States Push to Get the Most Out of Marijuana Taxes

Three men appear in court on charges relating to €1.5m cannabis seizureIf marijuana is legalized and properly regulated, its proponents have long said, it could generate millions of dollars in state tax revenue. But how the drug should be taxed has proved to be a thorny question.

In Colorado, where voters approved a measure in November legalizing small amounts of marijuana for recreational use, officials have been grappling with this issue for months as the state works to forge a cohesive regulatory code.

This week, legislators here will consider excise and sales taxes on marijuana of up to 30 percent combined. The proposal emerged from a task force of health officials, representatives of the state’s rapidly developing marijuana industry and others that was commissioned last year to help develop rules for marijuana.

The goal, task force members and lawmakers say, is to set taxes high enough to finance the administration of new laws, but not so high that customers are driven back to the black market.

“We should see a financial benefit as a state that can help pay for enforcement and other fundamental issues,” said Christian Sederberg, a Denver lawyer on the panel whose firm helped draft Amendment 64, the measure legalizing recreational marijuana. “The other side is that if you tax something too high, then you simply crowd out the regulated market. We’re confident we’ll find the right balance.”

Under the proposal, the first $40 million collected from a 15 percent excise tax would be used to build public schools. Revenue from a 15 percent sales tax imposed, in addition to the state’s 2.9 percent sales tax and any local sales tax, would be apportioned to local governments and for enforcement.

A legislative hearing on the proposal, which would give lawmakers the flexibility to lower the tax rate, is scheduled for Thursday. The tax measure is one of several proposals related to marijuana regulation being debated this week.

State Representative Jonathan Singer, a Democrat from Longmont and the bill’s sponsor, said finding the right tax rate was also a matter of public safety.

“The big thing is that we want to make sure we’re able to put the appropriate safeguards in place so that marijuana doesn’t end up in the hands of kids, criminals or cartels,” he said.

Not everyone is certain that a tax is a good idea. Michael Elliott, executive director of the Medical Marijuana Industry Group here, said he feared that too heavy a tax could make it hard for any marijuana business to survive, because Colorado’s black market is so entrenched.

Virtually all of the state’s businesses that sell medical marijuana, which would be exempt from the taxes, will eventually shift over to selling the drug for recreational use as well. If taxes are too high, Mr. Elliott warned, those businesses could struggle and eventually close.

“Higher taxes on the legal, commercial model will prevent the transition to a legitimate market from happening and keep more people buying it illegally,” he said.

Furthermore, if lawmakers pass the tax proposal, it will still require voter approval. Under a state constitutional amendment, tax increases are subject to a popular vote.

Meanwhile, projections over how much revenue the taxes might raise vary widely.

In Washington State, where voters in November passed a similar measure legalizing small amounts of marijuana for personal use, taxes will be levied in three tiers of 25 percent each on producers, processors and retailers. Those taxes were laid out in the initiative that voters approved, and will result in an effective rate for consumers of 44 percent, according to the state’s Liquor Control Board, which will administer marijuana regulations.

A state study found that revenue from marijuana taxes could range from zero dollars, if Washington’s marijuana laws are ultimately superseded by federal criminal law, to $2 billion over five years if a fully formed market develops. “Nobody knows for sure how it will work out, but there are people who say they could grow and process marijuana at a lower price point than what is currently available illegally,” said Brian Smith, a spokesman for the board.

Jeffrey Miron, an economics professor at Harvard University and a senior fellow at the Cato Institute, a libertarian group, cautioned that while both states’ approaches seemed reasonable, he doubted the taxes would create a substantial windfall.

Dr. Miron, who supports legalization, said that as long as federal marijuana laws continued to be unsettled, collecting taxes would be challenging. Moreover, he said, there is no way to predict how many customers would continue to buy on the black market.

After Prohibition ended in 1933, states levied taxes on alcohol, in part because they were desperate for revenue after the Great Depression. But that shift, Dr. Miron noted, was undertaken with the full support of the federal government.

“It’s easy to get a little overexcited that legalizing marijuana is going to solve the world’s budgetary problems,” Dr. Miron said. “But the question for the tax revenue part of this will be how much the federal government allows these markets to come completely above ground.”

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