A Principled Approach to Taxing Marijuana:EQUITY ACROSS STATES

EQUITY ACROSS STATES

Marijuana can be grown anywhere. Ten thousand acres — about 15 square miles — can supply all the THC (tetrahydrocannabinol, the principal psychoactive component of cannabis) consumed in the entire country. So after national legalization, the industry will gravitate to states with low production costs.

The cannabis plant can yield several thousand pounds of conventional marijuana per acre, plus leaves that can be used to produce extracts. Comparable crops cost $5,000 to $20,000 per acre to grow. So with federal legalization, farming costs can be expected to fall below $20 per pound for a product that now “wholesales” for less than $1,500 a pound — and sold for over $5,000 a pound not long ago. Assuming one pound produces about 2,000-3,000 hours of intoxication, farming costs could fall below a penny per hour of intoxication.

The industry’s production costs will therefore be driven by regulations and taxes, not fertilizer, land, or labor. Production and associated jobs will move to whatever state offers the most business-friendly environment, including the lowest taxes. Expect a race to the bottom as states compete to host industry jobs.

A similar race dooms state-based retail taxes. To see why, consider a tax that works out to the equivalent of $4 per gram on “flowers” (the traditional smokeable form of marijuana). If total consumption remains around 6,000 metric tons per year (not an unlikely scenario even with national legalization, as increases in THC consumption continue to be offset by rising potency in marijuana products), such a tax could produce annual revenue of around $24 billion — not a panacea for budget problems, but nothing to sneeze at either.

In states where marijuana is legal, recent prices for high-quality flowers have hovered around $10-$15 per gram, but once national legalization allows professional farmers to replace criminals and artisanal growers, the production costs and hence the pre-tax price of basic, no-name marijuana could be remarkably low. Farming costs of $20 per pound work out to only a nickel per gram. Distribution, regulation, and testing will add to the cost, but not very much; consider that typical teas sell in grocery stores for $5 an ounce, which is less than 20 cents per gram.

Of course, some companies will promote expensive, organic, hand-cultivated premium varieties for affluent and once-a-week users and for gifts, but those will be niche markets. Eighty percent of marijuana is consumed by daily and near-daily users; 60% by people with a high-school education or less. Most will shop based on price, more like customers at Walmart than at Whole Foods. Expect the marijuana equivalent of microbrews, but also expect most intoxication to come from the marijuana equivalent of Budweiser, with prices in the absence of taxes falling below $1-$2 per gram in the long run.

So a $4-per-gram tax would only be slowing anticipated declines in price, not driving prices above where they are now — let alone where they were a decade ago. And taxes would eventually account for most of the cost to consumers, as they already do for cigarettes in many European countries.

As a practical matter, only the federal government could collect such a tax. State-to-state variation in cigarette taxes is roughly $4 per pack, and that disparity has engendered considerable gray-market smuggling from states like Virginia (with the lowest state tax at $0.30 per pack) to New York (with the highest at $4.35 per pack). But a pack of cigarettes weighs 20 grams. Trying to collect a $4-per-gram marijuana tax in one state when another state charges little would create smuggling opportunities equivalent to an $80 difference between states in the price of a pack of cigarettes.

Furthermore, marijuana’s production and high-level distribution are still dominated in most states by criminals operating in black markets. Legalization would bring supply above board, thereby “laying off” more than 100,000 professional criminals. Those criminals would respond to losing that income in diverse ways, but one would inevitably be trying to traffic marijuana for purposes of tax evasion. Taxes need to be managed cleverly to avoid committing an error akin to that of the Coalition Provisional Authority’s mistake in Iraq when it laid off all Ba’ath party members without considering what alternative employment they might seek.

Without a revolution in public attitudes about enforcement and penalties for tax evasion, interstate price differentials of even $1 per gram are likely unsustainable. That effectively means the federal government will have to be the primary taxing authority.

 

 

 

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