Federal legalization of cannabis in connection with taxes, pricing, and illegal markets

I’m having to miss a conference in Seattle starting tomorrow on federal legalization of cannabis in connection with taxes, pricing, and illegal markets.  Here are notes for what I hoped to say.

States fall into 4 categories:

  1. 7 states with weight-based taxes or producer taxes that will be eviscerated by interstate commerce in products like imported edibles:  Alaska, Colorado, Illinois, Maine, New Jersey, and Nevada – and California, unless its Legislature acts.  [Those states could use a separate small session.]
  2. 2 states, New York and Connecticut, whose potency taxes may be tested locally by imports that haven’t been tested in-state.  
  3. States with other taxes on the books.
  4. States without taxes yet, like my state of North Carolina, where state monopoly retailing seems a better choice for revenue and public health, and legally avoids the federal 280E selling expense tax. (https://digitalcommons.wcl.american.edu/facsch_lawrev/410/)

For any state with taxes, federal legalization brings problems and maybe opportunities:

Federal legalization and elimination of the federal prohibition premium would probably make pre-tax prices lower, leaving more room for state taxes, but new federal taxes might crowd out state taxes. 

Federal taxes might bring standardization of measurement and piggybacking opportunities – like tobacco taxes today, where the federal government’s blessing of the weight of a pack of cigarettes means states don’t have to weigh packs independently.  Federal weight or potency standards could make state weight or potency taxes just peel off.

Interstate commerce could bring a race to the bottom on marijuana taxes, as we have today with tobacco taxes, as the Eric Garner case shows.  Now some states may want to race to the bottom, and become marijuana tax havens, but Congress could solve that problem in advance, by giving a capped rebate, or a credit against federal marijuana tax for state taxes paid.  So if the federal tax rate is $10, they could give states a credit up to say $8.  If the state tax is zero, the federal tax is $10.  If the state tax is $5, the federal tax is $5.  If the state tax is $8, the federal tax is $2.    If the state tax is $9, the federal tax is still $2, because the credit is capped at $2.  States would have no incentive to race to the bottom.  If the states get together, Congress will listen.  We’re still at the starting gate.

Deep dive of 4,000 words from Tax Notes is at https://newtax.files.wordpress.com/2022/05/the-federal-shake-up-of-americas-marijuana-taxes-endnotes-links-1.pdf.

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