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.

9 responses to “Cannabis Excise Taxes: Are They Fair?”

  1. Interesting take. Thank you. I would add that nobody seems to be addressing the fairness of taxing medical patients rather than recreational users. We do not apply tax to other medications, and there is no “sin” rationale for doing so with Cannabis as medicine. We should not be taxing medical patients’ medicine as we might recreational users’ weed. Currently at least CA is considering taxing everyone (not sure what CO does presently).

  2. Very interesting discussion and I agree with most of the points you made. From where I’m standing (in CO), your acknowledgment of much of the tax revenue ending up in states’ general funds is an important one, as it deprives regulators of needed resources to truly oversee these complex, novel legal industries. For example, in Colorado much of the required quality assurance testing written in law has not been implemented due to the fact that labs are not yet subject to proficiency testing. It’s my understanding that the state Dept of Public Health and Environment is working on it, but I imagine more resources would only help. Similarly, the Dept of Agriculture recently received a relatively modest funding increase to enhance pesticide and worker safety inspections, but I overall that dept is dealing with a ton of new responsibilities due to cannabis without many new resources being given to them.

    As you note, much of the tax money goes to schools and other areas – which is great on its face and of course was key in getting people to vote for legalization – but it also makes the amount of taxes going back to regulate the actual legal cannabis systems insufficient. So in this scenario, what’s to be done? Raise taxes? Distribute them differently? In my mind, an audit of a state system to identify areas in which resources are needed most would be a prudent first step, in order to gauge the needs of potential areas of concern.

    Additionally, we don’t yet know that full impact of long-term cannabis use, especially in some of the new forms and products being developed in legal states. Hopefully nothing serious is being missed, but it’s possible that there could be some public health issues down the line that will need to be addressed by public programs. Of course, a stronger healthcare system and social safety net generally would help address such issues, and it’s hard (or should I say impossible?) to tax people based on what might happen.

  3. Interesting take. Thank you. I would add that nobody seems to be addressing the fairness of taxing medical patients rather than recreational users. We do not apply tax to other medications, and there is no “sin” rationale for doing so with Cannabis as medicine. We should not be taxing medical patients’ medicine as we might recreational users’ weed. Currently at least CA is considering taxing everyone (not sure what CO does presently).

  4. Very interesting discussion and I agree with most of the points you made. From where I’m standing (in CO), your acknowledgment of much of the tax revenue ending up in states’ general funds is an important one, as it deprives regulators of needed resources to truly oversee these complex, novel legal industries. For example, in Colorado much of the required quality assurance testing written in law has not been implemented due to the fact that labs are not yet subject to proficiency testing. It’s my understanding that the state Dept of Public Health and Environment is working on it, but I imagine more resources would only help. Similarly, the Dept of Agriculture recently received a relatively modest funding increase to enhance pesticide and worker safety inspections, but I overall that dept is dealing with a ton of new responsibilities due to cannabis without many new resources being given to them.

    As you note, much of the tax money goes to schools and other areas – which is great on its face and of course was key in getting people to vote for legalization – but it also makes the amount of taxes going back to regulate the actual legal cannabis systems insufficient. So in this scenario, what’s to be done? Raise taxes? Distribute them differently? In my mind, an audit of a state system to identify areas in which resources are needed most would be a prudent first step, in order to gauge the needs of potential areas of concern.

    Additionally, we don’t yet know that full impact of long-term cannabis use, especially in some of the new forms and products being developed in legal states. Hopefully nothing serious is being missed, but it’s possible that there could be some public health issues down the line that will need to be addressed by public programs. Of course, a stronger healthcare system and social safety net generally would help address such issues, and it’s hard (or should I say impossible?) to tax people based on what might happen.

  5. Interesting take. Thank you. I would add that nobody seems to be addressing the fairness of taxing medical patients rather than recreational users. We do not apply tax to other medications, and there is no “sin” rationale for doing so with Cannabis as medicine. We should not be taxing medical patients’ medicine as we might recreational users’ weed. Currently at least CA is considering taxing everyone (not sure what CO does presently).

  6. Very interesting discussion and I agree with most of the points you made. From where I’m standing (in CO), your acknowledgment of much of the tax revenue ending up in states’ general funds is an important one, as it deprives regulators of needed resources to truly oversee these complex, novel legal industries. For example, in Colorado much of the required quality assurance testing written in law has not been implemented due to the fact that labs are not yet subject to proficiency testing. It’s my understanding that the state Dept of Public Health and Environment is working on it, but I imagine more resources would only help. Similarly, the Dept of Agriculture recently received a relatively modest funding increase to enhance pesticide and worker safety inspections, but I overall that dept is dealing with a ton of new responsibilities due to cannabis without many new resources being given to them.

    As you note, much of the tax money goes to schools and other areas – which is great on its face and of course was key in getting people to vote for legalization – but it also makes the amount of taxes going back to regulate the actual legal cannabis systems insufficient. So in this scenario, what’s to be done? Raise taxes? Distribute them differently? In my mind, an audit of a state system to identify areas in which resources are needed most would be a prudent first step, in order to gauge the needs of potential areas of concern.

    Additionally, we don’t yet know that full impact of long-term cannabis use, especially in some of the new forms and products being developed in legal states. Hopefully nothing serious is being missed, but it’s possible that there could be some public health issues down the line that will need to be addressed by public programs. Of course, a stronger healthcare system and social safety net generally would help address such issues, and it’s hard (or should I say impossible?) to tax people based on what might happen.

  7. Our country is historically racist and prejudice. However, when something is known to be useful, it is the American way to use it. This leads us to the ethical dilemma of expanding the state at the detriment of personal liberty. Cannabis is a medicine and a national security resource, to tax it or impede a person’s ability to harvest it for any personal industrial, medical, or sacramental uses would be counter to the framework to which we all participate in this social exploration called the Constitution.

    This status quo of taxation, regulation and largess is going to be challenged by people interested in using their religious rights – these people will be joined others interested in individual liberty and self agency.

    Watch as the term “marijuana” dissolves away and the term “entheogen” comes alive. Cannabis has a thousand and one uses and eventually the notion of “Sin Tax” on a plant with no victims is going to seem just as bigoted as many of our cultural standards of the past.

    I look forward to the outcome of the federal case where using the 5th Amendment to hedge the state against the Feds. What really needs to occur is Constitutionally illiterate Americans need to start utilizing and ex resizing their 1st Amendment right to personal and spiritual expression.

    The drug war is not over, it just became corporatized by the state.

  8. Our country is historically racist and prejudice. However, when something is known to be useful, it is the American way to use it. This leads us to the ethical dilemma of expanding the state at the detriment of personal liberty. Cannabis is a medicine and a national security resource, to tax it or impede a person’s ability to harvest it for any personal industrial, medical, or sacramental uses would be counter to the framework to which we all participate in this social exploration called the Constitution.

    This status quo of taxation, regulation and largess is going to be challenged by people interested in using their religious rights – these people will be joined others interested in individual liberty and self agency.

    Watch as the term “marijuana” dissolves away and the term “entheogen” comes alive. Cannabis has a thousand and one uses and eventually the notion of “Sin Tax” on a plant with no victims is going to seem just as bigoted as many of our cultural standards of the past.

    I look forward to the outcome of the federal case where using the 5th Amendment to hedge the state against the Feds. What really needs to occur is Constitutionally illiterate Americans need to start utilizing and ex resizing their 1st Amendment right to personal and spiritual expression.

    The drug war is not over, it just became corporatized by the state.

  9. Our country is historically racist and prejudice. However, when something is known to be useful, it is the American way to use it. This leads us to the ethical dilemma of expanding the state at the detriment of personal liberty. Cannabis is a medicine and a national security resource, to tax it or impede a person’s ability to harvest it for any personal industrial, medical, or sacramental uses would be counter to the framework to which we all participate in this social exploration called the Constitution.

    This status quo of taxation, regulation and largess is going to be challenged by people interested in using their religious rights – these people will be joined others interested in individual liberty and self agency.

    Watch as the term “marijuana” dissolves away and the term “entheogen” comes alive. Cannabis has a thousand and one uses and eventually the notion of “Sin Tax” on a plant with no victims is going to seem just as bigoted as many of our cultural standards of the past.

    I look forward to the outcome of the federal case where using the 5th Amendment to hedge the state against the Feds. What really needs to occur is Constitutionally illiterate Americans need to start utilizing and ex resizing their 1st Amendment right to personal and spiritual expression.

    The drug war is not over, it just became corporatized by the state.

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