Source: Pat Oglesby Lawyer; Former Congressional tax staffer May 15 2014
Primitive? That’s how the first wave of taxes on legalized recreational marijuana, in Washington and Colorado, may seem. For now, at least, other states are moving toward different tax plans. And it would be amazing if the first laws got everything right.
The First Wave — Dollars
The marijuana taxes in Washington and Colorado measure only dollar prices. Those taxes may be counterproductive, and sometimes manipulable.
Washington‘s law puts a 25 percent tax on the dollar value of marijuana sales three times: first, when and if a producer sells to a separate processor; second, when a processor sells to a retailer; and third, when a retailer sells to a consumer.
A dollar-based tax fluctuates with prices. It is highest at the worst time, before efficiencies and economies of scale bring dollar prices down — when legal operators are just starting out. That start-up phase is just when industry needs taxes to be lowest — to fight a price war with bootleggers who won’t give up easily.
Colorado is collecting two taxes. One, a retail tax, parallels that third Washington tax: When a retailer sells to a consumer, Colorado collects a 10 percent tax. The other tax, earlier in the supply chain, is a wholesale tax that pretty much combines Washington’s producer and processor taxes.
Colorado’s Constitution allows a wholesale tax of 15 percent of dollars. But the bulk of marijuana sales in Colorado have no wholesaler even in the picture. These are direct grower-to-consumer sales. No dollars change hands until the consumer comes in. So there is no wholesale price to measure 15 percent of. The 15 percent wholesale rate just plain doesn’t work as a percentage tax. So Colorado, de facto, has substituted per-gram taxes. Details below.
The Second Wave – Grams
Percentage of price appears passé. Legalization proposals in California to tax by dollar price all failed to make the 2014 ballot. The current wave of marijuana legalization proposals taxes at wholesale by weight — grams, ounces or pounds. Weight is something we can reliably measure. If there’s a dispute about how many grams something weighs, we can settle it on the spot, and pronto.
The tax rates in these new plans are between $1 and $2 a gram:
– $1.06 in New Hampshire’s House Bill 492.
– $1.50 in Representative Diane Russell’s Maine bill.
Here’s where it gets interesting. That Alaska initiative would allow a lower rate “for certain parts of the marijuana plant.”
Taxing different parts of the plant differently brings us back to Colorado, where that is happening already. Replacing its failed 15 percent tax, Colorado collects two different per-gram wholesale tax rates. The tax on smokeable “bud” or “flower” — the potent nugget packed with intoxicant THC — is 62 cents a gram. Colorado’s tax on the rest of the plant, call it “trim” or “leaves,” is 10 cents a gram. Those less valuable leftovers are what gets processed — kind of boiled down — into “concentrates,” put into e-joints, balms or edibles like cookies or oils.
In other states, Legislators and initiative drafters are following Colorado’s lead by lining up to tax bud and trim at different rates. Rhode Island Senate Bill 2379 taxes “dried flowers” — bud — at $1.76 per gram, and “all other parts” of the plant at 35 cents. The prominent New Approach Oregon proposal, too, would tax trim at 35 cents per gram, while taxing bud at $1.23.
This is a new world. Is there a real incentive to put bud in the trim box? Can folks agree on the spot on what’s bud and what’s trim? Or will they need to go to court? Will random audits and replays of video surveillance make any cheating a losing bet?
If the bud-trim line is not clear enough, a line between raw plant matter and processed material might work. That line shows up in New York Senate Bill 6005, where plant matter would be taxed at $1.76 a gram, and “concentrated cannabis” at $7.05.
Whether any of these tax experiments will succeed, or, indeed, whether any of the larger legalization experiments themselves will succeed, remains to be seen. Even with a weight tax base, rates need to be calibrated. And adjusted nimbly.
The Third wave – THC
We tax liquor by potency — alcohol content. One day, we may figure out how to tax marijuana’s intoxicant, THC, directly. But maybe never for raw material, whether bud or trim.
Raw material is not homogeneous — each little speck has different properties and strength. So we can’t measure THC of raw material in a way that’s close enough for the government work of collecting precise taxes. THC in marijuana is like tar and nicotine in tobacco. Tar and nicotine taxes on cigarettes make sense in theory, but they have been tried, and have failed.
But concentrates, in liquid form, are a different story. They are more homogeneous. Technology and standards to measure THC in concentrates are not here yet, but they are imaginable. THC content could be the third, and maybe final, wave of marijuana taxes.
It’s hard to look at this early history without optimism for America. The Founders emphasized spreading power around — among three federal branches, and between federal and state governments. As a result, “a single courageous State may … serve as a laboratory; and try novel social and economic experiments.” In Washington and Colorado, the experiments are underway.
For now, no one knows for sure which ways are best to tax — or handle — marijuana. We are not even at the end of the beginning.
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