We don’t know the best way to tax cannabis, but New York State is advancing the process.
With a THC potency excise tax, New York is starting a bold and radical experiment. It’s the first jurisdiction in the world to tax cannabis flower or bud – smokeable plant matter – by THC content. Canada taxes processed cannabis at 1 Canadian cent per milligram of THC, but taxes flower with a weight-based tax, at $1 per gram. Canada doesn’t tax flower by THC. New York’s tax of 0.7 cent per milligram of THC of flower is revolutionary.
Not only does no jurisdiction in the world tax by THC content, no jurisdiction in the world taxes tobacco by tar and nicotine content. Sampling non-homogeneous plant material for tax purposes is new. THC varies widely, even within a single plant. The big question is whether sampling can be kept honest. But even if it can’t, the New York law provides a safeguard: the THC that the state taxes shows up on the label of the product the customer buys. If the seller understates THC to beat tax, the customer may value the product less, and pay less for it. If the seller overstates THC, the customer may value the product more, and pay more for it – but the tax is higher. That conundrum is the safeguard.
Cannabis is a complicated plant. THC is the primary intoxicant, but there are about 544 other compounds, like CBD, in the plant. People aren’t sure what those other compounds do – but THC is the best proxy for intoxication we have so far.
The experiment of taxing raw plant matter by THC needs to happen. Public health experts say the sampling error isn’t important enough to worry about.
Before the federal government legalizes cannabis, it will need a tax structure. A lot of states take the easy way out, with ad valorem (price-based) taxes that are easy to set up, but will collapse as pre-tax prices fall. And they are gameable (free pot with pipe; quantity and employee discounts; transfer pricing, etc.) The federal government has virtually no ad valorem taxes on products like tobacco and alcohol. It’s hard to imagine a federal ad valorem tax on cannabis – the MORE Act’s primitive ad valorem tax will turn out to be a placeholder. A THC potency tax experiment may let the federal government see a way forward toward cannabis legalization nationally. States that take the easy ad valorem way out aren’t helping the federal government find its way through the minefield of cannabis excise taxation.