Getting the cannabis tax right

National Affairs recently published an article on the complexity and importance or taxing marijuana correctly:

While marijuana has tens of millions of happy occasional users, they account for a trivial share of industry sales. Consumption is concentrated among the smaller number of high-frequency users; half of marijuana is consumed by people with a medically diagnosable substance-use disorder, and these individuals are disproportionately poor and less educated. Policy — including tax policy — should be designed to protect these problem users from exploitation by industry and from their own bad choices, rather than cater to the convenience of occasional users.

Lower prices for marijuana have been shown to increase use, particularly for younger and heavier marijuana users. Hence, a major goal should be to keep after-tax prices from falling too sharply (ideally by no more than 50%). Dictating that outcome only via minimum-pricing rules, however, would let industry pocket excess profits. Propping up prices with excise taxes — a favored strategy for tobacco — would achieve the public-health goal of discouraging excessive marijuana use, while relieving the public of having to finance government via other less-popular and more-counterproductive taxes.

Alas, taxing marijuana is not simple. Federal legalization — specifically, allowing for-profit corporations to sell marijuana — would unleash a dynamic market that would evolve precipitously and unpredictably, with the potential for aggressive anti-tax lobbying, price collapses, rapidly changing marijuana-derived products, and black- and gray-market tax evasion. All this would create complicated secondary goals: Taxes would need to be nearly uniform across states; they would need to cover a wide variety of products; and they would need to increase dramatically over time.

Here’s just one example of the complexity discussed:

A first impulse might be to say, “If you want prices to be $6 per gram when the cost is $1 per gram, just make the tax $5 per gram.” Alas, it’s not that simple. Weight-based taxes create incentives to sell high-potency forms of marijuana. Potency is already up: Flowers sold in Washington state’s legal market now average over 20% THC, whereas the average potency of cannabis (at least the cannabis discovered and confiscated by law enforcement) did not rise above 5% until 2001.

Take the time to read the entire article here.

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