Little word choices (and 280E) in the MORE Act

The MORE Act marijuana legalization bill revenue estimate says the bill would increase federal revenue “by creating business income, compliance, and occupational taxes.” Congressional Budget Office, Cost Estimate, H.R. 3884, the MORE Act of 2020, as passed by the House of Representatives on December 4, 2020, Estimated Budgetary Effects, https://www.cbo.gov/system/files/2020-12/hr3884.pdf.

I don’t understand.  Are there “compliance taxes”?  Or does that mean compliance with income and occupational taxes (and so on)?  (“Creating” seems an odd verb, too; I think of creating taxes as the legislative function of enacting them.)

And are there numbers showing the revenue effect of the elimination of 280E – “allowing certain deductions for business expenses associated with trafficking controlled substances”?  

I wrote CBO to wonder about all this, and will post any reply

Marijuana Price-Guessing Contest Winner Announced

In February, the Center for New Revenue announced a publicity stunt:  “What will Colorado’s Average Market Rate for flower be as of January 1, 2021?  It’s $1,316 [per pound at wholesale] today.  Best guess wins $100.  Enter at CO2021@newrevenue.org.”

Colorado’s AMR is out – and the “retail bud rate” is $1,721 per pound – way higher than a year ago.  The pandemic may have boosted demand and prices. 

The winner of the contest is Scott Atkinson, owner of retail locations in Tacoma, Seattle, and Clarkston, Washington.  He said this:  “Please keep the $100 or use it for the next contest – I appreciate that you are driving a conversation and would love to see more participation.”  I appreciate that gesture, but I need to keep my commitment somehow, so we agreed to donate the cash to NORML.

Links:

https://newrevenue.org/2020/02/23/100-prize-for-guessing-colorado-weed-flower-tax-amr-for-q1-2021/

https://tax.colorado.gov/average-market-rate

With $1 tip:

The Rats Keep Winning the Rat Race

With craft brewers across the country and liquor interests in Mitch McConnell’s Kentucky cheering and campaign-contributing, Congress just voted to keep alcohol taxes low and unindexed.  Low alcohol taxes cost revenue, and hurt public health.  But special interests, now euphemized as “stakeholders,” call the shots in our government.  So alcohol taxes are too low. 

In 2009, I took up marijuana tax policy, because I figured that legalization without taxation was implausible – and that legalization was going to happen.

Out of the corner of my eye during that marijuana work I noticed that alcohol was undertaxed in America.  Today’s non-indexed tax of $13.50 per proof gallon has far from kept up with inflation. Since the early 1990s, that nominal rate has lost about 60 percent of its real impact.

Working on RAND’s Insights for Vermont let me know that I’m not the only one thinking that “the total social cost associated with alcohol abuse is very much larger than all costs and outcomes related directly to marijuana use.” And exposed me to the idea that “even a 10-percent reduction in alcohol abuse accompanying the doubling in marijuana use could be a net win for society.”

Here’s more on alcohol taxes and public health — a slam dunk case for higher taxes that doesn’t matter in our plutocracy: https://newrevenue.org/2016/06/17/4788/

I got out of the international tax business long ago on the theory that multinationals called the shots politically, and would continue to dodge taxes, as indeed they have. Monied interests, from liquor to high-tech companies, don’t pay tax. So we are borrowing what we need. Lots of experts say decifits don’t matter. Fingers crossed!

New Jersey’s ground-breaking marijuana tax

The tax rules in New Jersey’s new marijuana legalization law are the first of their kind.  In addition to a retail ad valorem tax approved by the voters, the New Jersey law sets a rate schedule for a specific weight-based tax, with the tax rate going up as the retail price goes down:  

(a) up to $10 per ounce, as established by the commission, if the average retail price of an ounce of usable cannabis was $350 or more; 

(b) up to $30 per ounce, . . . if the average retail price of an ounce of usable cannabis was less than $350 but at least $250; 

(c) up to $40 per ounce, . . . if the average retail price of an ounce of usable cannabis was less than $250 but at least $200; 

(d) up to $60 per ounce, . . . if the average retail price of an ounce of usable cannabis was less than $250. 

That approach has several advantages.  First, it keeps after-tax prices steadier than any other approach enacted so far.  That’s a major advance – leaving Canada, which up to now was considered here to have the state of the art cannabis tax scheme, stuck with a weight-based tax whose rate does not vary so nimbly. 

Second, its “up to” language allows for lower rates for trim and less valuable products.  

Third, its “up to” language allows for a commission to avoid discontinuities, that is, crazy cliffs or notches with wildly different tax rates when average prices move just above or below a threshold amount.  It’s rare for a Legislature to delegate taxing authority with so much discretion:  That “up to” language could allow the commission to fail to collect the maximum tax allowable for any reason.  But there’s this “catch-up” provision that puts pressure on the commission to collect all it can:  The commission is to recommend how to spend revenues collected, or “if the commission has not imposed or adjusted the excise fee in the current fiscal year, then appropriations to be made from the General Fund in an amount equal to the revenues that would have been collected had it imposed or adjusted the fee.” 

The new weight-based tax is labeled a “Social Equity Excise Fee,” and all its proceeds are dedicated to social equity purposes.

And by the way, the weight-based tax comes in only after a nine-month tax holiday, when only a one-third of one percent ad valorem producer tax, allows producers to get up and running with a negligible tax.  That’s another nod to how marijuana markets get going slowly as they battle illegal sellers.

Medical marijuana is exempt from the tax, but most U.S. states give it some tax break (Canada doesn’t). 

https://www.njleg.state.nj.us/2020/Bills/A0500/21_R2.PDF, starting at page 162.

South Carolina medical marijuana bill

Republicans in the South Carolina Legislature are pushing medical marijuana with a 6 percent retail tax, exempt from sales tax and all other taxes.  That’s how SC treats non-Rx drugs. SC’s sales tax rate is 6 percent, so that’s a wash. North Carolina has no meaningful GOP medical marijuana support that I know of.

Who gets licenses is not clear; maybe the issue is punted.  But the House version allows sales of licenses after two years.

House: https://www.scstatehouse.gov/sess124_2021-2022/bills/3361.htm

Senate: https://www.scstatehouse.gov/sess124_2021-2022/bills/150.htm

write-up: https://www.marijuanamoment.net/south-carolina-can-legalize-medical-marijuana-in-2021-republican-lawmakers-say/

MORE Act revenue compared to state marijuana revenue

States with marijuana markets were collecting about $43 per man, woman, and child in marijuana excise taxes a couple of years ago. https://newrevenue.org/2018/04/26/marijuana-revenue-can-any-state-get-43-per-capita-like-co-and-wa/.  Since then, that number has gone up.

The comparable number for the federal MORE Act, legalizing marijuana,is $2.15.

is CBO says the federal MORE Act, legalizing marijuana, would reduce the budget deficit by $1.258 billion in its most productive year, fiscal 2030.  Total tax increases amount to $2.256 billion (an ad valorem excise tax would collect $.762 billion; other revenues not from marijuana excises  – from income taxes, FICA, and the like, would go up $1.494 billion).  Spending, mainly on marijuana-related trust funds, would go up by $.998 billion.

So with a projected U.S. population of 355,100,000 in 2030, the gross tax increases are $6.35 per capita, and the deficit help is $3.54 per capita. The excise tax is $2.15.

Are there reiiable state revenue numbers for the increase in revenues not frommarijuana excise taxes?

MORE Act budget numbers, accepted

Earlier today, I wondered if the budget estimate for the MORE Act reflected enough savings.  Center for New Revenue Board Member Doug Berman, Professor at the Ohio State University Law School, explained on Twitter how the estimate could be right. https://twitter.com/SLandP/status/1335609314862657536

“Cost per inmate is often quoted much higher when total Bureau of Prison costs are divided by total number of inmates, but the “real” cost of one more or one less inmate is lower because removing, say, 50 inmates will not justify shutting a facility and reducing staff.

“Federal inmate population has dropped 60,000+ over last 8 years, and yet BOP budget has stayed stable … which means cost per prisoner calculation for whole system has increased and shows how reduction in prisoners does not perfectly convert to immediate cost savings.” 

And my friend Dr. Keith Humphreys of Stanford tweeted, “Given the strength of correctional unions, it’s not clear that releasing 10,000 inmates would either.” https://twitter.com/KeithNHumphreys/status/1335639798845898753

I figured the average cost of housing an inmate would approximate the marginal cost of freeing one. But that figuring was not thought through.

MORE Act budget numbers, questioned

UNC Law Professor Emeritus Bill Turnier points out that the Federal Register indicates that “the fee to cover the average cost of incarceration for Federal inmates was $34,704.12 ($94.82 per day) in FY 2016 and $36,299.25 ($99.45 per day) in FY 2017.” https://www.federalregister.gov/documents/2018/04/30/2018-09062/annual-determination-of-average-cost-of-incarceration

The official budget estimate for the MORE Act (posted here yesterday projects) savings from less incarceration:  “reducing both the number of inmates in federal facilities and the aggregate time they serve would result in net savings of about $1 billion over the 2021-2030 period.”  “CBO estimates that H.R. 3884 would reduce time served by 73,000 person-years, among existing and future inmates.”  Calculating, that’s a cost of about $13,700 per person year.

So the actual savings using the Federal Register numbers would seem to be nearly three times the $1 billion stated. Usually, CBO is pretty thorough about this kind of budget estimate, so Professor Turnier and I are curious here.

Official MORE Act budget numbers

The last few posts here have been about the MORE Act, legalizing marijuana, and taxes. Here and below are official budget numbers for the MORE Act, which passed the House yesterday: https://www.cbo.gov/system/files/2020-12/hr3884.pdf.

A quick tax, taxes first:

“CBO and the staff of the Joint Committee on Taxation estimate that H.R. 3884 would increase revenues, on net, by about $13.7 billion over the 2021-2030 period by creating business income, compliance, and occupational taxes; those increases would be partially offset by allowing certain deductions for business expenses associated with trafficking controlled substances.”

That $13.7 billion comes from two sources:  an ad valorem excise tax, picking up $5.677 billion, and general revenues like income taxes that come from opening up the marijuana market to legality and the light of day, and picking up $8.013 billion.  The latter number would be greater if 280E, disallowing those business expense deduction, were in place.  A 2017 estimate of 280E repeal was that it lost $5 billion over 10 years – for a 10-year period when legalization was less widespread. https://newrevenue.org/2018/12/17/official-280e-revenue-cost-5-billion-over-10-years/.  That number should be higher than $5 billion now. Keeping 280E (or reinstituting it) and foregoing the excise tax might yield more revenue.

The bill would reduce the deficit by about $ 1 billion over 5 years, and by about $7 billion over 10 years.  Most of that impact comes from the $8 billion in “other” taxes like post-280E income taxes; the excise taxes are spent, via trust fund operations.

Other stuff:

Other budget impacts include savings from less incarceration:  “reducing both the number of inmates in federal facilities and the aggregate time they serve would result in net savings of about $1 billion over the 2021-2030 period.”  “CBO estimates that H.R. 3884 would reduce time served by 73,000 person-years, among existing and future inmates.”  Calculating, that’s a cost of about $13,700 per person year.  I thought incarceration cost more than that.  Anyway, prisoners aren’t eligible for federal programs; lessening the prison population and freeing folks up for programs is estimated to cost $636 over the period.

MORE Act revenue effect — superseded

So the MORE Act legalizing marijuana just passed the House.  It loses revenue, by eliminating the 280E tax on advertising and marketing (which are now non-deductible, but would become deductible under the Act).  It gains revenue, by imposing a 5% (rising to 8% in year 5) ad valorem grower tax (converted to THC and product weight after year 5).  

But what is the net revenue effect?  Is the Act a net gainer or loser?  I haven’t seen.

Update: Here are the numbers, issued December 4: https://newrevenue.org/2020/12/05/official-more-act-budget-numbers/

Tax questions about the MORE Act legalizing marijuana

1.  The tax rate now inches up over time, landing at 8 percent ad valorem in year 5.  The tax then switches from ad valorem to weight and THC after year 5, but still works with an ANNUAL look-back to price.  If you keep looking back, why bother switching?  This switch mimics the old Blumenauer–Wyden bill switch to an annual lookback, which I thought so weird that I couldn’t believe the old bill did it, so I misread the old bill. Isn’t the main point of switching to weight and THC to keep the tax burden steady, rather than fluctuating with price?

2.  280E repeal effective date:  Say date of enactment is July 1, and marijuana is descheduled then.  Taxpayer is on a calendar year, or say a June 1 fiscal year.  280E is the law for part of the taxpayer’s tax year.  What happens?  There may be an easy answer.

3. The new ad valorem tax is effective “after 180 days after the date of the enactment of this Act.”  Are no sales contemplated before those 180 days expire?

New tax provisions in MORE Act — some improvement

The MORE Act, legalizing marijuana, has been amended before a House vote this week, with a little improvement in the tax provisions.  Here is the new text: https://docs.house.gov/billsthisweek/20201130/CP-116HR3884RH-COMPARED-RCP116-67.pdf

Here are some quick reactions:

1.  The tax rate inches up over time, instead of being frozen at a permanently low rate.  This increase follows the old Blumenauer–Wyden bill, https://www.finance.senate.gov/imo/media/doc/(7)%20Marijuana%20Revenue%20and%20Regulation%20Act%20(GAI17183).pdf, but with lower rates, capped at 8 percent ad valorem, instead of 25 percent in Blumenauer–Wyden.  The tax then switches from ad valorem to weight after year five, but still works with a look-back to price.  If you keep looking back, why bother?  That’s a switch that makes no sense to me. But increasing rates have been suggested since at least RAND-Vermont, https://www.rand.org/pubs/research_reports/RR864.html.

2.  The tax kicks in right away, as near as I can tell, instead of being delayed.

Old MORE Act section 4(c) :

Effective Date.—(1) IN GENERAL.—Except as otherwise provided in this subsection, the amendments made by this section shall apply to articles manufactured or imported in calendar quarters beginning more than one year after the date of the enactment of this Act.

New:

(f) Effective date.— 

(1) In general.— Except as otherwise provided in this subsection, the amendments made by this section shall apply to removals, and applications for permits under section 5922 of the Internal Revenue Code of 1986 (as added by subsection (b)), after 180 days after the date of the enactment of this Act. 

The bill doesn’t necessarily contemplate sales before 180 days after the date of the enactment of this Act.  I’m not sure, but it’s an improvement over the one-year-plus tax holiday in the original MORE Act.

+++

Most of the criticism of the original bill here (https://newrevenue.org/2020/10/22/problems-with-the-more-act/) still obtains. For instance, the Act still favors advertising and disfavors Mom & Pops by repeal of 280E, and it still requires transfer pricing adjustments, but there has been a little improvement.  So good.

+++

On a non-tax issue, I think this is new:

Packages.— All cannabis products shall, before removal, be put up in such packages as the Secretary shall by regulation prescribe. 

Calaveras’s smart marijuana tax move?

On Election Day, Calaveras County, California, reportedly repealed its weight-based tax on marijuana and replaced it with a square footage tax.

Now inferior jurisdictions’ taxes on production make no sense if the consumption level is the wellspring of any negative externalities (DUI, kids) that might justify taxation, so that taxing production would only drive production to lower-tax jurisdictions, competing for industry.  (So states tax cigarette consumption by the pound, but place no special taxes on growing or manufacture, excise or otherwise.)

But for production, some say there is a negative externality, odor, which is so difficult to measure that proxy taxes are necessary.  Doesn’t Calvaras’s shift from weight-based tax to area create a better proxy for smell?

Mj podcast, and questions

Duke Law School Professor Kim Krawiec and I talk marijuana legalization on a 62- minute podcast. 

http://www.buzzsprout.com/1227113/6317080

https://podcasts.apple.com/us/podcast/taboo-trades/id1529173759

After we finished, she forwarded some questions from her students.  Here are the questions, and some quick reactions.

— Is it true that the tax revenue from legalized marijuana has gone towards improving public schools in states like Colorado?

Continue reading “Mj podcast, and questions”

Kevin Sabet’s Decrim Bill

Kevin Sabet, America’s most prominent marijuana prohibitionist, suggests a decriminalization option – possession of a very small amount would not be a crime, but it would involve penalties.  His plan is included in a bill in New Jersey.

The penalties seem to be $150 for the first offense, $200 for the second, $500 for the third — the first penalty waivable upon completion of “a substance abuse assessment by a professional.” 

Here’s the bill:

2018 Kevin Sabet Rice bill 1926_I2

Illegal weed market? It’s the impunity, stupid.

It’s the impunity, stupid.

The marijuana industry says taxes keep the illegal market alive.  At the margin, maybe taxes drive some transactions away from legal sellers.  

But analogy to illegal logging in the rain forest of the Brazilian Amazon offers another answer, explained by the Wall Street Journal.  

The success of legal, licensed loggers, operating “concessions” with constraints designed for sustainability, “depends on the government’s ability to crack down on illegal logging.  Since they pay no taxes and make no effort to protect certain species or invest in restoration, illegal loggers can charge $431 per square meter of lumber, compared with $1,511 per square meter of legally logged timber, concession operators said.  ‘It is like having a regular, taxpaying shop competing with lots of tax-free peddlers right in front of your door,’ said Jonas Perutti, owner of Lumbering Industrial Madeflona Ltda., which also operates concessions in the Amazon.”

. . . 

“Illegal logging is thriving in part because the Bolsonaro administration has cut environmental protection budgets. Here in Rondônia, a state the size of Michigan, there is only about one patrol agent from the Ibama environmental agency per 540 square miles. ‘What makes these loggers continue in the forest? It’s the certainty of impunity,’ said a government official.” 

California’s illegal market in retail marijuana is not due to taxes, whose burden is lower than that in Washington and maybe comparable to that in Colorado.  A lack of licensesand an overhang of supply from entrenched growers are not helping.  But a key factor is the open and flagrant operation of illegal storefronts, whose operators keep dodging what law enforcement there is. Legitimate sellers are frustrated by lack of enforcement.

Look, you’ll never eliminate the illegal market.  You’ll only marginalize it.  The optimal amount of crime is not zero.  But a knee-jerk blaming of taxes doesn’t complete the analysis.

How much revenue can law enforcement bring?  Here’s an old take:

“The President’s budget for fiscal year 1991, for example, proposes adding 3,600 staff to examine more tax returns, collect more unpaid taxes, and do other tax enforcement jobs. IRS estimated that with this additional staff, it would generate about $500 million of additional revenue in 1991 and about $6.5 billion by the end of fiscal year 1995.” http://www.gao.gov/assets/150/149315.pdf (GAO report questioning those numbers and suggesting other methodologies).

That old take gives little about quantification today — how much enforcement could help with marijuana tax collections, or with protecting the Amazonian rain forest.  But enforcement should not be overlooked.

Growers pay federal cannabis tax under the MORE Act

Who would pay the federal cannabis tax under the proposed MORE Act?  I was talking today with a sophisticated private sector marijuana guy, who thought it was a retail tax. But no. It’s a grower tax.

The MORE Act says:

(1) IN GENERAL.—Section 5701 of the Internal Revenue Code of 1986 is amended by redesignating subsection (h) as subsection (i) and by inserting after subsection (g) the following new subsection:

“(h) CANNABIS PRODUCTS.—On cannabis products, manufactured in or imported into the United States, there shall be imposed a tax equal to 5 percent of the price for which sold.”.

And:

“(r) MANUFACTURER OF CANNABIS PRODUCTS.—

“(1) IN GENERAL.—Any person who plants, cultivates, harvests, produces, manufactures, compounds, converts, processes, prepares, or packages any cannabis product shall be treated as a manufacturer of cannabis products (and as manufacturing such cannabis product).

+++

Section 5703 identifies the taxpayer under 5701 as amended. It’s the manufacturer. Since the MORE Act says the grower is a manufacturer, the first one in the supply chain, the grower pays the new tax.

(a)Liability for tax

(1)Original liability

The manufacturer or importer of tobacco products and cigarette papers and tubes shall be liable for the taxes imposed thereon by section 5701.