Video enforcement — and live feeds

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”

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Collection Point for Marijuana Tax — BOE

(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.”

A parental excise tax illustrates some principles

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/

Bright and silly lines

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.

When smokers draft the marijuana laws

(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.

Why we can’t raise taxes

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.