Slide for my guest lecture on marijuana tax policy, for the June 30 class of my old friend from Senate Finance Committee staff days, Chief Tax Court Judge Maurice Foley, Jurist in Residence at the University of San Diego:
Preparing for another guest lecture on marijuana tax policy, for the June 30 class of my old friend from Senate Finance Committee staff days, Chief Tax Court Judge Maurice Foley, Jurist in Residence at the University of San Diego, I shrink at the task.
Nobody knows how to tax cannabis.
We don’t even know what we’re dealing with. Cannabis consists of at least 545 distinct compounds, like THC, the main intoxicant, and CBD, innocuous enough to be sold over the counter. But some of those other 543 compounds, other cannabinoids and terpenes and maybe more, may create an “entourage effect” more powerful or at least different from what isolated compounds give.
And then we’ve got folks taking CBD and turning it into new, engineered products, like delta-8 – milder than delta-9 THC, but still an intoxicant.
And what are we so mad at that we want to tax weed? Some people like weed so much that they overdo it, and can’t quit. Jerry Brown worried that a nation of stoners would not accomplish much. Maybe there’s a puritanical “kill-joy” streak that gets nervous when people have too much fun by artifice. Well, keeping the price high makes it harder to kids to afford with their pocket change.
But marijuana can be medicine – or at least some of its compounds can, and the whole plant, with its entourage effect, can. How can we know when it’s medicine and when it’s recreational? (We can’t, at the margin.) Meanwhile, recreational users say its benefits – to them and to society – outweigh its costs.
What tax base do we use? The main nominees are price (ad valorem), weight, and THC (potency).
Adding to complexity, we’ve got all kinds of products. There’s raw plant matter, with subcategories of bud (flower), trim (leaves), and more – all taxed at by different states at different rates per gram.
And there are products that are processed or “concentrated” from raw plant matter, like edibles (brownies, gummy bears) and other products, like tinctures, suppositories, and powerful “wax” or “shatter”.
Taxing by price is simple, or it can be. Most states that tax by price use one rate for everything. Illinois complicates things, with a 20% rate for edibles, but a split rate for everything else: a 10% rate for everything else with less than 35% THC, and a 25% rate for everything else with 35% or more THC. In practice, that complication aims to tax flower at 10% and “wax” or “shatter” at 25%.
Some states tax raw plant matter by weight, early in the supply change, whether it’s sold as raw plant matter or processed, with different categories – bud or flower being taxed at a higher rate per gram than less powerful and less valuable trim or leaves. Many states create intermediate categories, like small bud and immature bud, with tax rates between the rate for flower and the rate for trim.
Canada taxes flower and trim (that is, raw plant matter) by weight, and everything else by THC content.
New York and Connecticut tax by THC across the board – with different rates for different products. Here are New York’s tax rates per milligram of THC:
(1) Flower 0.5 cents;
(2) Concentrated cannabis 0.8 cents; and
(3) Edibles 3 cents
Connecticut has different rates, but similar categories and ratios.
These ratios come, apparently, from a single study out of Colorado in 2015.
Maybe all this uncertainty, and these experiments, will show how marijuana needs to be taxed. Don’t think it won’t happen just because it hasn’t happened yet.
How are government monopoly cannabis retail sales working in Canada? Pretty well, maybe. There’s a lot to learn.
Most provinces allow private retailing. Two of those that don’t, Quebec and Prince Edward Island, have reportedly done the best at capturing market share from bootleggers.
Brock University Business School Professor Michael J. Armstrong presents this data:
Michael J. Armstrong, “Legal cannabis market shares during Canada’s first year of recreational legalisation”, International Journal of Drug Policy, Volume 88, February 2021, 103028,
I don’t know how much to make of that data, which is now old. Ontario was having trouble then, and at one point switched from government to private retailing. But government monopoly retailing in two provinces was reportedly doing well at defeating the illegal market.
Beyond market share, “[i]n 2019, Quebec’s monopoly marijuana retailer – Société québécoise du cannabis (SQDC) – said it would not carry cannabis vaporizers ‘in the light of many health problems.’ Quebec also bans ‘sweet or savory edible products,’ including marijuana-infused chocolates, as well as all topical cannabis products.” https://mjbizdaily.com/legal-cannabis-sales-in-gatineau-quebec-collapse-after-age-requirement-hike/
Maybe that’s a bug, driving consumers to bootleggers, or to neighboring provinces. Or maybe it’s a feature, keeping consumers away from vaping (when was that vaping scare, anyway?) and keeping kids away from cannabis candy.
Lots to think about.