The Center for New Revenue

A criticism of taxing marijuana by weight is that it should incentivize more potent product, while a price-based tax should not.  Critics have suggested that customers will pay much more for an ounce of potent product – which would bear the same tax as a weak ounce.  Taxing by price, they say, will avoid that incentive.

But new data shows that  potency and price are not tightly related.

Dr. Caroline Weber of the University of Washington sent me this chart:  https://newrevenue.org/wp-content/uploads/2018/11/table_for_pat_oglesby.pdf.  It comes from her and from two University of Oregon economists, Ben Hansen and Keaton Miller, and considers about 60 million retail transactions.

If price followed potency directly, if a gram of 10-percent THC cannabis sells for $7, a gram of 15-percent THC cannabis would sell for $10.50 = $7 (15/10).

But in fact, in those 60 million transactions, a shift between 10 and 15 percent potency typically increases the price of a gram by much less than the 50 percent increase in potency.

In Table 1, the regression coefficient of THC concentration for the tax-inclusive price of cannabis in Washington State is 0.188, if I have the terminology right.

Using Table 1: If a gram of 10-percent THC cannabis sells for $7, a gram of 15-percent THC cannabis would sell for $7.94 = $7 + ((15 – 10) 0.188).

Meanwhile, using Table 2: If THC increases by one percentage point, price increases by 2.05 percent. So if a gram of 10-percent THC cannabis sells for $7, a gram of 15-percent THC cannabis would sell for $7.75 = $7 X (1.0205 to the 5th power)).

Now the sophisticated weight-based schemes in place in Alaska, California, Colorado, Maine, and Nevada, all tax multiple categories of product to tax.  Potent bud is typically taxed at about three times the rate per ounce used for less potent bud.  These weight based taxes may reflect potency better than price-based taxes.

In any event, price is not a very good proxy for potency.

 

Click on 370531229-Senator-Gardner-280E-Score-12-04-2017 for a letter from Joint Tax Deputy Chief of Staff Robert P. Harvey to Senator Cory Gardner (R-CO) indicating that repeal of the section 280E limitation on tax deductions for state-legal marijuana sellers would cost $5 billion over 10 years.  That letter, dated December 1, went out before Massachusetts voted to legalize.  The estimate could go up over time.

I do a speculative analysis, independent of the Joint Tax analysis, at https://newrevenue.org/2017/02/02/5119/.

Dr. Caroline Weber of the University of Washington sent me this chart:  table_for_pat_oglesby.  It comes from her and from two University of Oregon economists, Ben Hansen and Keaton Miller, and considers about 60 million retail transactions.

The regression coefficient of THC concentration for the tax-inclusive price of cannabis in Washington State is 0.188, if I have the terminology right.

A shift between 10 and 20 percent potency would only increase the price of a gram by much less than a doubling.

Here are Maine’s marijuana producer tax rates, in addition to its 10 percent retail tax.  The Legislature overrode the price-based producer taxes that the voter initiative contained:

• $335 per pound of marijuana flower or mature marijuana plants;
• $94 per pound of marijuana trim;
• $1.50 per immature marijuana plant or seedling; and
• $0.30 per marijuana seed.

http://news.cchgroup.com/2018/05/07/maine-enacts-marijuana-taxes/

 

 

I’m posting a table covering cannabis sales in Washington that was prepared by Ben Hansen, Keaton Miller, and Caroline Weber – academic economists out west, the first two authors at the University of Oregon, the last at the University of Washington.  They authorized me to share it.  Click here:  table_for_pat_oglesby

The table shows only a small correlation, 0.188, between (reported or claimed) THC concentration and price per gram, so it seems to chip away at the claim that a price tax base is a pretty good proxy for a THC tax.

The research considers about 60 million retail transactions.

If price followed potency directly, if a gram of 10-percent THC cannabis sells for $7, a gram of 15-percent THC cannabis would sell for $10.50 = $7 (15/10).

But in fact, in those 60 million transactions, a shift between 10 and 15 percent potency typically increases the price of a gram by much less than the 50 percent increase in potency.

In Table 1, the regression coefficient of THC concentration for the tax-inclusive price of cannabis in Washington State is 0.188, if I have the terminology right.

Using Table 1: If a gram of 10-percent THC cannabis sells for $7, a gram of 15-percent THC cannabis would sell for $7.94 = $7 + ((15 – 10) 0.188).

Meanwhile, using Table 2: If THC increases by one percentage point, price increases by 2.05 percent. So if a gram of 10-percent THC cannabis sells for $7, a gram of 15-percent THC cannabis would sell for $7.75 = $7 X (1.0205 to the 5th power).

So upon a 50-percent increase in potency, instead of a 50-percent increase in price from $7 to $10.50, the expected price is less than $8.  The price increase is less than 14 percent.

Now the sophisticated weight-based schemes in place in Alaska, California, Colorado, Maine, and Nevada, all tax multiple categories of product.  Potent bud is typically taxed at about three times the rate per ounce used for less potent bud.  California’s tax for flower is $9.25 per ounce; for leaves or trim, it’s $2.75.

In any event, price is not a very good proxy for potency.  Those weight-based taxes may well correlate with potency better than price-based taxes do.

 

NOLA NTA November 15, 2018

Click on that link to download slides.

 Current mj taxes with MI 3 columns big font 

Note the bolding for medical.

My friend Dr. Dale Gieringer, head of California NORML, writes (and authorizes me to post):

Hi Pat –

      The illicit market is going great guns here in CA.   Continue reading “Over-regulating cannabis in California?”

I’m to give a guest lecture in my old friend from international tax days Peter Barnes’s VAT and Sales Tax Class at Duke Law School today on Excise taxes, especially alcohol and cannabis. Here are the 100 slides I’m still tinkering with (download): 

Master Sales and VAT Duke 2018 beyond the $

 

Note the bolding, above.  Nevada taxes all cannabis de facto by weight; Colorado taxes producers by weight unless there is an arm’s-length sale.

Oregon’s 20-percent number reflects a 17-percent state tax and universally adopted 3-percent local taxes.  Otherwise local taxes are more of a patchwork, and are ignored.  Colorado and Nevada have nominal 15-percent producer taxes.  Colorado converts its tax to a weight base for related party or vertically integrated cases. https://newrevenue.org/2017/07/23/is-colorados-new-marijuana-tax-leaky/. Nevada converts to a weight base for all cases. https://newrevenue.org/2017/07/02/nevadas-70-cent-per-gram-tax-on-marijuana-flower/

Details on Washington:  Exemption from 6.5% standard sales tax for medical marijuana: https://dor.wa.gov/find-taxes-rates/taxes-due-marijuana.  Obligation to pay 37 percent excise tax on medicalamarijuana: https://dor.wa.gov/sites/default/files/legacy/Docs/Pubs/SpecialNotices/2016/sn_16_med_endorsement.pdf.

Senators McCaskill and Shaheen have a bill to stop tax deduction for prescription drug ads. The American Medial Association and my drug policy friends approve.  This stoppage would treat Rx drug ads like marijuana ads — and nudge against them via taking away this tax break.  Maybe freedom of speech (for marijuana, in state Constitutions) won’t let us stop the ads, but we don’t have to subsidize them.

Proposed section 280I text includes:

No deduction shall be allowed under this chapter for expenses relating to direct-to-consumer advertising of prescription  drugs for any taxable year. 

Why not do the same for alcohol, tobacco, and opioids?

Dear Members of the Vermont Marijuana Commission:

It was a privilege to serve as co-author of the RAND Report, Considering Marijuana Legalization: Insights for Vermont and Other Jurisdictions, http://www.rand.org/pubs/research_reports/RR864.html, and as the only attorney and tax person to do so.

I would be delighted to try to come to speak with you if you would be willing to hear me. In any event, here are the four main points I would make.

1.  Taxes can and need to go up over time. Already, economists say, “[D]espite having the nation’s highest tax rate, Washington . . . could generate significantly higher revenue by increasing the tax rate.” Continue reading “CNR comments to Vermont Marijuana Commission”

I was surprised and heartened to that California Governor Brown vetoed AB 1863, keeping non-deductibility of marijuana advertising expenses on California individual income tax returns. His rationale is revenue loss and the bill’s evasion of the budget process. https://www.gov.ca.gov/wp-content/uploads/2018/09/AB-1863-Veto-Message.pdf

And I was surprised and heartened to see that the California Legislature hasn’t overridden a veto since 1979.

So there is an opportunity for California to tinker with 280E conformity to treat individuals and corporations the same and not lose revenue. Continue reading “California 280E tax needs fixing”

For instance,

“Another point to which the attention of the Commissioners should be directed is the probability or possibility, that if the use of hemp-drugs is prohibited, those who would other-wise continue to use them may be driven to have recourse to alcohol, or to other stimulants or narcotics which may be more deleterious.” 

IHD vol 3 pages Title-17 or so74464868_53_72

 

Here is a message I sent Governor Brown of California about a bill to allow individual sellers of marijuana, like corporate sellers, to deduct advertising and marketing expenses on their state income tax returns:

+++

AB 1863 loses revenue.

California should treat individuals and corporations alike for marijuana tax deductions:  Let everything be deductible but advertising and marketing.

That might raise revenue (or maybe come out neutral to avoid 2/3).  It would be better for the budget. Continue reading “CNR urges veto of California AB 1863”

Per-gram taxes on marijuana flower in Colorado have dropped over half, as prices collapse.

For July to September 2018, here are the new producer tax rates for seven categories of marijuana not sold to third parties in Colorado.

Flower: AMR (Average Market Rate) = $846 per pound.
Tax = $126.90 per pound, or approximately $0.28 per gram.
[The highest AMR for flower was $2,007, in the early days, yielding a tax of $301.05 per pound, or $0.66 per gram.]

Continue reading “Colorado’s marijuana tax continues to decline”

I don’t work for marijuana sellers, so why should I give them free advice?  Because I want to keep their ads and promotion non-tax-deductible under 280E.  Ads irritate parents, favor Big Business, and stimulate demand.  They are a frill for consumers.

But even without ads, cannabis sellers have an easy, low after-tax cost way to show customers their products are special.

The customer walks into the retail store, and sees a live feed of suppliers’ grows.  Continue reading “How craft growers might work around 280E”