The Center for New Revenue

OK, this is nitpicking, but http://www.irs.gov/pub/irs-pdf/f1023.pdf has this:

User fee increases are effective for all applications postmarked after January 3, 2010.

1. $400 for organizations whose gross receipts do not exceed $10,000 or less annually over a 4-year period.

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They could have said

$400 for organizations whose gross receipts do not exceed $10,000 annually over a 4-year period.

or $400 for organizations whose gross receipts are $10,000 or less annually over a 4-year period.

A virtue of bureaucracy is (or was) to have enough eyes look at drafts to prevent this kind of redundancy.  My faith is the Service is still great enough that I think I may be missing something.

It looks like the late 2010 tax bill will sacrifice revenue to benefit ethanol, which is environmentally unfriendly, http://www.edf.org/page.cfm?tagID=1550, and competes with food production.  If the bill is going to be porked up, Senator Grassley is going to help his people (what else could he do?).   Even as a Democrat, I have admired Senator Grassley as a serious public servant generally, though not for this log-rolling.

(For a more comprehensive discussion of this issue, go to http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1741735.)

Excerpt of email from California BOE spokesperson Anita Gore to the author, October 12, 2010 8:24:16 PM (before the outcome of Proposition 19 was knowable):

Staff has discussed the possibility of using potency as a component of an excise tax scheme.  Right now it is an option to consider, and when and if marijuana is legalized, and the legislature moves to impose an excise tax, a potency based tax would be a viable option if the legislature chooses to go in that direction.

With properly crafted legislation and sufficient resources staff believes it is doable.

Staff agrees there are issues around testing and certification like those you raise that would need to be addressed to support a potency based tax.  The question that goes with that is compliance.  Legalization itself will move distribution from an underground economy to a regulated industry.  Will the industry buy into that level of regulation?  No one knows.

Associated revenue – no way to know.

(For a more comprehensive discussion of this issue, go to http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1741735.)

“Steep Hill Lab in Oakland, http://steephilllab.com/, conducts potency testing on medical cannabis using a 2 gram sample that statistically represents up to two pounds of medical cannabis.  The two gram sample is selected from 5 to 15 sites from the bulk material which has been determined to be sufficient to accurately represent potency.  Comprehensive scientific analysis is conducted and a certificate of analysis is generated for potency as well as other important factors such as microbiological contamination and pesticide residue.”

That’s an excerpt from an email to me from Wilson Linker at Steep Hill Lab of December 5, 2010, 9:43:35 PM.  He was correcting a draft I had sent him.

The Lab charges $120 per sample for flowers and concentrates.  http://steephilllab.com/services/potency-analysis/ (last visited Dec. 6, 2010).

I had stricken the following from a draft paper before seeing in Time magazine (November 11, 2010, at 36) that Colorado is planning video monitoring of marijuana grow sites:

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Whether governments or private parties cultivate and distribute marijuana, prevention of bootlegging involves keeping the substance from leaving the legal supply chain in the hands or orifices of workers.  Strict rules might help to prevent that kind of leakage.  Continue reading “Video enforcement — and live feeds”

(For a more comprehensive discussion of this issue, go to http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1741735.)

At the end is an excerpt from an email of November 3, 2010, from Anita Gore, spokesperson at the California State Board Of Equalization, to me.  But first, here is what I was asking her about:  some draft language I sent her:

“For alcohol, fermentation takes place in bonded locations.  Tax is imposed as beverage alcohol as or before leaves its final bonded location.

“For tobacco, the choke point is found after the time when and distant from the place where the curing process makes green tobacco smokable.  Cured tobacco from tens of thousands of domestic farms travels untaxed to manufacturing plants where tax will be assessed.[1]

“For marijuana, Staff of the California Board of Equalization, which “typically recommends that excise taxes or fees be imposed as high in the distribution chain as possible,” advises against collecting from “the highest point in the distribution chain[,] . . . the grower[,] . . . [because], growers normally sell in bulk volume, which would not be conducive to a unit-based tax.”[2]  The Staff instead recommends collecting at the level of the distributor/processor, where repackaging would allow for the use of tax stamps.

“A more aggressive scheme for taxing marijuana would involve a limited number of farms or grow areas placed under security.  The government could monitor the process from seed (or clone) to cigarette, and assess tax when the product is packaged for sale.”

[1] Tax on imported tobacco is assessed at customs.  Meanwhile, “monitoring of raw leaf tobacco [to] . . . control the supply of raw leaf tobacco from grower to manufacturer” is nonetheless a part of a comprehensive excise system.  Brandy Brinson, “Regulating Security,” Tobacco Reporter Magazine (June 2006), available at http://www.tobaccoreporter.com/home.php?id=119&cid=4&article_id=798.

[2] BOE Analysis, supra note 152, at 8.
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Here is my question:

“What would prevent growers (in the system the Staff recommends) from diverting unprocessed marijuana into the black market before it gets to the distributor/processor?  That is, might not the alcohol model be more bullet-proof than the tobacco model?  If so, would practical considerations nonetheless tip the scales toward the tobacco model?”

This is her reply to me, on November 3, 2010:

“As you mention, Prop. 19 failed, so we will not be implementing any taxation program at this time for the manufacture and sale of marijuana.  Regarding any future attempts at legalization, there are too many unknowns to make any decisions at this time.

“However, generally speaking, growers would be licensed and inspected regularly.  By knowing the size of a grower’s crop, we know the approximate amount of product produced.  Just like alcohol, some product may go out the back door that the taxing agency is not aware of.  This can never be completely controlled.  There is no fool proof system to stop all evasion schemes.  But by using indicia, licensing all the levels including retailers, and doing regular inspections, the State of California can reduce the evasion level.”

Australian economics professor and author of Parentonomics Joshua Gans shows that excise rates can be too high to collect any revenue and that evasion can beat the system as he tried this plan for his daughter “B.”:

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Gans came up with a special incentive plan for candy. If B. wanted to buy candy, she would have to pay her parents a 100 percent tax, effectively doubling the cost.

The tax was based on how much B.’s candy consumption would add to the family’s health costs, because of increased dental visits and the like. As it turned out, Gans never earned any revenue from the tax — because B. never bought candy with her allowance.

“I realized that’s just a ripoff,” B. says. “Why would I want the candy then?”

Of course, just as people evade government regulation by crossing state lines for cigarettes or fireworks, B. can go to her grandmother’s for tax-free candy.

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http://www.npr.org/blogs/money/2010/09/02/129604336/?ft=1&f=93559255, via http://taxprof.typepad.com/

“Halfway through college, and still drifting, I decided to become a high-powered tax lawyer. The plan was sailing along until I took my first course in tax law. I was stunned by its complexity and lunacy, and I barely passed the course.”

This is why some of my friends make big bucks.  Grisham abandoned tax pronto on his way to writing best sellers.

Two recent examples in the news prove that drawing reasonable lines in taxation is not child’s play.  New York taxes sliced bagels at 9 percent, as it taxes bagels with cream cheese spread by the seller, and exempts unsliced bagels.  Federal tax on loose cigarette tobacco is about 10 times that on pipe tobacco.

In the New York case, the answer seems to me to be to exempt bagels that are simply sliced.   They are more like a loaf of bread than they are like a sandwich.  More transformation than just slicing, like combining (as with cream cheese) or heating should be required for a change in tax categories.  The answer should definitely not be to create a new category and tax it at 4.5 percent.  Fairness is the enemy of simplicity.

In the tobacco case, I don’t know about the differences in the kinds of tobacco, but roll-your-own smokers are now happy to put pipe tobacco in their cigarettes.  The 10-fold difference is way out of whack, it seems.

This line-drawing comes up all the time.  It produces weird and embarrassing results for those of us who support some kind of taxation, but it’s manageable.

What’s not manageable is different excise tax rates based on hidden characteristics of the purchaser.   No one I know suggests having the rich and poor pay different sales taxes when they buy the same item, like shampoo (we may get some progressivity anyway if the rich buy costlier stuff).  But some proponents of medical marijuana contend that when marijuana is legalized for all, medical users should pay no or less tax.  That would be weird.

(For a more comprehensive discussion of this issue, go to http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1741735.)

The process of initiative and referendum that California and other, mostly Western, States use is a weak instrument for creating a new system of taxation and regulation .

California’s Proposition 19 reflects the wishes of the powerful forces in the marijuana community.  For instance, it doesn’t even tax marijuana:  it allows localities to tax or not tax.

This one-sided drafting is a recipe for backlash.  In a deliberative process, by contrast, if marijuana becomes legal, opponents of marijuana won’t necessarily be convinced it’s OK, but some of them may cut a deal if they see enough benefit from the revenue gain.

The American way of the Founders is not the victory of one faction over another, but accommodation.  Meaningful taxation of marijuana is the middle ground we may get to one day.

Proposition 19’s  revenue is so speculative and ephemeral that even if it passes, all the tax thinking remains to be done.

Mr. Rangel, lauded here in a previous post, is an example of the reason people don’t want to pay taxes.  He treated himself better than most people could treat themselves, thanks to the power of his office.  His success came thanks also to his friendliness and love for people, to be sure, but he broke the rules.

So people distrust their representatives who write Federal tax laws and want to keep their power down.

Our work is cut out for us.  The Democrats could gain a lot of credibility by trying Mr. Rangel and voting against him not on friendship but on the merits.

As the public resists taxation,  end games for our democracy are foreseeable, though the timing is beyond me.  The military leads the list of institutions that Americans have confidence in (76 percent) followed by small business (66 percent) and the police (59 percent).  The Presidency and the Supreme Court tie at 36 percent, while Congress brings up the rear with 11 percent.  http://www.gallup.com/poll/141512/congress-ranks-last-confidence-institutions.aspx

So here’s the result: eventually unable to borrow and still unable to tax, States and the Feds cut spending to the point where passable roadways, crime-free neighborhoods, and then clean water go missing.  The military steps in for the benefit of the public.  The Constitution is suspended.  The military takes what assets it needs to fund a government.  Police units help out.

Another end game is conflict with China as we renege on our debts, maybe by fast or slow devaluation.  The military will need all the confidence it can get in that scenario, too.

I’m for balancing the budget, like many Republicans from the middle of the 20^th century were.

[An updated version appears as part of http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1741735.]

While marijuana helps some people with illness, I am very wary of exemptions, lower rates, or special rules for marijuana when it’s said to be medicinal.  No proscription, no prescription.

First, any special rule puts the government in charge of making decisions about individual people.  The government can distinguish, however awkwardly, among substances, so as to tax wine with an alcohol content of 13.9 percent at a lower rate than wine with an alcohol content of 14.0 percent.  But putting human beings into categories can be more difficult.  To be sure, there are easy cases, like the extra Federal tax exemption for individuals 65 and over (you just produce that birth certificate or otherwise prove your birth date as Mr. Obama has done to the satisfaction of most).  But even the extra tax exemption for blindness on the Form 1040 creates a regulatory tangle and even a few disputes.  Deciding whether someone has some ailment as subjective as chronic pain is a task that I hate to see government taking on.  Folks who are distrustful of government ought to be especially careful about this kind of official categorization of individuals.

Second, any special rule rewards hypocrisy with a special right. Folks who pretend to be sick get something that honest folks won’t allow themselves to get.

Third, providing even any perceived benefit, even a placebo, to folks who say they are sick encourages people to think of themselves as victims.  (The argument back is that we all may have chronic pain in our souls: it’s the human condition.)  Having people think of themselves as victims has a positive aspect:  it encourages them to seek help (and it encourages others to try to get them help).  But such thinking tends to weaken the thinker.

Fourth, any special rule adds complexity.

Finally, any special rule diminishes the tax base.

A new Rand corporation study, “Altered State?  Assessing How Marijuana Legalization in California Could Influence Marijuana Consumption and Public Budgets,” estimates revenue from the California proposals.  http://www.rand.org/pubs/occasional_papers/2010/RAND_OP315.pdf

It’s quite elaborate.  I’m working through it, but it seems to do a good job of spotting the issues.

A couple of quick reactions:

The uncertainty in Rand’s conclusions makes the case for having the State be the sole retailer (and maybe having the State own the whole supply chain).  Rand finds it hard to estimate elasticities and can’t pin down bootleggers’ reactions or even current price.  Setting a tax rate too firmly fixes a probably incorrect rate in place.  So following the lottery model, where the State can adjust prices quickly, looks appealing.

Their analysis makes the case for measuring potency and taxing on the basis of it.  First, they note the incentive, long noted on this blog, that a per-ounce tax gives to produce more intoxicating cannabis.  But second, there’s more to it.  Measuring potency officially by the State will give consumers certainty about what they are getting.  Bootleggers can’t supply that certainty.  Folks will pay a premium for it.

The imprecise statement that potency testing will cost $100 per test needs elaboration.  The cost must include fixed and variable costs, and they need to be stated.

Still, this is the most thorough and serious look at revenue I’ve seen.  And I’ve just started to study it.

The NYT of July 4 points out that we are subsidizing big oil, and undertaxing it.  “As Oil Industry Fights a Tax, It Reaps Billions From Subsidies,”  http://www.nytimes.com/2010/07/04/business/04bptax.html?ref=global-home.  Transocean, the owner of the Deepwater Horizon that caused all the trouble, is one of what John Kerry called those Benedict Arnold corporations that escaped the USA to avoid tax.

That brings to mind a controversy in the 1980s about whether a pamphlet describing some tax break for the oil industry that was to be issued by the staff of the Joint Committee on Taxation would use the phrase “Drain America first.”  Friends of the oil industry at the Member level didn’t like the phrase:  I don’t think it got printed in the pamphlet.

A friend reminded me yesterday that “[t]he estate tax is seen as the most ‘unfair’ federal tax,” as shown in a 2009 Tax Foundation survey, http://www.taxfoundation.org/files/sr166.pdf.  That happens even though only a tiny fraction of people will ever pay it.

As a vehement supporter of death taxes (even with the right wing’s label), I quickly blamed propaganda and said education is the answer.  Let people know not just “you won’t pay it,” but also that it’s not a meaningful disincentive to economic activity.

But an article makes me wonder.  It says that many people deny scientific consensuses despite exposure to scientists’ views:  people base their views of reality on ideology, not science.  If scientists want to educate the public, they should start by listening, Chris Mooney, Washington Post of June 27, 2010, http://www.washingtonpost.com/wp-dyn/content/article/2010/06/25/AR2010062502158.html?hpid=opinionsbox1.

That propensity to disregard what so-called experts say makes it hard to think education will do the trick.  And taxes aren’t science.  When I got into the tax policy business, one of the first things I learned was, “It’s all theology.”  You can’t convince people that a particular tax policy is right or wrong:  individual values determine everyone’s views.

The article’s thinking might lead tax policy folks to ask citizens where they think revenues should come from.  (Let folks think about the effects of payroll taxes over against those of death taxes.)   Maybe that would work.

American Public Media has a budget simulation exercise online at http://marketplace.publicradio.org/features/budget_hero/.  Its treatment of taxes is primitive; its come-on ignores taxes altogether:  “If you ever wanted to control where your tax dollars go, here’s your chance to decide.”

Thanks to the Raleigh N&O for publishing my letter on excises as an alternative to prohibition, which they labeled “Taxing ‘Sin'”:

http://www.newsobserver.com/2010/06/07/515498/taxing-sin.html

It’s a reply to

http://www.newsobserver.com/2010/05/25/v-print/498695/sales-taxes-and-free-choices.html.