A Principled Approach to Taxing Marijuana:A FUNCTIONAL REPLACEMENT


If marijuana is legalized nationally, tax rates will have to be set nationally; gray-market arbitrage will undercut any substantial taxes imposed by states or localities. Production costs will fall sharply, and the public interest requires minimum after-tax prices that are reasonably stable. Therefore, if supply is left entirely to for-profit enterprise, tax rates must increase substantially over time. Other aspects — such as the equivalence rates between flowers and extracts — will also need to be adjusted in response to changes in market conditions and improved understanding of health risks.

Unfortunately, Congress may be too focused on fundraising and too vulnerable to industry lobbying to be trusted to implement such dynamic, evidence-based adjustments. There are at least two ways to work around this: delegating tax-rate-setting to an independent agency, and launching legalization with a schedule of tax increases that are clearly too large, so that all adjustments will be in the downward direction. Additional strategies undoubtedly exist, but none have a proven track record.

Fortunately, the choices are not limited to continued prohibition or hoping that Congress will suddenly become innovative and principled enough to prioritize public health over corporate profits (and campaign contributions). Besides more cautious approaches, such as restricting the privilege of supplying legal marijuana to nonprofit organizations, there is also the option of inserting a government monopoly between the producers and the retailers that could set prices directly.

Giving the government a prominent role in price-setting is distasteful for myriad reasons. But the federal government adopting the legalization model being pursued by the states would be even worse.

Marijuana is not an ordinary commodity, and the lifting of prohibition demands the creation of some mechanism for nudging against certain consumers making bad choices, even if that inconveniences the (politically more powerful) majority of users whose consumption is relatively harmless.

It is important for the public to engage on these issues now. The 2003 invasion of Iraq showed that it is sometimes easier to topple the old regime than to craft a well-functioning replacement. Marijuana prohibition is tottering, and procrastinating on doing the hard work of thinking through tax principles will more or less ensure a bad replacement.

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