What if the best way to tax cannabis is by potency, by applying a tax rate to measured quantities of intoxicants, like  of THC?  Two hard questions loom. Should the same per-milligram tax rate apply to intoxicants in various forms of cannabis products like raw plant material (like flower) and concentrates and edibles? And what tax rates should apply to cannabinoids other than delta-9 THC, like delta-8 and delta-10?  

For the second question (Let’s say the best way to tax cannabis is by potency, by applying a tax rate to measured quantities of intoxicants, like  of THC?  What tax rates should apply to compounds other than delta-9 THC, like delta-8 and delta-10 and HHC, based on relative intoxicating power?) here’s a quick answer (that I in no way vouch for, because no one knows) from perplexity.ai, based apparently on https://therichardrosereport.com/cannasearch-daily-news/:

To design an effective cannabis potency tax framework that accounts for different intoxicating compounds like delta-8, delta-9, delta-10 THC, and HHC, tax rates should reflect their relative psychoactive strength and metabolic impacts. Here’s a science-based approach informed by current research and existing tax models:

Relative Intoxicating Power & Tax Multipliers

*Multipliers adjust tax rates based on compound strength compared to delta-9

In 2009, I was a 62-year old lawyer looking for a pro bono project.  My career in law at its high point was designing tax laws for Congress — writing laws to bring in revenue — as a staffer for the Joint Committee on Taxation and then the U.S. Senate Finance Committee.

I started with marijuana taxation back then for several reasons. 

1 . I didn’t think people should get arrested for possession. Taxation is the main reason and sometimes the only reason that some voters and representatives want to move beyond prohibition.

2.   I’m a tax and spend Democrat.  That last reason makes industry people and even activists nervous, but OK.

3. It was fun to think about. The field was wide open. No tax professionals were studying it — industry didn’t really exist to study it, and tax academics turn up their noses at marijuana taxation because they think both excise taxes and subnational taxes are not important. The top people in drug policy were interested, but they had only a nodding acquaintance with tax policy.

4. I figured that possession would get legal, and that commerce was sure to follow, and so was taxation.  Marijuana tax policy would get interesting.

By the spring of 2010, I went to Massachusetts at the invitation of NORML board member Dick Evans to speak to a legislative committee about taxing marijuana.  In January 2011, State Tax Notes published 25,000 words – “Laws to Tax Marijuana.”  https://newrevenue.org/wp-content/uploads/2014/08/laws-to-tax-marijuana-published-version-in-state-tax-notes.pdf.  

It has lots of discussion about the tax base but very little about the tax burden, except for this kind of thing:  “Tax rates on marijuana need to be low at first to gain advantage in the inevitable price war against bootleggers.  As taxing authorities win that war, they can raise rates and generate more revenue.”

Oh, and in 2009, Obama had said, “Yes we can,” and I figured marijuana taxation could be my little part.

For the nonpartisan Texas Lyceum: 10-minute panel talk, 15 slides: Marijuana, revenue, and hemp

At my age, now that A.I. is taking over proofreading, I feel like a good thing I can do is to set the record straight.  For instance, the Tax Foundation’s tax piece of its cannabis posting, https://taxfoundation.org/blog/states-act-2-0-federal-cannabis-reform/, has incorrect information, as of August 12.  (I wrote an author August 8 and haven’t heard back.) 

It has this:

Hemp THC is wide open in North Carolina. The public and the Legislature hardly notice; the professional prohibitionists know about it but aren’t raising a finger.

The clip is under three minutes. I come in shortly after the one minute mark.

https://www.wral.com/video/nc-lawmakers-consider-next-steps-to-legalize-medical-marijuana/21498062/

(Draft statutory language is at the bottom.)

“Hemp-derived consumables” in HB563, https://www.ncleg.gov/Sessions/2023/Bills/House/PDF/H563v5.pdf

We can and should tax these hemp products.

Taxing by percentage of price is weak.

Taxing by weight of THC is better than taxing by price.

Hemp drugs: Hearing June 12, 2024, 2 EDT in North Carolina Senate Judiciary Committee

Mr. Chairman, Thank you.  

My name is Pat Oglesby.  I’m a lawyer with the Center for New Revenue in Chapel Hill.  I was a staffer for the nonpartisan Joint Congressional Committee on Taxation, and  I’ve been a paid advisor to several states on cannabis tax policy.  

As you’re discovering, hemp-derived cannabinoids create both costs and externalities.  That’s why North Carolina should tax these substances – ideally by THC content – as part of a comprehensive cannabis strategy. 

Louisiana, Minnesota, Tennessee, and West Virginia are four states that already collect extra excise taxes on these substances.  Those taxes range from 3 percent to 11 percent of retail price.

But that’s just one approach. An alternative and more effective tax is one being used in Connecticut, Illinois, and all Canadian provinces. They tax legalized cannabis products by the volume of THC they contain. This THC tax aims straight at the target you want to hit.

Whichever taxes you choose — taxes based on price or taxes based on THC levels — there’s a risk of overdoing it.  If you tax too heavily, illicit sellers will bypass the tax and you won’t get the revenue you hope for.  I don’t work for industry, but I do know that other states have learned this lesson the hard way: Overtaxing backfires.  

The journey you’re on won’t be easy. But please know that I will do what I can to help.  You can find me at http://www.newrevenue.org.

We can expect that when the Legislature bans substances like Tianeptine or “gas station heroin,” then copycat drugs will pop up, maybe with a molecule in a complex organic compound changed here or there. 

To go beyond listing dangerous drugs that are out there already, Texas and other states have enacted catch-all language that would list or cover “whack-a-mole” new drugs that people would discover or invent.  

New psychoactive substances like Tianeptine or “gas station heroin” are popping up in North Carolina, and our Legislature is struggling with the problem.  https://www.wbtv.com/2024/02/14/nc-lawmakers-working-ban-gas-station-drug-that-mimics-effects-opioids/

But as soon as the Legislature bans substances, copycat drugs pop up, maybe with a molecule in a complex organic compound changed here or there.

To go beyond listing dangerous drugs that are out there already, I’m trying to find catch-all language that would list or cover “whack-a-mole” new drugs that people would discover or invent.

February 6, 2024

This post has turned into an ongoing and updated long look at open and flagrant sales of delta-9 THC in North Carolina.

Here’s a telling quote: “”Marijuana has been legal [in North Carolina] for a while now — we just didn’t realize it.” https://www.wunc.org/politics/2024-04-29/nc-legislature-cbd-hemp-thc-delta-9-regulations] Yes, regular old intoxicating marijuana is being quietly sold in retail storefronts across the state. It’s the tomato model: No licenses, no taxes, no age limits, no regulations.  Delta-8 THC is being sold, too, but it’s a side show to the original intoxicant, delta-9.

There are plausible claims of legality for these sales, claims that are largely and unchallenged as a practical matter. Much standard raw plant material or “flower” is said to be legal because it contains less than the federal limit of 0.3% Delta-9 THC. Gummies and other Delta-9 products, thanks to sugar and other non-intoxicants, stay under the 0.3% threshold at retail, too.   Maybe this open market benefits from a loophole, or maybe law enforcement is mostly standing down.

In any event, 0.3% looks like a technical glitch in the 2018 farm bill that Mitch McConnell pushed — to create opportunities in hemp cultivation for Kentucky farmers. But he didn’t know what he was doing, or the staffers who drafted the language didn’t. (When I worked for Congress, House Ways and Means and Senate Finance Republicans’ and Democrats’ committee staffs flyspecked legislation. For tax, so did staffs from Treasury, the IRS, and Joint Tax. Might some staff weed fan have spotted this loophole or ambiguity in 2018 and kept quiet? Maybe agriculture bills don’t get anything like the technical scrutiny that tax bills do.)

So far, that marijuana market is thriving. North Carolina cities and counties and the state itself are mostly tolerating this market. Will Congress or our Legislature do anything about it? We’ll see. 

Here are three stories:

https://abc11.com/hemp-marijuana-cannibas-stores-north-carolina/12767483/:  “In its raw form, the THCa flower meets the legal qualifications of having less than 0.3% Delta-9 THC. But when heat is applied, like when the user smokes or vapes it, more of the product (the THCa) is converted to Delta-9 THC which allows its effect to mirror marijuana products sold in legalized states.”  

Good article by Simon Westlake, https://www.csmonitor.com/USA/2024/0123/Growing-like-a-weed-Taking-stock-10-years-after-legalization-began

While a handful of smaller conservative states rejected pro-cannabis ballot measures in 2022, there’s no sign of a wider national rollback. In November 2023, Republican-run Ohio voted to become the 24th state to legalize pot. “Nobody has retracted or retreated,” says Pat Oglesby, a tax lawyer who teaches a cannabis policy class at the University of Virginia. “I think the momentum is for a loosening, not a tightening, of state marijuana sales.” 

+++

Another policy tool is taxation. New York and Connecticut levy excise taxes on cannabis that increase with potency, just as liquor is taxed at higher rates than beer. But regulators have also found that high taxes on cannabis, while healthy for state coffers, can make illegal weed more attractive. A combination of high taxes, stringent regulations, and a lack of dispensaries has hamstrung California’s legal recreational market, while illegal producers are thriving.  

California faces a law enforcement challenge in shutting down its entrenched illegal industry, says Mr. Oglesby, the tax lawyer, who has advised the state’s regulators. “Cops don’t want to arrest people,” he says. “And juries might not convict them.” 

Here is the public-domain 2015 study by Adam Orens and the Marijuana Policy Group for the state of Colorado reporting that THC in edibles and other products is more intoxicating than TCN raw plant material — Marijuana Equivalency in Portion and Dosage. It’s the basis for differential tax rates in Connecticut, listed at https://portal.ct.gov/drs/taxes/cannabis/cannabis-tax#calculation.

Cannabis plant materials: Six hundred twenty-five-thousandths of one cent ($0.00625) per milligram of total THC, as reflected on the product label;

Cannabis edible products: Two and seventy-five-hundredths cents ($0.0275) per milligram of total THC, as reflected on the product label; and

Cannabis, other than cannabis plant material or cannabis edible products: Nine-tenths of one cent ($0.009) per milligram of total THC, as reflected on the product label.

So far as I know, the MPG report has not been validated or refined by subsequent studies. It’s pasted below and available at https://www.researchgate.net/publication/316977045_Marijuana_Equivalency_in_Portion_and_Dosage/link/591b4cd5aca272bf75c7a07d/download?_tp=eyJjb250ZXh0Ijp7ImZpcnN0UGFnZSI6InB1YmxpY2F0aW9uIiwicGFnZSI6InB1YmxpY2F0aW9uIn19

Marijuana Equivalency in Portion and Dosage

August 10, 2015

Prepared for the Colorado Department of Revenue

An assessment of physical and pharmacokinetic relationships in marijuana production and consumption in Colorado

Here from the public record is my friend Jon Caulkins’s written submission to the Pennsylvania Legislature on cannabis legalization – about expectations for the illicit market and about social equity.

On the illicit market:  “I think two-thirds legal and one-third illegal is a reasonable expectation for after the market has stabilized a few years after state-licensed supply opens and before national legalization. That ballpark estimate comes with several elaborations and two warnings.”

On social equity:  Although “Most discussion focuses on” “[e]nsuring equitable access to cannabis licenses,” “[t]hat is a mistake.” 

And there’s a warning that regulating the marijuana industry won’t be easy. Click to download legible version: https://newrevenue.org/wp-content/uploads/2023/11/2023-10-20-written-testimony-for-pa-cannabis-legalization-hearing.pdf