A pro-pot jingle in Colorado last year went like this: “Jobs for our people/Money for schools/Who could ask for more?” Nearly a year after Colorado legalized recreational weed, voters get the chance to decide exactly how much more — in taxes. On Tuesday, voters decide whether to approve a 15 percent pot excise tax to pay for school construction, plus an extra sales tax of 10 percent to fund marijuana enforcement. Some pot activists are campaigning against the taxes, arguing that marijuana should be taxed like beer, which has a tax rate of 8 cents a gallon. They’ve handed out free joints at tax protests.
“Our alcohol system is regulated just fine with the taxes they have, so we don’t see any need for this huge grab for cash from marijuana,” said Miguel Lopez, volunteer coordinator for the small opposition campaign to Colorado’s pot tax measure. While polls suggest the tax is going to pass — even in this state where voters frequently reject new taxes — it is very much an open question how much the state is going to reap. A projection prepared for voters by state fiscal analysts predicted the taxes would bring in $70 million a year. But an early draft of Colorado’s first budget after retail sales begin, the 2014-15 fiscal year, doesn’t include an amount they expect in pot revenue.
Washington state isn’t counting on pot revenue, either. Voters in that state set tax rates when they approved legalization last year. Taxes will be 25 percent, levied at least twice and up to three times between when the pot is grown and when it reaches the customer, plus sales tax. Marijuana’s tax potential is an important question for the prospects for pot legalization in other states. If pot proves a tax windfall for Colorado and Washington, other states may be inclined to look favorably on legal weed. But if recreational pot smokers in the two states stay in the black market to avoid taxes, while the price tag for regulating a new industry balloons, marijuana legalization could suddenly look like a bad deal.
That’s why many in Colorado’s marijuana industry are pushing the tax measure. They say that because most people don’t use marijuana, the public needs to see a public benefit from making the drug legal. “Taxes are an opportunity for marijuana to show it can play a valuable role in the community,” said Joe Megyesy, spokesman for the campaign promoting the tax measure. Support for the marijuana taxes extends even to politicians who opposed legalization in the first place, including Democratic Gov. John Hickenlooper and Republican Attorney General John Suthers. “I think everyone sort of realizes that the die has been cast. We’re really doing this, and if we’re going to move marijuana out of the shadows, we need to regulate it and tax it,” said Sam Kamin, a University of Denver law professor who studies drug policy and served on the Colorado panel that helped write state marijuana regulations.
Still unclear is how the new marijuana market responds. Colorado’s medical marijuana framework will remain in place, with a much lower taxation rate. Heavy pot users could save a lot of money by paying nominal annual fees to be on the state medical marijuana registry and paying only regular sales taxes on their pot. Colorado also allows growing pot at home without a license, allowing users to avoid taxes entirely. Surveys suggest that 20 percent of pot smokers consume 80 percent of the pot, so the behavior of the heavy user has significant tax consequences, said Beau Kilmer, co-director of the RAND Drug Policy Research Center.
It’s too soon to say what will happen to recreational pot prices after retail sales begin next year. But if current prices hold, Colorado’s proposed tax rate would add about $50 to an ounce of medium-quality loose marijuana, roughly the amount that would fit in a sandwich-sized plastic bag. Precise projections for the pot tax burden on the user are dicey. Like alcohol, marijuana can vary widely in potency, quality and price. Both Washington and Colorado plan to use taxes based on price. By contrast, alcohol is taxed by the gallon and cigarettes by the pack, regardless of how expensive the booze or smokes are. Another unknown is how much regulation will cost.
Colorado has approved an ambitious seed-to-sale tracking scheme that includes extensive video surveillance of licensed growing sites and radio-frequency identification tagging. That could end up costing more than the 10 percent special sales tax produces, warned Colorado State University economists in a report issued in April. Kilmer said that Colorado and Washington are aware they’re treading into uncharted waters on marijuana taxation. Voters and consumers, he said, should be prepared for big changes in pot tax rates and regulatory schemes. “Flexibility is clearly going to be the key here,” Kilmer said.
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