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.”
Some go so far as to call for abolition of “differential excise taxes on tobacco, alcohol and entertainment. These kinds of taxes, often called sin taxes, are disrespectful of people’s freely made choices and represent an unwarranted interference with private decision making.” Roy Cordato, Sales taxes and free choices, (May 25, 2010), http://www.newsobserver.com/2010/05/25/v-print/498695/sales-taxes-and-free-choices.html. That’s wild. The full letter is pasted below.
A more mainstream conservative view that is skeptical of excise taxes on specific goods says a tax should be “[n]eutral in its impact on resource allocation decisions” but allows for non-neutrality where there are negative externalities or “spillover effect.” Joint Economic Committee Study by Richard K. Vedder and Lowell E. Gallaway, Some Underlying Principles of Tax Policy (September 1998), http://www.house.gov/jec/fiscal/tx-grwth/taxpol/taxpol.htm.
Point of View
|Sales taxes and free choices
BY ROY CORDATO
Continue reading “Free choice to use tobacco and alcohol — Tax free!”
1. Simplistically, either we adopt a marijuana tax (low hanging fruit) or we go broke because can’t muster the will to make hard choices. This is a test.
2. For years, I worked for Congress on trying to tax income from intangibles, which is not only hard to measure, it’s hard even to locate (companies like to say it’s in tax havens). Locating marijuana will be simple unless the tax is so high as to encourage bootlegging. But once you find it, you can measure it. Or tax it based on potency.
Some conservative in the 21st century sense finds an easy target for mockery in the UK VAT on the op-ed page of today’s WSJ:
Food for animals creates other problems. If it is “suitable for all breeds” it is taxed, but if “it is held out for sale exclusively for working dogs” it is not, unless, of course, “it is biscuit or meal,” in which case it is taxed.
So dog food for “sheepdog breeds” is taxed, but dog food for “working sheep dogs of any breed” is not; food for greyhounds is taxed, food for “racing greyhounds” is not. This may be the only tax in Britain that favors work over leisure.
I don’t believe much of what the WSJ puts on its op-ed page, but we have to fight a tendency to complicate things too much.
The recent Xilinx case says:
“Purpose is paramount. The purpose of the regulations is parity between taxpayers in uncontrolled transactions and taxpayers in controlled transactions. The regulations are not to be construed to stultify that purpose. If the standard of arm’s length is trumped by 7(d)(1), the purpose of the statute is frustrated. If Xilinx cannot deduct all its stock option costs, Xilinx does not have tax parity with an independent taxpayer.” http://www.ca9.uscourts.gov/datastore/opinions/2010/03/22/06-74246.pdf
On the surface, parity between deals involving related parties and deals involving unrelated parties can be achieved by ignoring the relationship. That line of thinking would lead to the repeal the related party sales rules, because “If Dad cannot deduct his loss on the sale of closely held stock to Son, Dad does not have parity with an independent taxpayer.” But that repeal would not make sense. Neither does that Xilinx result.
Whatever the Government’s regulations or litigating position may say, a low-taxed subsidiary is not in the position of a contract manufacturer in a world full of contract manufacturers.
People know already how to fix the income tax. For instance, an unofficial list of loopholes and fixes appears at http://www.taxshelf.org/wiki/Main_Page. A broader list, a compilation of tax expenditures (not all of which need fixing) by the Joint Committee on Taxation of the U.S. Congress, appears at http://www.jct.gov/publications.html?func=select&id=5. There is plenty of tax learning to choose from if citizens want a better income tax.
A woman on Fox News used the term “VAT Tax” in the style of “IRA Account” and “ATM Machine.” At least the public is getting exposed to the idea.
A Value Added Tax avoids some problems of the income tax. For instance, the income tax often can’t locate the income of a cross-border corporation (multinational enterprise). That snipe hunt now requires folks to use the arm’s-length method of sourcing income. That method was a joke, the last time I looked, but this useful option shows up in The Shelf Project : “Tax the global income of all companies that do business in the United States on a consolidated basis with income allocated based upon sales, employment or other real world drivers, rather than relying upon transfer pricing regimes.” http://www.taxshelf.org/wiki/Stubs_for_Foreign.
If that option, a worldwide unitary income tax, makes sense but seems remote, a fallback is available: a Value Added Tax. A VAT seems a little like a worldwide unitary income tax that uses sales as the sole factor for income allocation.
The VAT uses sales as its base; single-factor sales unitary uses corporate income. Using income for a base may seem fairer, but giveaways decimate the income tax base. And multinationals’ income, if it can be found at all, is likely to be assigned to low-tax countries. Compared to income, sales are easy to find and measure.
The VAT lacks progressivity, but U.S. corporate tax rates are not steeply progressive.
The VAT uses sales as a base, so it loses whatever advantage comes from two traditional unitary factors, property and payroll. But those two factors may not be useful for unitary now. Payroll and property are the targets in a race to the bottom among jurisdictions like my State, North Carolina, that give tax breaks to companies that bring them in – or maintain them. Using them in the unitary method cuts against what jurisdictions want. Moreover, using a property factor requires people to find intangibles and measure them, which puts us back in the soup.
Arguments against a single-factor sales method appear at http://www.itepnet.org/pdf/pb11ssf.pdf.
A Value Added Tax can be regressive, so it needs to be combined with progressive measures.
The Federal income tax is supposed to be progressive, and often it is. But it has been often hijacked by the special interests to the point that it’s often palpably regressive. It treats income that hedge fund guys earn for the work of managing investments as low-taxed capital gain and not high-taxed ordinary income. The Senate can’t summon the will to call that income by its right name. http://www.newyorker.com/talk/financial/2010/03/15/100315ta_talk_surowiecki.
This issue is easy; see http://www.theconglomerate.org/2007/07/index.html. And the Government needs the money.
http://www.philly.com/inquirer/home_top_stories/20100304_Nutter_proposes_2-cent-per-ounce_sweet-drink_tax.html has this:
“Mayor Nutter [of Philadelphia] wants to treat the city’s weight and wallet problems in his 2010-11 budget with the same remedy: the nation’s highest tax on all sweetened beverages including soda, energy drinks, ice tea, even chocolate milk. . . .
“The tax rate would be 2 cents per ounce, 40 cents on a 20-ounce bottle of soda. The levy would cover fountain-drink syrups and powders, based on the number of liquid ounces they produce. Diet drinks without added sugar and baby formula would be excluded.
“City officials said they could raise $77 million a year.”
I’m quick to say let’s tax sodas. And donuts and candy bars. (A friend says I make Marie Antoinette look compassionate: “Don’t let them eat cake.”)
A soda tax would be regressive, but maybe not so regressive as the payroll tax.
Diet sodas are trickier. I have a hunch that it’s not nice to fool Mother Nature, and that diet sodas, like margarine with its transfats, will turn out to be bad for you. And “some studies suggest that drinking soda of any type leads to obesity and other health problems.” http://www.mayoclinic.com/health/diet-soda/AN01732
Setting up vending machines, some of which sell not just sweet and diet sodas but also water, to have two different prices, opponents will say, is just more than they can handle. Sometimes I can’t get my computer to work, but I don’t think that programming task is beyond corporate America.
But I’m nervous about caffeinated cola drinks and that Tea Party in Boston Harbour, as we might still spell it if the British hadn’t overtaxed. Was it just the high-handedness of the British, or was there some problem with folks needing caffeine?
Mr. Rangel is no paragon, and he should have acted and known better, but he was straight enough, when he became ranking Democrat and then Chairman of the Committee on Ways and Means, to keep at the top of the Committee staff two of the ablest and most dedicated public servants I knew when I worked on Capitol Hill, Janice Mays and John Buckley.
The joint Judiciary Committee of the Commonwealth of Massachusetts let me speak March 2, 2010 at its hearing on S1801, An Act to Tax and Regulate the Cannabis Industry, in the Statehouse in Boston. Chairman Eugene O’Flaherty and the Committee were respectful to all.
Here’s what I said, more or less:
Mr. Chairman and Members of the Committee,
Thank you for your patience. My name is Pat Oglesby. I’m a lawyer and founder of a nonprofit organization, the Center for the Examination of New Taxes, based in North Carolina. On an airplane next to someone who talks too much, who won’t shut up, mentioning our website, newtaxes.org/, is a . . . conversation . . . stopper.
Tax marijuana? Or let criminals get richer? I’m not arguing legalization, but the power to tax is the power to discourage, and if you are mad at marijuana, you can tax the heck out of it if you start with S 1801 and consider ten tighteners.
S 1801 does many things right: here are three.
- Its tax starts high, with extra tax on potency. I’m not advocating cheaper marijuana. John Prine sang about the price: “You may see me tonight with an illegal smile. It don’t cost very much, but it lasts a long while.” If you permit pot puffers to partake in peace, they’ll pay plenty.
- It does not exempt medical marijuana from tax. We can treat marijuana like Penicillin or like Pabst Blue Ribbon, but not like both, without a lot of fussing [about who’s sick and who’s faking].
- The bill allows changes in the tax rate so as to fight bootlegging. The alcohol bootlegger had the dignified image during Prohibition of mighty, respected kingpin. Now he’s a toothless backwoodsman sneaking around in the dark. Repeal of marijuana Prohibition can take away the drug lords’ mystique along with their money.
Ten possible tighteners would make the tax more bulletproof.
- Index for inflation.
- Add an alternative minimum tax based on retail price, as Europe does with tobacco.
- Start small with a pilot program in an eager City or Town, with all revenue coming to the
- Auction off licenses for producers and distributors.
- Don’t worry about protecting hemp.
- Charge consumers for a license like a hunting license. Maybe base the fee on income.
- Allow sale of only items that bootleggers can’t copy: maybe in cigarette paper that’s hard to counterfeit, or with genetic markers like the big seed companies use.
- Limit the exemption for home grown.
- Delay the effective date until the Federal Government winks, as it has with medical marijuana.
- Add a sunset date.
Tax marijuana? Or let criminals get richer? Why not tax the heck of it? Thank you. God bless the Commonwealth of Massachusetts.
In writing about new taxes, I’m liable to head straight for the capillaries, but real money is available from at least three sources:
1. A Value Added Tax
2. A carbon tax or an energy tax — instead of cap and trade
3. Adoption of worldwide unitary apportionment for the income of multinationals