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Old revenue estimates for marijuana taxes have just made way for new, more informed ones.  An official 2012 Washington State legislative revenue estimate called for $1.9 billion in marijuana taxes by the end of Fiscal 2017.  On February 19, the Governor drastically cut that questionable number, with a new, lower estimate calling for around $155 million during that time frame.

That $155 million number does not show up in print yet.  It comes from adding up and rounding off (1) the $28 million estimated to go into the general fund from sales and B&O taxes and (2) $125 million.  That $125 million number (this gets tricky) comes from knowing that the nearly 20 percent of excise revenues estimated for the general fund are $23 million — thanks to Steve Lerch, an old friend from Joint Tax Committee staff in D.C. who now heads up estimating for the State of Washington, who graciously clued me in.  (Multiplying by a little over 5, the inverse of 20 percent, gets to $125 million.)

The basis for those new Washington numbers comes from a thoughtful analysis led by Jon Caulkins, a top drug policy scholar who has gone out of his way to help me over the years, though we have met only electronically.  But even with all this expertise, the numbers are iffy.   For instance, the Washington estimate assumes that retail sales won’t start before mid-2015, and I would bet sales start much earlier.

In Colorado, the estimate for marijuana taxes went up, not down.  An official 2013 legislative estimate called for $67 million a year.  As of February 18, the Governor is officially expecting around $100 million a year — $184 million over the first 18 months.

Washington has more people than Colorado – and higher marijuana taxes.  Colorado’s wholesale tax rate is 15 percent; Washington’s is 25 percent.  Colorado’s retail tax rate is 10 percent; Washington’s is 25 percent.  Washington sometimes adds a third 25 percent tax, on producer sales.

Both states estimate that revenue will increase over time.  But both have percentage-based taxes, which shrink when pre-tax prices fall. Continue reading “Marijuana – How Much Revenue?”

The amount of marijuana tax that Colorado collects for the first month of legalization, to be reported in early March, is unlikely to be a good proxy for a twelfth of a full year’s tax.

For one thing, Colorado’s 15 percent “wholesale” tax will start very slowly in the first few months and then gain steam.  This slow start is due to a “one-time transfer” exception to the wholesale tax:  Product originally owned by a medical marijuana business and then transferred to a recreational business during the startup of legalization will completely avoid the 15-percent wholesale excise tax forever.  Continue reading “Colorado marijuana taxes — Don’t extrapolate”

UPDATE September 22, 2014:  Ms. Habib notes: CBDA is an important standard but wasn’t available commercially. It is now available commercially.

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Is THC content is a practical tax base for marijuana concentrates?  I asked Rose Habib.  She was part of the BOTEC team that worked on Washington’s marijuana laws, and is an analytical chemist with Cannabanalysis Laboratories in Montana, http://cannabanalysis.com.

To restate the question, can different labs  measure liquid alcohol extracts and come back with THC results that are very different?

We have a good way to go.  Here’s Ms. Habib’s full answer:

It is true that labs currently could take the same alcohol extract and get different results.  Because of the homogeneity of the sample, we know that this is not because of sample irregularities, we can easily attribute that to lack of analytical accuracy.

In other industries like pharma or supplements or cGMP regulated industries there are validated methods Continue reading “Taxing marijuana potency – Rose Habib”

Treasury’s long awaited guidance on marijuana banking anticipates that banks will know what is in marijuana  depositors’ tax returns.  Continue reading “Treasury and bank depositors’ confidential tax info”

If the government wrote a check to every church’s minister, that would be Establishment of Religion, right?  Then what about tax breaks for every minister?  Code section 107 gives tax breaks for housing to any “minister of the gospel” (expanded in Regs to cover rabbis, imams, etc.).  I think that’s the kind of establishment of religion the Founders forbade in the 1^st Amendment.

A court agrees.   Continue reading “Establishment of Religion via Tax Break”

Deferral and deferment may seem like synonyms, but international tax folks always use the word deferral for the tax break that multinationals get on foreign income — I’ve never heard deferment.   Continue reading “International tax: Deferral and Deferment”

[Original here and at http://www.huffingtonpost.com/pat-oglesby/how-not-to-tax-marijuana_b_4739009.html%5D

With marijuana legalization gaining steam, we might ask not just whether to legalize and tax, but how.  Here are three mistakes that California and other states can still avoid.

Mistake 1.  Collecting late Continue reading “How Not to Tax Marijuana — HuffPo”

Unable to figure out a transfer price for a Constitutionally permitted 15 percent wholesale tax  when vertical integration forbids the existence of a wholesaler, Colorado has substituted a weight based tax.  Wow.

The excise tax is calculated by multiplying the quantity of retail marijuana product by the average market rate at the time, then multiplying by the 15% (excise tax rate). For example: ABC cultivator transfers 3 pounds of flower, 5 pounds of trim and 8 plants to ABC store. At the time of transfer the average market rates are:

$1,876 for Flower Continue reading “Colorado converts percentage tax base to weight!”

Update June 24, 2014:

Salient taxes are those that taxpayers notice.  Code section 280E’s denial of marketing and other deductions for marijuana businesses could hardly be less salient to consumers.

To retailers, though, it’s highly salient.  That explains the ongoing complaints (Discriminatory!) against 280E.  To be sure, it’s preposterous (and some in the industry agree) to think that Congress (who decides) would repeal 280E and not replace it.  But its replacement (an excise of some sort) would be more salient to consumers – bringing them to the side of industry.

Even considering support of consumers, repeal of 280E might still bring a replacement that brings the industry regrets.  But the industry has no reason to stop complaining about 280E.  The best defense is a good offense.  And 280E is discriminatory.  But we ain’t gonna treat marijuana like milk.

Proposed new Text of 26 U.S.C. § 280E, Expenditures in connection with the illegal sale of drugs:

No deduction or credit other than for cost of goods sold and current employee compensation shall be allowed for, and section 263A shall not apply to, any amount paid or incurred during the taxable year in carrying on any trade or business if such trade or business (or the activities which comprise such trade or business) consists of trafficking in controlled substances (within the meaning of schedule I and II of the Controlled Substances Act) which is prohibited by Federal law and the law of any State in which such trade or business is conducted. Continue reading “280E Win-Win?”

NYT:  “They charge $199 per person per night — you have to be over 21 — and offer two rooms, 24/7 car service and a hot tub. They can give, rather than sell, their homegrown pot to guests.”  On  November 24, 2013,  I predicted this bundling of service and marijuana where the marijuana was “free” – and free of the percentage based retail tax. Continue reading “Percentage retail marijuana tax fails”

A new and fresh idea came up while talking yesterday with Beau Kilmer of RAND.  (Thanks, Beau.)  In addition to the primary tax on marijuana plant material, maybe based on weight, jurisdictions could add on a little tax calculated on basis of weight-adjusted potency (in terms of THC content) claimed by the seller.

I’ve opposed taxing marijuana plant material on the basis of potency, because potency there can’t be replicably measured.  (Concentrates, unlike unprocessed marijuana plant material, are fungible enough to yield replicable potency testing results.)  Beau is interested in labeling marijuana so consumers have more information, Continue reading “Taxing Stated Marijuana Potency (a Book Income Analogy)”

Lonely old men need a place to congregate?  A McDonald’s kicks them out.  But a NYT op-ed writer offers a solution:  “I can imagine tax breaks for franchises that serve a high proportion of older adults.”  Tax solutions:  No problem too small?

But what David Brockway said about current Joint Tax Committee staff still seems true for me, 25 years after leaving the staff:  We are “likely to be ‘reformers’ at heart, with a very healthy skepticism about preferential tax treatment for any special activity.”  Even welcoming old-timers.  It’s easy to suggest a tax break, but making it actually work (counting the old folks) and keeping a coherent tax system are hard.

Indoor marijuana operations use lots of electricity – for grow lights, ventilation, and so on.  Arcata, California, decided to tax extraordinarily high electricity use as a proxy for taxing marijuana directly – or as an environmental tax.  The tax applied only to users whose electricity bills were six times greater than a standard base.  It turns out that that tax has not produced much cash, but decimates extraordinarily high use of electricity.

When Prohibition of alcohol was repealed in 1933, government studied how to tax it.  The Treasury Department commissioned a study, Report to the Secretary of the Treasury of Recommendations of Informal Interdepartmental Committee Relative to Taxation and Control of Alcoholic Beverages.  Congressional study included extensive hearings, with input from a wide range of interests.  Tax on Intoxicating Liquor, Hearings Before the Committee on Ways and Means, House of Representatives and the Committee on Finance, United States Senate, 73d Congress, Interim, 1st and 2d Sessions.

Those materials were mighty helpful in writing my first article on marijuana taxation.  They are in the public domain in hard copy, but in electronic form they are available only behind pay walls.  I’m looking for a student or anyone to go to a research library, check out a hard copy, and create an electronic file of those materials — 417 pages of them — to post here.  I’m willing to pay 10 cents a page.  Any takers?

Marc Landry sets forth standard arguments for taxation and regulation (and against Prohibition).  North Carolina will not be the first by whom the new is tried.  Nor yet the last to cast the old aside?

I played such a small part on the BOTEC team consulting on marijuana legalization in Washington State that I just ran across this BOTEC document:  “Recognize the high GHG [greenhouse gas] intensity of indoor growing with a differential tax”:

A simple recognition of the distinctive climate effects of indoor growing would be to increase the producer tax on indoor marijuana by an amount that reflected (approximately) its respective carbon foot-print. At $30/tonne of CO Continue reading “Math of environmental tax on indoor marijuana”

Freezing marijuana tax rates until 2022, as the proposed  “Control, Regulate, and Tax Marijuana Act” in California would do, strikes me as a risky gamble.  Flexibility on taxes is needed.  One expert puts it this way:

“There is stuff we’re going to get wrong – whether it’s tax rates, enforcement, the relationship [between recreational and] medical marijuana,” says law professor Sam Kamin at the University of Denver, who served on a task force that recommended regulations for Colorado’s marijuana industry. Continue reading “Expert calls for flexible marijuana taxes”