Washington State - When Congress banned marijuana in 1937, it did so in
the guise of taxation, imposing a prohibitive levy on cannabis and
created criminal penalties for those who failed to pay it. Marijuana
taxes also played a prominent role in what may be the beginning of the
end for pot prohibition: the legalization measures that voters in
Colorado and Washington approved last fall.
Supporters of Washington’s I-502 and Colorado’s Amendment 64 emphasized
the revenue that the government could reap by recognizing cannabis
production and distribution as a legitimate business. The tricky part,
as officials in both states will soon discover, is balancing the desire
for tax revenue against the desire to eliminate the black market created
by prohibition. Or as UCLA drug policy expert Mark Kleiman, an adviser
to Washington’s marijuana regulators, puts it: “What if we gave a pot
legalization and nobody came?”
The dilemma is especially clear in Washington, where I-502 specified a
25 percent excise tax at three levels: sales between producers and
processors, between processors and retailers, and between retailers and
consumers. That’s in addition to the standard state sales tax of 8.75
percent. According to calculations by BOTEC, Kleiman’s consulting firm,
these taxes will make the retail cost of cannabis 58 percent higher than
it would otherwise be, accounting for 37 percent of the price paid by
consumers. One BOTEC projection, based on a production cost of $2 per
gram, indicates the after-tax retail price will be $17 per gram, or $482
per ounce. Another projection, based on a production cost of $3 per
gram, puts the retail price at $25.50 per gram, or $723 per ounce.
That’s a lot more than pot smokers in Washington currently pay.
According to the website Price of Weed, which collects reports from
marijuana consumers across the country, the average price for
high-quality cannabis in Washington is $239 per ounce. Some of those
purchases may be from medical marijuana dispensaries, which are not
explicitly authorized by state law but operate as patient and provider
cooperatives. Washington’s medical marijuana rules are relatively
permissive, allowing cultivation and possession by patients with a wide
variety of conditions, as long as they have a doctor’s recommendation.
Dispensaries in Seattle currently charge $250 or so per ounce, and
medical marijuana sales remain untaxed under I-502.
In short, BOTEC’s projections indicate that the after-tax price for
marijuana sold by state-licensed outlets will be something like two to
three times as high as prices charged by black-market dealers or
dispensaries. “That’s a big problem,” Kleiman says. “The legal market is
going to have a hard time competing with the illegal market, but a
particularly hard time competing with the untaxed, unregulated
sort-of-legal market.”
Colorado’s constitution, unlike Washington’s, requires separate voter
approval for new taxes. The price of legal marijuana in Colorado
therefore will depend on the fate of Proposition AA, an initiative on
next month’s ballot that would authorize not only the 15 percent excise
tax mentioned in Amendment 64 but also a special sales tax of up to 15
percent. That’s on top of the standard state and local sales taxes,
which in Denver total 8 percent. Meanwhile, voters in Denver, where most
pot stores will be located, will decide whether to approve an
additional municipal marijuana tax of up to 15 percent. Supporters of
the marijuana taxes, including Amendment 64 co-author Brian Vicente and
the Medical Marijuana Industry Group, argue that they are necessary to
fund an effective regulatory system, which in turn will help discourage
federal interference. Opponents, led by Rob Corry, a Denver attorney and
longtime marijuana activist, argue that excessively high taxes will
undermine regulation by preserving the black market. “Over-taxation
creates a marijuana market ripe for takeover by the unregulated,
untaxed, underground market,” Corry says.
The Proposition AA campaign deems that prospect “unlikely,” saying “the
combined taxes on retail marijuana sales will add about 22 percent to
the retail cost of marijuana products”—less than half the impact of
Washington’s taxes. That estimate does not include local taxes, which
could make a big difference given Denver’s important role in the
marijuana industry.Washington and Colorado legislators will have the
power to adjust tax rates. But they may be tempted to keep taxes high in
the hope of generating more revenue, even when reducing rates might
actually boost revenue by allowing licensed sellers to attract more
business. The backers of hefty marijuana taxes are putting a lot of
trust in legislators’ ability to anticipate unintended consequences and
learn from experience—skills that do not come naturally to politicians.
This article was brought to you by
Forbes.com
Author: Jacob Sullum
