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Taxing Marijuana in Colorado and Washington

Tax Marijuana
Proposed tax rates in CO and WA could keep pot prices sky high.

Legalization may not lower the price of marijuana. The two states that voted to regulate it in November, Colorado and Washington, have proposed tax rates that could keep pot prices sky high.

Colorado's Amendment 64 was sold to voters, in part, with the promise of at least $40 million in new tax revenue for schools. This was to be achieved through a special excise tax. In fact, Colorado has established very heavy taxes to be imposed on their adult social use marijuana market, including:

• An excise tax of 15% of the wholesale value of marijuana
• A special sales tax of 15% on the retail sale of marijuana.
• Extension of the state’s existing 2.9% general sales tax to sales of marijuana and marijuana products.

This handy calculator, created by Colorado State University's Colorado Futures Center, shows the variables which the CFC used in coming up with its revenue estimates. They warn that, according to their figures, the excise tax - which is earmarked for schools - is projected to only raise $21.7 million per year. That's a significant shortfall, but are their numbers valid?

Their website states that “The CFC model assumed that, on average, each user consumes 3.53 oz of marijuana a year.” There are 28.35 grams per ounce. That means that in a year, CFC estimates that an average consumer will go through 100.08 grams. That works out to 8.3 grams per month, or 1.9 grams per week. To say the least, that's a lowball estimate.

The CFC's calculator lets you change some of those variables to see what might happen if, for instance, the average consumer were to go through six ounces per year - that is, 3.27 grams per week (or less than half a gram per day). At that rate, the excise tax alone would raise $36.9 million per year.

Washington State has also created an onerous, burdensome tax structure for their legal adult social use marijuana market, thanks to Initiative 502. As explained by CNN, “The law approved by its voters last year includes a 25% sales tax at three different stages: when it's sold from grower to processor, processor to retailer, and retailer to customer. That will add a few dollars to every store purchase, pushing the price of a gram from its current average of $10 closer to $15.”

It's a 25% tax at each of three levels - producer, processor and retail - not just a 25% tax at the consumer level. At that rate, the ounce price of marijuana would add up to a very familiar number: $420!

The state's Office of Financial Management originally estimated that taxes could raise nearly $300 million in the first year of the program's operation (2014), rising to more than $530 million in 2015.

On the other hand, Mark Kleiman, consultant to the state's medical marijuana program, projects much lower revenue. Kleiman believes that confounding factors, especially the availability of medical marijuana which won't be subject to the new marijuana taxes, will mean greatly reduced revenue.

In fact, Kleiman's best guess is that revenue will be no more than half of what has been projected. There are a few problems with his analysis, or rather questions which won't be answered until the program is up and running. The first is, what impact will a legal adult social use market have on the medical marijuana industry?

In Washington State, the prices at medical marijuana dispensaries will be lower than at adult social use shops because of the added taxes on the latter. One possibility would be to put added taxes on medical cannabis - a doubtful approach, since patients and advocates will scream bloody murder at imposing extra burdens on the sick for the purpose of building up competing businesses.

What isn't being considered is the question of whether patients will be willing to trade a slightly higher price at the cash register for the freedom of no longer having to pay the added cost of doctor's visits and a physician's recommendation.

Another concern of Kleiman's is that the marijuana industry not turn into a state lottery or liquor industry, which relies on pushing people to keep spending money rather than behaving responsibly. As he put it in a televised interview: “The only way to get a lot of revenue is to sell a lot of marijuana. And the only way to sell a lot of marijuana is to sell it to people who smoke a lot of marijuana. And that’s not a good thing. You don’t want the state to set itself up as dependent on dependent cannabis users any more than you want the state to do what it already has done, which is to set itself up as dependent on addicted gamblers. I don’t think anybody in this process wants to see the legal cannabis market go the way of the state lottery, where they’ve got a state agency that’s deliberately fostering disease. Adults want to use a responsible amount of cannabis, I don’t think that’s a bad thing.”

In addition, the revenue estimates in Washington are based on consumption estimates, which may or may not be accurate. If we rely on self-reports about consumption, the question is begged: How honest are those self-reports? When the government, or your doctor, asks you about your drug use, really how honest are your answers? How many people say they maybe smoke one or two joints a week and only on the weekend, when they really smoke one or two joints a day every day, and more on weekends?

The good, and in some ways bad, news is that we'll find out the answers to these and many other questions in a very short time.

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Doug McVay

Doug McVay

Doug McVay is on the board of directors of Common Sense for Drug Policy. He lives in Portland, Oregon.