Cannabis Excise Taxes: Are They Fair?

Cannabis excise taxesHigh Times has a column out this week arguing against excise taxes for marijuana. The main point is that excise taxes on marijuana are unfair to consumers because they aren’t proportional to the harm caused by marijuana. Marijuana taxes are higher, for example, than alcohol taxes, even though alcohol is a more dangerous product. The column also argues that revenues from these taxes are not steady, as they are tied to wholesale prices which are rapidly declining. Since marijuana excise taxes are neither tied to harm nor do they generate steady revenues, they should be dropped entirely or kept as low as possible.

Are marijuana excise taxes really that unfair?

In an economic utopia, excise taxes, also called “sin taxes” would all work the same way. They would exist only when a company’s or a consumer’s use of a product causes costly negative consequences, or externalities, on other parts of society. An excise tax on a product does two things. First, it makes the product more expensive, thereby reducing its demand and its harms to society. Second, it generates revenue for the government that can be used to address the product’s harm. A perfectly tailored excise tax results in a wash, where society is no better off and no worse off based on the product’s externalities.

In reality, there is no such thing as a perfectly tailored excise tax. The world is complicated and complex, and we really don’t know the exact external costs that products cause. Gasoline and tires are taxed because they use public resources and contribute pollution into the environment. At the same time, our products are cheaper and our food is fresher because it is brought quickly to market by trucks that use gasoline and fuel. Externalities can be both negative and positive and societal harms aren’t so simple that we can point to a single product as the cause. Soda is being taxed in many different jurisdictions because soda leads to obesity and has various other negative health effects, increasing health care expenses across the board. But why treat soda differently? Donuts and ice cream also make us fat, but they aren’t getting their own excise taxes.

But we can still try our best and make educated guesses. What are the real costs of marijuana? There are plenty of studies that seek to define that. Use of both marijuana and alcohol by young people is correlated with poor academic performance. Psychiatrists have said that “marijuana use disorder,” a term for marijuana abuse or dependency, has increased substantially this century.

Even if we could come up with real numbers for the costs to society from cannabis usage, a truly tailored excise tax requires the government that collects cannabis excise taxes to actually use those tax revenues to pay for the costs cannabis supposedly inflicts. And though states like Washington have tried to direct money toward substance abuse prevention and law enforcement, the large balance of the cannabis excise taxes collected by most cannabis states will end up in their general fund.

Coming back to the original question of whether these taxes are fair — the answer is probably no, but that may not really matter. Gas taxes, alcohol taxes, and cigarette taxes are all probably too low to pay for those products’ externalities. Marijuana taxes, gambling taxes, and state taxes on private lotteries all usually overshoot and end up being profitable for the state. They aren’t economically perfect, and marijuana users end up subsidizing the rest of the state.

But it all comes down to politics and history. Marijuana has been part of a serious culture war since before the Nixon administration. There are still huge blocks of people that see marijuana as evil and dangerous despite all the evidence put in front of them and there are still also huge blocks of people who don’t care one way or another about legalization. The only way legalization campaigns have been able to garner sufficient votes to succeed has been to tax the hell out of marijuana. Politically, the taxes are non-negotiable.

Socially, the market is still young and it is going to be young for years to come. The illegal cannabis market is strong and will only get stronger if it can price-compete with the legal market. State governments will likely end up tailoring excise taxes over time not so much based on marijuana’s alleged harms, but more on keeping taxes as high as possible while still making cannabis cheap enough to the consumer so that it can dominant over the illegal market. So even though cannabis taxes are unfair, we are not likely to see large excise tax cuts in the cannabis industry for some time.