Ad valorem excise taxes are not the way to go for marijuana. Ideological adversaries agree on that, if on little else! The left-leaning Institute for Taxation and Economic Policy warned, in a detailed report, that ad valorem price-based “ad valorem” taxes on marijuana are a recipe for trouble when prices go down – as they do in every jurisdiction where legalization takes hold. https://itep.org/taxing-cannabis/
More recently, the right-leaning Tax Foundation has joined the warning: “states risk losing out on forecasted revenue if prices continue to go down.” https://taxfoundation.org/safe-banking-act-state-marijuana-revenues/
We needn’t use ad valorem taxes at all for marijuana. The bill phases ad valorem taxes out, but keeps them too long, then compounds the error by de facto freezing them.
The draft sticks precisely to the early 2017 design of the old Blumenauer-Wyden bill, with ad valorem taxes for five years before switching to “specific” (non-ad valorem) taxes, only at that late date taxing flower by weight and concentrates by THC. See http://thehill.com/blogs/pundits-blog/economy-budget/327694-marijuana-legalization-grows-closer-with-senate-tax.
2017 is a long time ago for a drug that was first legalized in 2012; we’ve come a long way in what we know since then.
That five-year delay may have had some possible justification in 2017, but not now. But even then, ad valorem taxes were outdated. Sure, no one was taxing anything by THC content then – but several states had already worked out taxing raw plant matter by weight, the state of the art tax system in 2017. In the intervening four years since the 2017 bill, Canada, legalizing in 2018, moved straight into taxing flower by weight immediately, and concentrates by THC content about a year later. No five-year delay! The system up north seems to be humming. Lots of states tax by weight already, and Canada has the gold standard using both bases, weight and THC. I don’t know why we don’t just go ahead and copy it — now.
Taxing by price means that when the pre-tax price goes down, taxes do, too. So do after-tax prices. Low taxes and cheap weed are not on some people’s wish list, but not everyone’s. After legalization, pre-tax prices are bound to wither. Fully legal marijuana won’t sell for hundreds or even dozens of dollars per ounce, pre-tax.
But price taxes create another problem. In case of “vertical integration” like a farm-to-market operation, the bill shies away from taxing the actual price the consumer pays, so it imagines an artificial — and probably arbitrary — “constructive sale price” in section 5903. This is the amount one person, who is both retail clerk and farmer, supposedly pays his farmer self as a wholesale price. Shenanigans galore! Colorado has this kind of unworkable producer price tax on the books but, finding it doesn’t work, has quietly given up. Colorado taxes producers by weight instead of by the de jure price-based ad valorem method in related party transactions. Nevada taxes producers by weight instead of the de jure price-based ad valorem tax on its statute books, last I heard – in all transactions.
— Sent to sponsors of U.S. Senate marijuana bill.