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Marijuana legalization grows closer with Senate tax proposal

Marijuana legalization

marijuana legalization

Want to legalize marijuana federally? Propose sensible taxes on the drug.

That’s the tactic of a new bill from two Oregon Democrats: House Ways and Means Committee member Earl Blumenauer and ranking Senate Finance Committee member Ron Wyden. It takes on tough marijuana legalization questions: What should a marijuana tax measure? Should it tax medical marijuana? The Marijuana Revenue and Regulation Act (MRRA) provides thoughtful answers.

What to tax?

The 64-page bill, S. 776, and House companions H.R. 1823 and 1841, starts out problematically, taxing marijuana by price for a five-year transition period, but ends up brilliantly, with sophisticated weight-based taxes for the long run. A companion bill repeals the useful current tax on advertising.

Price

For its first five years, the MRRA taxes marijuana by percentage of producer price, with rates ratcheting up from 10 percent to 25 percent.

Taxing by price means that when the pre-tax price goes down, taxes do, too. So do after-tax prices. Low taxes and cheap weed are not on everyone’s wish list. After marijuana legalization, pre-tax prices are bound to wither. Fully legal marijuana won’t sell for hundreds or even dozens of dollars per ounce, pre-tax. Is the MRRA’s final 25 percent rate high enough? Will five years be too long? No one knows. As a tax design architect — yes, that’s a thing — I’ll leave the numbers to the economists.

 

But price taxes create another problem. In case of “vertical integration” like a farm-to-market operation, the bill shies away from taxing the actual price the consumer pays, so it imagines an artificial — and probably arbitrary — “constructive [producer] price … determined by the Secretary” of the Treasury. This is the amount one person, who is both retail clerk and farmer, supposedly pays his farmer self as a wholesale price. Shenanigans galore! Colorado has this kind of unworkable producer price tax on the books but, finding it doesn’t work, has quietly given up. Colorado taxes producers by weight instead.

Weight

Eventually, after five years of marijuana legalization, the MRRA taxes “concentrates” — processed marijuana used in liquid form or put into “edibles,” as when baked into cookies — by the number of grams they contain of marijuana’s primary intoxicant, tetrahydrocannabinol (THC). Chemistry reveals the amount of THC in the processed product. So far, so good.

As for unprocessed plant material — “naturally grown and unadulterated marijuana flower,” the bill taxes by the ounce.

That’s less theoretically beautiful, but it makes perfect sense. Measuring THC in flower involves guesswork, sampling error and gamesmanship. Ever wonder why no jurisdiction taxes cigarettes by nicotine content? Nicotine, like THC in the marijuana flower, is too tricky to measure accurately enough for the government work of taxation. Sure, taxing by weight incentivizes powerful marijuana — stuff that’s rich in THC. But unless we’re willing to take the seller’s word for THC content, the MRRA’s Colorado-style weight tax on flowers is the best we can hope for.

How much per gram or per ounce will the MRRA charge in taxes eventually? It has a formula designed to keep the amount of tax owed the same after the five-year transition ends. It aims to convert the price tax burden — the amount of tax owed — to a weight tax burden.

Technically, it takes the per-ounce “prevailing sales price” of flower during the fifth and final price-tax year, multiplies it by that year’s 25 percent tax rate, and makes that the per-ounce tax on flower. For THC measured in concentrates, the per-ounce rate is 10 times the flower rate. That’s an equivalent for flower that is 10 percent THC by weight. Commendably, the bill adjusts those tax rates annually for marijuana price inflation.

A final word about federal design: Federal taxes need to be high enough to prevent the kind of interstate tax arbitrage that causes criminals to buy low-taxed cigarettes at retail in Virginia to resell illegally in New York. Marijuana is enormously more valuable by weight and volume than tobacco. A high federal tax, high enough to dominate the field, would address that problem. A credit for state taxes paid could leave states whole.

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