Earlier this month, I spoke on marijuana and state taxation at the 2015 National Conference of State Legislatures (NCSL) in Seattle. At this conference, I sat on a panel entitled “Taxation of Marijuana,” along with Randy Simmons (former member of the Washington State Liquor and Cannabis Board), John Schochet (Deputy Chief of Staff for the Seattle Attorney’s Office), and Andrew Freedman (Colorado Governor’s Office of Marijuana Coordination). Needless to say, this panel was not short on insight into this sensitive and complex subject matter.
I view my even being invited to speak at this event as meaningful both for my firm’s cannabis attorneys and for the industry as a whole. It shows the strong desire of our states’ leaders to address the critical issue of marijuana and taxation and it says something about their openness to hear industry views. Talking with those at the conference demonstrates to me that many states wish to see substantial and rapid progress in making taxation improve their cannabis regimes, rather than stifle them.
On the panel, John Schochet explained the history of I-502 and how the City of Seattle has used policies and laws to seek to promote a harmonious and well-functioning marijuana marketplace. Randy Simmons spoke about various Washington State I-502 tax policies that could not be changed for two years without a super majority vote from the state legislature. He also talked of the progress the state has made in transitioning from the three-tiered 25% excise tax to a 37% excise tax at the retail level only. Andrew Freedman concluded the panel by discussing how Colorado handles its own tax issues as the market in that state shifts.
As the only private practice attorney on the panel, my job was to provide state representatives (from all over the U.S.) with a “boots on the ground” industry perspective. I saw my role as trying to convey how tax policies in various states have impacted and will impact our cannabis clients’ ability to survive and the concerns our clients have about state tax policy moving forward. This included me talking about the tax policies states should consider when looking at marijuana legalization. And, though the overall sentiment at NCSL was that the Feds should stay out of state legalization, you cannot have a tax policy conversation without discussing the IRS. So, at one point in my talk, I asked the state representatives in the audience if they knew anything about IRC 280e. Surprisingly few hands went up. After very briefly explaining IRC 280e and its effects, I advocated for states formulating their marijuana tax structures so as to reduce the heavy burden IRC 280e puts on cannabis businesses.
I also urged state lawmakers to consider the following areas when formulating their marijuana taxation regimes:
1. The right tax rate. States should enact a tax rate high enough to accommodate implementation of their marijuana programs, but not so high as to become cost prohibitive for businesses participating in the industry or so high that consumers will choose not to buy their cannabis on the legal market. For multiple reasons, states should not prioritize increased tax revenue when it comes to marijuana legalization. Though the theory of “let’s make money more off marijuana instead of letting that revenue go to the black market” is a popular one, it isn’t necessarily a sound policy decision–with federal prohibition alive and well, that tax revenue could easily be eliminated on the whim of the Department of Justice.
2. Potential diversion. Tied in with finding the “right tax rate,” states need to tax at a rate so that marijuana is adequately available, yet not so cheap as to lead to its diversion to other states where it isn’t legal.
3. What about the locals? As we all know in Washington and Oregon, marijuana revenue going to cities and counties is a touchy area. States need to remember that the cities and the counties are the ones that will need to do the bulk of industry policing and it therefore makes sense that they get at least some of that marijuana revenue to cover their bills for that work. Giving cities and counties some of the taxation spoils will go a long way towards convincing them not to enact bans against marijuana businesses or to lift existing ones.
Lastly, I recommended that all of the representatives read the California Blue Ribbon Commission on Marijuana’s Pathway Report where it serves as a fantastic starting point for marijuana tax policy choices to analyze and consider.
I ultimately left this conference with a strong sense that the successes of the Colorado and Washington “experiments” are working to change the minds of those in authority across the country when it comes to marijuana policy reform. If I am invited to the conference again next year, I look forward to more advanced discussions about legalization.