- L. Mencken once said, “For every complex problem there is an answer that is clear, simple, and wrong.” That quote applies to legalization generally. It is naïve to think legalization boils down to a simple yes-or-no question, or that legalization means everything will be exactly as before except that people will no longer be arrested. But Mencken’s quote applies also to the specific matter of how to tax marijuana.
A first impulse might be to say, “If you want prices to be $6 per gram when the cost is $1 per gram, just make the tax $5 per gram.” Alas, it’s not that simple. Weight-based taxes create incentives to sell high-potency forms of marijuana. Potency is already up: Flowers sold in Washington state’s legal market now average over 20% THC, whereas the average potency of cannabis (at least the cannabis discovered and confiscated by law enforcement) did not rise above 5% until 2001. Furthermore, the state-legal industry is now promoting the sale of concentrated cannabinoids. This is because marijuana concentrate is easy to extract via automation, and it offers greater economies of scale. It also appeals to a growing market segment. In Washington, marijuana concentrates used for vaping, dabbing, or mixing into edibles now average over 60% THC. These concentrates should bear more tax than $5 per gram.
We might try assessing taxes per unit of THC, but whereas there is only one psychoactive molecule in alcohol, marijuana contains scores of psychoactive compounds, and measuring even THC alone is complicated. Alcoholic beverages are “miscible” — meaning they form homogenous mixtures — but THC content varies from strain to strain and from flower to flower on the same plant. Often, marijuana products’ actual contents differ substantially from what their labels promise, so no jurisdiction has yet attempted to tax cannabinoid content.
Most jurisdictions simply tax marijuana as a percentage of value, such as Washington state’s tax of 37% of the retail price. Such ad valorem taxes will decline over time as prices fall — and that’s exactly the wrong direction. If 37% of $10 per gram is close to the “right” tax level, then 37% of $1 per gram is not. Furthermore, taxes on value can be dodged by “bundling” (e.g., using a cover charge to subsidize a bar’s sale of low-priced marijuana) or using marijuana as a “loss leader” to attract customers. (Convenience stores could sell cheap marijuana to boost sales of gas or corn chips. Restaurants could even give away free marijuana — the way bars offer patrons salty nuts — to induce customers to order more food.) Standard discounts for employees or for quantity would also reduce tax costs. An ad valorem tax may therefore be a perfectly natural “starter tax” for early-legalizing states. It would not, however, be adequate as the main tax after national legalization.
There is yet another complexity, as health risks vary by product form. Marijuana smoke is unhealthy; it literally contains carcinogens. Marijuana-infused edibles and beverages tend to foster overconsumption, especially the candies and sodas that appeal to youngsters. Many vaping pens are shoddily made, exposing users to heavy metals, and the unregulated production of hash oils often leaves behind flammable solvents that can be hazardous. In principle, differential tax rates could nudge consumption toward less risky product forms. However, the science base needed to quantify how risks vary by product form and cannabinoid content is in its infancy.
Parallel considerations apply to indirect effects on other substances. If increased marijuana use substitutes for abuse of alcohol, tobacco, or other drugs, that would be an argument for lower taxes; if it turns out to be a complement that stimulates greater use of those substances, that’s an argument for higher taxes. The current evidence concerning indirect effects is split right down the middle for alcohol; for tobacco, it suggests complementarity; and while there are a few peer-reviewed articles suggesting that medical marijuana could reduce problems with opioid abuse, that debate is far from settled. What’s important for the present argument is that, as better evidence becomes available, taxes should be adjusted to reflect that new information.
Marijuana taxes will thus not only need to increase over time, but the structures affecting revenue bases will need to be flexible as products evolve and knowledge of their relative risks improves. More generally, the taxes will need to be adapted to respond to unforeseen trends. No nation in the modern era has ever legalized an alcohol-style, for-profit cannabis industry, so we just don’t know what is coming. (The Dutch have de facto legalized only retail sales, not production or the wholesale trade, let alone national brands and advertising. Uruguay’s heavily regulated system is currently limited to two producers, and advertising is banned.)
There’s a lot to be said for keeping taxes simple, but as Einstein supposedly quipped, “Everything should be made as simple as possible, but no simpler.” Marijuana taxes should be as simple as possible, but hardwiring in static taxes from the get-go is a recipe for unintended consequences down the road.