Taxing Advertising

Tax Code section 280E denies tax deductions for advertising marijuana.  That rule tends to promote public health, and to keep the noise down on branding and promotion. Similar rules for alcohol, tobacco, and direct-to-consumer pharmaceutical ads have been suggested, too.

Denying tax deductions for advertising expenses is not a new and fresh idea.  Google “25 Years of Initiatives to Tax Advertising” for a link to the document from the Association of National Advertisers.  Even standard advertising of non-temptation goods tends to have a useful life of over a year (I still remember cola jingles from my youth).  So amortization of all advertising expenses might make sense.

Who gets marijuana licenses?

There are various ways of dealing with excess applicants for marijuana licenses, like holding a lottery, as Washington state did; selling licenses to the high bidder, as colonial India did in the 1800s; or, as the Roosevelt Administration did in 1933, considering each application on its merits and deciding yes or no for each application.  Voucher privatization, where each voter gets a transferrable fraction of the overall quota, may seem far-fetched, but it may be worth a look in Theoryland.

Marijuana licensing “on the merits” leads to disappointed applicants.  At best, merit selection (in the USA) has led to an enormous amount of energy going into appeals and litigation.  At worst, it’s corrupt crony capitalism.

Even lotteries require threshold qualification, whose denial can engender appeals and litigation.  Social equity licensing adds more complexity if not uncertainty.

The Merits in the 1930s

Continue reading “Who gets marijuana licenses?”

RBG and Marty

One good thing about being in the tax policy business in D.C. in the 198os was meeting brilliant people, like Marty Ginsburg, tax professor and lawyer, who came to Capitol Hill from time to time to talk about legislation (though not in my area). I once met his wife, at a party, when she was a circuit court judge.

RBG was extraordinary, but Marty was, too. He was at the top of the tax law heap.

Let’s Ban Marijuana Imports

If the federal government legalizes marijuana, would trade treaties require us to allow imports? Would keeping the feeble Narcotics Conventions in place help?

When initiatives passed, we winked at the treaties and said, “It’s the States that are in violation, not the treaty signatory – not ‘US.’”

Maybe the STATES Act – allowing states to ban imports — would give us that same kind of federalism argument, and show that we’re willing to take our own medicine. The balance was tilted toward globalism for so long. . .

There’s a public health and safety concern, and concerns about laborers and the planet. Banning imports addresses those concerns, too — as well as keeping the wealth here.

Social equity marijuana licenses — fool’s gold?

Social equity licenses have started to seem like fool’s gold to me.

They are a new and fresh idea, with no successful precedent I have found.  (Let me know:  po@newrevenue.org.)

Don’t cite standard preferences or set-asides that unlike social equity licenses can deliver protected and sure benefits.  A requirement that a contractor employ X% minority subcontractors delivers a non-contingent benefit to the minority subcontractor who gets the plumbing subcontract on a construction project.  Good business is guaranteed.  Similarly, an assignment of electromagnetic spectrum delivers a benefit that no one can take away – and that the holder can profit from in all events.  

But a license to sell cannabis – in a general pool where other sellers are well-funded capitalists, often with experience in other states or Canada – may turn out to be worth less than nothing.  I was on a panel for Connecticut state government where a woman spoke of Minority Marijuana Millionaires that social equity licenses would create.  Well, I think John Boehner is doing just fine, and there are plenty of millionaires, but I’m looking for a list of millionaires who were casualties of the War on Drugs. Governments are throwing money at social equity licensees, with training, mentors, loans, etc.  Maybe that will work.  For now, though, the lucky applicants for social equity licenses may be the ones whose applications get rejected.

But a new iteration of social equity licensing is emerging:  ring-fencing opportunities so that only social equity licensees get them.  Massachusetts has started this, with delivery licenses – no competition from wealthy folks (unless they pass themselves off as social equity licensees, or are the real parties in interest – a pattern all too familiar – “Falsely claiming disadvantaged business status, or using sham subcontractors or other structures to circumvent small business, minority/women-owned business, or service-disabled veteran-owned business programs”).

The Massachusetts plan may well cause casualties of the War on Drugs to prosper – though maybe some will lose their shirts.  But ring-fencing seems like a better plan that putting social equity licensees in the general pool with the sharks.

Still, will it work?  In Colombia, “regulations require that cannabis companies purchase 10% of their raw material from small- or medium-sized cultivating communities . . .  However, this approach has not delivered the expected outcome either.” 

Picking winners to profit seems like Crony Capitalism, but nobly, with a heart.  But if it doesn’t produce winners, it’s not good.  And making different people wealthy may not be the goal to seek. 

Rather than try to create huge profits for a few, government stores or high taxes would fund programs for the general good.  

Making a Carbon Tax Work — BTAs

Marijuana is only the second most interesting field of tax policy today.

BTAs for carbon excise taxes top it.

When we tax carbon emissions, we can tax our industry, but not foreign industry.  BUT we can put on Border Tax Adjustments.  Say a U.S. luxury automobile incurred $15,000 worth of carbon tax.  We can tax its competitor vehicles.  But no one knows how to.  We did tax have BTAs for our chlorofluorocarbon or Ozone Depleting Chemicals tax, very specific ones, in currency per weight by category.

https://newrevenue.org/2017/10/03/border-tax-adjustments-for-carbon-taxes-the-odc-model/

So it can be done.

But for now, no carbon tax.

Tax-targeting big business

Denying deductions for advertising not just for marijuana sellers but for everyone would be anti-big business, pro-Mom & Pop.

$1 out of every $6 spent on restaurant advertising in America [was] done by McDonald’s. https://www.businessinsider.com/this-one-statistic-shows-how-much-mcdonalds-tries-to-entrench-itself-in-everybodys-minds-2012-3. Mom & Pop rely on word of mouth.

And if a jurisdiction wants to tax facebook and google, denying deductions for advertising would pinch them indirectly via the people who pay them.

Baucus actually supported allowing current deductions for only half of advertising, with the rest amortized over the next five years.  Marketing – everything other than cost of goods sold, 280E-style – could fall in that category, maybe.

But there’s the old adage, Don’t pick a fight with someone who buys ink by the barrel.  Or data by the petabyte.

“Stop oligopoly” or “Share the wealth”

Annual marijuana license auctions, mentioned here recently, are a dream in Theoryland, I’m afraid.  (At least they would tilt toward sun-grown – no one would build an indoor grow with a one-year license.)  A more realistic way to time-limit economic power – sunsetted quotas – is on the table in New Zealand now.

Is Canada stopping oligopoly, or sharing the wealth?  Uruguay?  

Revenue options seem a side-show to the real business of allocating licenses.  And worrying about their transferability.  I’m afraid of a cannabis version of Carlos Slim.  (And government monopoly – is PEMEX a success story?)

Annual license auctions are a dream in Theoryland, I’m afraid.  (At least they would tilt toward sun-grown – no one would build an indoor grow with a one-year license.)  

But sunsetted quotas are on the table in New Zealand now.   Licenses next?

MUCD panel today heard me rant against preferential licenses.

Sharing marijuana wealth in Mexico — Panel September 8.

I’m to be on a panel Tuesday, September 8 at 1:30 EDT on cannabis legalization in Mexico – especially preventing oligopoly and market capture by Big Marijuana. It’s open to everyone, in English and Spanish, but you must register first at this link: https://zoom.us/meeting/register/tJYrduCqqzwuE9L3YolRLGPZPtbpIYSDgPi3.

Here are some notes for that panel.

There are possible conflicting goals for tax policy – provide revenue to distribute (maybe to casualties of the Drug War); prevent price collapse to protect public health; nudge in favor of small or deserving businesses.  Administration and feasibility hang over any of those goals.  Taxation is just one design feature, and it interacts with a host of others.  And I know very little about the situation on the ground in Mexico – cannabis culture: the existing market; any role of organized crime.

This is a very hard problem.  Here is a tentative list of options, addressing “avoid hoarding,” and “attaching price to product potency, the nature of the taxes.”  Some of these options may not fit Mexico at all.

+++

OPTIONS

— Retail monopoly

— High taxes

Continue reading “Sharing marijuana wealth in Mexico — Panel September 8.”

Sharing weed wealth — Annual license auctions

A while back, the late Mark Kleiman wrote ““handing out production rights for modest fixed licensing fees . . . [means that] any gain from scarcity pricing will go to the industry and encourage even more vigorous marketing. If, instead, production quotas were put up for auction, the gain could go to the taxpayers. . . . [P]roduction quotas with an auction would be the equivalent of taxes.”

Nineteenth century India, the pioneer in cannabis policy, did just that.  It both imposed taxes and held annual license auctions. “For the retail vend of ganja, charas, and bhang . . . [t]he number of shops is fixed by the Collector according to the demand for the drug. The licenses are sold by public auction for one year.” 

More recently, the State of Louisiana enacted this:  “The Department of Agriculture and Forestry shall develop an annual, nontransferable specialty license for the production of prescribed marijuana for therapeutic use and shall limit the number of such licenses granted in the state.”  That annual cannabis license auction was a backstop or Plan B if state universities elected not to grow cannabis – but they are growing, so there are no annual licenses.

Continue reading “Sharing weed wealth — Annual license auctions”

Issues with the MORE Act

Tax issues with the MORE Act first

I.  280E repeal

 The MORE Act repeals 280E, perhaps the most useful marijuana tax model of all.  (Descheduling marijuana takes if off the bad list cross-reference in 280E.)  280E, denying deductions for selling expenses, makes advertising and marketing more expensive, after tax.  Weed ads, like these “sex sells” billboards, irritate parents.  

The MORE Act devotes revenue dollars to casualties of the War on Drugs, but the tax side is not so friendly.  280E is basically a tax on retailers, and turns out to favor Mom & Pop – or the social equity licensee – over Big Retail Marijuana, like retail chains such as John Boehner’s Acreage Holdings.  

While small businesses may rely on reputation and word of mouth, Big Business advertises.  Recently, “$1 out of every $6 spent on restaurant advertising in America [was] done by McDonald’s.” 

Continue reading “Issues with the MORE Act”

Center for New Revenue isn’t enthused by the MORE marijuana legalization bill

       

{Update 4 September 2020: Instead of “Center for New Revenue opposes MORE marijuana legalization bill.” I’m thinking of toning this down to “does not support.” This bill is a political stunt; it doesn’t matter.]

Only in 2015, with Responsible Ohio and its blatant greed, has the Center for New Revenue opposed a marijuana legalization measure.  

With a bias toward small business and sharing power if not wealth, the Center opposes H.R. 3884, the MORE Act:

1.  It repeals 280E, perhaps the most useful marijuana tax model of all.

2.  It imposes only a primitive ad valorem tax, which will quickly fade.

The Center does not oppose the STATES Act, despite both those objections, because only the MORE Act opens up marijuana to interstate commerce.  This will bring a quick end to experimentation with regulatory models, which we desperately need.  We still don’t agree even on how to tax – y mucho, mucho mas.

Bring on the STATES Act.  Or fix the taxes.  Or wait ‘til next year.  

280E should be the only federal hemp drug tax.

Folks have to pay income tax ANYWAY.  Just keep 280E, so marijuana sellers can’t deduct selling expenses.  The rich, or at least high earners, pay more in this economically progressive way – and don’t have the federal government reaching its tentacles into the capillaries of hemp drug trade.  (MORE’s ad valorem tax could turn out to be amazingly intrusive.)  280E requires no new bureaucracy – not a single form.  Selling expenses are not so easily disguised.  

Here’s the Argument that 280E should be the only federal hemp drug tax ever:  It was designed as punishment.  It’s that high — it’s more than enough.  But by now, the marijuana community can manage 280E as well as any new other tax.  The devil you know. 

Ads and marketing are a good target for a tax. Retailers hire their own lobbyists, because they’re the ones 280E hurts, but some of the marijuana community I’m familiar with says, “Who needs retailers?  We did fine for years without them.”

Anti-weed-ad diatribe is at https://www.brookings.edu/blog/fixgov/2015/12/18/how-bob-dole-got-america-addicted-to-marijuana-taxes/#disqus_thread.

How high should marijuana revenue be?

Marijuana revenue depends on a value judgment:  What tax burden is appropriate?  

Some of my friends would tax marijuana like milk, on principle.  Some would exempt it, and subsidize it.  Some would tax the heck out of it.  Others would try to raise only enough to match current drug harm costs; others would add revenue for Victims of the Drug War.  Let the philosophers and the interest groups sort that out.    

That’s a draft. Comments welcomed.

Cannabis weight-based tax in grams (local currency)

Cannabis weight-based tax in grams (local currency)
AlaskaCaliforniaColoradoMaineNevadaCanada 
Bud/flower$1.76 $0.34 $0.33 $0.74 $0.71 $1 
Leaves/trim$0.53 $0.10 $0.10 $0.21 $0.17 $0.25 
Fresh/Wet whole plant$0.05 $0.06  $0.09  
Small bud (NV); Abnormal & immature bud (AK)$0.88    $0.56  
Bud for extraction $0.20  $0.18  
Trim for extraction  $0.07  $0.17  
Alaska has no retail ad valorem tax; all the other states do. Canada has an alternative minimum tax. This updates the previous post, showing statutory rates as adjusted.