CO and WA?” https://newrevenue.org/2018/04/26/marijuana-revenue-can-any-state-get-43-per-capita-like-co-and-wa/. So yes. Now Washington may have more consumers than the average state, but that $61.23 ignores local taxation, possible federal taxation, potential greater tax burdens, and general revenue, like income and employment taxes.

Those new WA numbers may reflect a surge in demand during the pandemic, boosting both demand and prices (Washington taxes ad valorem).

With a U.S. population of 332.6 million in 2020, that per capita $61.23 would work out to a total excise tax of $20.4 billion.

Little word choices (and 280E) in the MORE Act

The MORE Act marijuana legalization bill revenue estimate says the bill would increase federal revenue “by creating business income, compliance, and occupational taxes.” Congressional Budget Office, Cost Estimate, H.R. 3884, the MORE Act of 2020, as passed by the House of Representatives on December 4, 2020, Estimated Budgetary Effects, https://www.cbo.gov/system/files/2020-12/hr3884.pdf.

I don’t understand.  Are there “compliance taxes”?  Or does that mean compliance with income and occupational taxes (and so on)?  (“Creating” seems an odd verb, too; I think of creating taxes as the legislative function of enacting them.)

And are there numbers showing the revenue effect of the elimination of 280E – “allowing certain deductions for business expenses associated with trafficking controlled substances”?  

I wrote CBO to wonder about all this, and will post any reply

Marijuana Price-Guessing Contest Winner Announced

In February, the Center for New Revenue announced a publicity stunt:  “What will Colorado’s Average Market Rate for flower be as of January 1, 2021?  It’s $1,316 [per pound at wholesale] today.  Best guess wins $100.  Enter at CO2021@newrevenue.org.”

Colorado’s AMR is out – and the “retail bud rate” is $1,721 per pound – way higher than a year ago.  The pandemic may have boosted demand and prices. 

The winner of the contest is Scott Atkinson, owner of retail locations in Tacoma, Seattle, and Clarkston, Washington.  He said this:  “Please keep the $100 or use it for the next contest – I appreciate that you are driving a conversation and would love to see more participation.”  I appreciate that gesture, but I need to keep my commitment somehow, so we agreed to donate the cash to NORML.

Links:

https://newrevenue.org/2020/02/23/100-prize-for-guessing-colorado-weed-flower-tax-amr-for-q1-2021/

https://tax.colorado.gov/average-market-rate

With $1 tip:

The Rats Keep Winning the Rat Race

With craft brewers across the country and liquor interests in Mitch McConnell’s Kentucky cheering and campaign-contributing, Congress just voted to keep alcohol taxes low and unindexed.  Low alcohol taxes cost revenue, and hurt public health.  But special interests, now euphemized as “stakeholders,” call the shots in our government.  So alcohol taxes are too low. 

In 2009, I took up marijuana tax policy, because I figured that legalization without taxation was implausible – and that legalization was going to happen.

Out of the corner of my eye during that marijuana work I noticed that alcohol was undertaxed in America.  Today’s non-indexed tax of $13.50 per proof gallon has far from kept up with inflation. Since the early 1990s, that nominal rate has lost about 60 percent of its real impact.

Working on RAND’s Insights for Vermont let me know that I’m not the only one thinking that “the total social cost associated with alcohol abuse is very much larger than all costs and outcomes related directly to marijuana use.” And exposed me to the idea that “even a 10-percent reduction in alcohol abuse accompanying the doubling in marijuana use could be a net win for society.”

Here’s more on alcohol taxes and public health — a slam dunk case for higher taxes that doesn’t matter in our plutocracy: https://newrevenue.org/2016/06/17/4788/

I got out of the international tax business long ago on the theory that multinationals called the shots politically, and would continue to dodge taxes, as indeed they have. Monied interests, from liquor to high-tech companies, don’t pay tax. So we are borrowing what we need. Lots of experts say decifits don’t matter. Fingers crossed!

New Jersey’s ground-breaking marijuana tax

The tax rules in New Jersey’s new marijuana legalization law are the first of their kind.  In addition to a retail ad valorem tax approved by the voters, the New Jersey law sets a rate schedule for a specific weight-based tax, with the tax rate going up as the retail price goes down:  

(a) up to $10 per ounce, as established by the commission, if the average retail price of an ounce of usable cannabis was $350 or more; 

(b) up to $30 per ounce, . . . if the average retail price of an ounce of usable cannabis was less than $350 but at least $250; 

(c) up to $40 per ounce, . . . if the average retail price of an ounce of usable cannabis was less than $250 but at least $200; 

(d) up to $60 per ounce, . . . if the average retail price of an ounce of usable cannabis was less than $250. 

That approach has several advantages.  First, it keeps after-tax prices steadier than any other approach enacted so far.  That’s a major advance – leaving Canada, which up to now was considered here to have the state of the art cannabis tax scheme, stuck with a weight-based tax whose rate does not vary so nimbly. 

Second, its “up to” language allows for lower rates for trim and less valuable products.  

Third, its “up to” language allows for a commission to avoid discontinuities, that is, crazy cliffs or notches with wildly different tax rates when average prices move just above or below a threshold amount.  It’s rare for a Legislature to delegate taxing authority with so much discretion:  That “up to” language could allow the commission to fail to collect the maximum tax allowable for any reason.  But there’s this “catch-up” provision that puts pressure on the commission to collect all it can:  The commission is to recommend how to spend revenues collected, or “if the commission has not imposed or adjusted the excise fee in the current fiscal year, then appropriations to be made from the General Fund in an amount equal to the revenues that would have been collected had it imposed or adjusted the fee.” 

The new weight-based tax is labeled a “Social Equity Excise Fee,” and all its proceeds are dedicated to social equity purposes.

And by the way, the weight-based tax comes in only after a nine-month tax holiday, when only a one-third of one percent ad valorem producer tax, allows producers to get up and running with a negligible tax.  That’s another nod to how marijuana markets get going slowly as they battle illegal sellers.

Medical marijuana is exempt from the tax, but most U.S. states give it some tax break (Canada doesn’t). 

https://www.njleg.state.nj.us/2020/Bills/A0500/21_R2.PDF, starting at page 162.

South Carolina medical marijuana bill

Republicans in the South Carolina Legislature are pushing medical marijuana with a 6 percent retail tax, exempt from sales tax and all other taxes.  That’s how SC treats non-Rx drugs. SC’s sales tax rate is 6 percent, so that’s a wash. North Carolina has no meaningful GOP medical marijuana support that I know of.

Who gets licenses is not clear; maybe the issue is punted.  But the House version allows sales of licenses after two years.

House: https://www.scstatehouse.gov/sess124_2021-2022/bills/3361.htm

Senate: https://www.scstatehouse.gov/sess124_2021-2022/bills/150.htm

write-up: https://www.marijuanamoment.net/south-carolina-can-legalize-medical-marijuana-in-2021-republican-lawmakers-say/

MORE Act revenue compared to state marijuana revenue

States with marijuana markets were collecting about $43 per man, woman, and child in marijuana excise taxes a couple of years ago. https://newrevenue.org/2018/04/26/marijuana-revenue-can-any-state-get-43-per-capita-like-co-and-wa/.  Since then, that number has gone up.

The comparable number for the federal MORE Act, legalizing marijuana,is $2.15.

is CBO says the federal MORE Act, legalizing marijuana, would reduce the budget deficit by $1.258 billion in its most productive year, fiscal 2030.  Total tax increases amount to $2.256 billion (an ad valorem excise tax would collect $.762 billion; other revenues not from marijuana excises  – from income taxes, FICA, and the like, would go up $1.494 billion).  Spending, mainly on marijuana-related trust funds, would go up by $.998 billion.

So with a projected U.S. population of 355,100,000 in 2030, the gross tax increases are $6.35 per capita, and the deficit help is $3.54 per capita. The excise tax is $2.15.

Are there reiiable state revenue numbers for the increase in revenues not frommarijuana excise taxes?

MORE Act budget numbers, accepted

Earlier today, I wondered if the budget estimate for the MORE Act reflected enough savings.  Center for New Revenue Board Member Doug Berman, Professor at the Ohio State University Law School, explained on Twitter how the estimate could be right. https://twitter.com/SLandP/status/1335609314862657536

“Cost per inmate is often quoted much higher when total Bureau of Prison costs are divided by total number of inmates, but the “real” cost of one more or one less inmate is lower because removing, say, 50 inmates will not justify shutting a facility and reducing staff.

“Federal inmate population has dropped 60,000+ over last 8 years, and yet BOP budget has stayed stable … which means cost per prisoner calculation for whole system has increased and shows how reduction in prisoners does not perfectly convert to immediate cost savings.” 

And my friend Dr. Keith Humphreys of Stanford tweeted, “Given the strength of correctional unions, it’s not clear that releasing 10,000 inmates would either.” https://twitter.com/KeithNHumphreys/status/1335639798845898753

I figured the average cost of housing an inmate would approximate the marginal cost of freeing one. But that figuring was not thought through.

MORE Act budget numbers, questioned

UNC Law Professor Emeritus Bill Turnier points out that the Federal Register indicates that “the fee to cover the average cost of incarceration for Federal inmates was $34,704.12 ($94.82 per day) in FY 2016 and $36,299.25 ($99.45 per day) in FY 2017.” https://www.federalregister.gov/documents/2018/04/30/2018-09062/annual-determination-of-average-cost-of-incarceration

The official budget estimate for the MORE Act (posted here yesterday projects) savings from less incarceration:  “reducing both the number of inmates in federal facilities and the aggregate time they serve would result in net savings of about $1 billion over the 2021-2030 period.”  “CBO estimates that H.R. 3884 would reduce time served by 73,000 person-years, among existing and future inmates.”  Calculating, that’s a cost of about $13,700 per person year.

So the actual savings using the Federal Register numbers would seem to be nearly three times the $1 billion stated. Usually, CBO is pretty thorough about this kind of budget estimate, so Professor Turnier and I are curious here.

Official MORE Act budget numbers

The last few posts here have been about the MORE Act, legalizing marijuana, and taxes. Here and below are official budget numbers for the MORE Act, which passed the House yesterday: https://www.cbo.gov/system/files/2020-12/hr3884.pdf.

A quick tax, taxes first:

“CBO and the staff of the Joint Committee on Taxation estimate that H.R. 3884 would increase revenues, on net, by about $13.7 billion over the 2021-2030 period by creating business income, compliance, and occupational taxes; those increases would be partially offset by allowing certain deductions for business expenses associated with trafficking controlled substances.”

That $13.7 billion comes from two sources:  an ad valorem excise tax, picking up $5.677 billion, and general revenues like income taxes that come from opening up the marijuana market to legality and the light of day, and picking up $8.013 billion.  The latter number would be greater if 280E, disallowing those business expense deduction, were in place.  A 2017 estimate of 280E repeal was that it lost $5 billion over 10 years – for a 10-year period when legalization was less widespread. https://newrevenue.org/2018/12/17/official-280e-revenue-cost-5-billion-over-10-years/.  That number should be higher than $5 billion now. Keeping 280E (or reinstituting it) and foregoing the excise tax might yield more revenue.

The bill would reduce the deficit by about $ 1 billion over 5 years, and by about $7 billion over 10 years.  Most of that impact comes from the $8 billion in “other” taxes like post-280E income taxes; the excise taxes are spent, via trust fund operations.

Other stuff:

Other budget impacts include savings from less incarceration:  “reducing both the number of inmates in federal facilities and the aggregate time they serve would result in net savings of about $1 billion over the 2021-2030 period.”  “CBO estimates that H.R. 3884 would reduce time served by 73,000 person-years, among existing and future inmates.”  Calculating, that’s a cost of about $13,700 per person year.  I thought incarceration cost more than that.  Anyway, prisoners aren’t eligible for federal programs; lessening the prison population and freeing folks up for programs is estimated to cost $636 over the period.

MORE Act revenue effect — superseded

So the MORE Act legalizing marijuana just passed the House.  It loses revenue, by eliminating the 280E tax on advertising and marketing (which are now non-deductible, but would become deductible under the Act).  It gains revenue, by imposing a 5% (rising to 8% in year 5) ad valorem grower tax (converted to THC and product weight after year 5).  

But what is the net revenue effect?  Is the Act a net gainer or loser?  I haven’t seen.

Update: Here are the numbers, issued December 4: https://newrevenue.org/2020/12/05/official-more-act-budget-numbers/

Tax questions about the MORE Act legalizing marijuana

1.  The tax rate now inches up over time, landing at 8 percent ad valorem in year 5.  The tax then switches from ad valorem to weight and THC after year 5, but still works with an ANNUAL look-back to price.  If you keep looking back, why bother switching?  This switch mimics the old Blumenauer–Wyden bill switch to an annual lookback, which I thought so weird that I couldn’t believe the old bill did it, so I misread the old bill. Isn’t the main point of switching to weight and THC to keep the tax burden steady, rather than fluctuating with price?

2.  280E repeal effective date:  Say date of enactment is July 1, and marijuana is descheduled then.  Taxpayer is on a calendar year, or say a June 1 fiscal year.  280E is the law for part of the taxpayer’s tax year.  What happens?  There may be an easy answer.

3. The new ad valorem tax is effective “after 180 days after the date of the enactment of this Act.”  Are no sales contemplated before those 180 days expire?