Everything You Ever Wanted To Know About Marijuana and Taxes

New data indicates that tax revenue from marijuana in Colorado has nearly doubled in the last year, increasing from $4.9 million by June last year to $9.7 million by June of this year, according to a recent report from the Colorado Department of Taxation.

These figures are just for “Marijuana Taxes, Licenses, and Fees Transfers and Distribution.” Overall, Colorado expects to bring in $100 million per year from marijuana (taxes from medical marijuana sales are reported separately), indicating a growing trend that benefits the state’s budget.

Forbes recently provided a good account of the marijuana tax situation in Colorado. There are three taxes on recreational marijuana sales: a 2.9 percent sales tax, a 10 percent marijuana sales tax and a 15 percent excise tax. That’s 27.9 percent total.

However, medical marijuana is taxed at only 2.9 percent, and 23 percent of Colorado’s marijuana users can buy medical marijuana. Forbes estimated that 40 percent of Colorado’s marijuana purchases take place outside the legal system, in part due to medical purchasers reselling their marijuana to recreational users.

While tax revenue is growing in Colorado, policy makers and analysts are learning more about the economics of legal marijuana. Among the lessons learned is that the legal market loses business to illegal, unregulated markets if tax rates are too high.

Washington State took in $70 million in taxes during the first year of legalized marijuana on about $257 million in legal sales.

However, the legislature decided to change the excise tax structure this year. They replaced a regime that taxed every stage from production to processing to retail sales to one that just taxes retail sales. Washington went from a 25 percent tax at each level to a 37 percent tax on the retail customer. The reasons for the change involve accounting procedures; the new structure provides some relief from federal taxes for marijuana retail stores (as it changes what receipts are classified as income).

But one of the other problems was that recreational marijuana was costing more than three times the price of medical marijuana in Washington. The merging of the two markets (Washington is closing down the medical market and using the recreational market structure for all legal marijuana sales) and increased production is contributing to a drop in prices.

Once again, though, the lesson learned in Washington, as in Colorado, is that the initial level of marijuana taxes has been set too high—allowing the legal market to be undersold and contributing to market conditions that benefit illegal production and sales.

Marijuana is easy to grow, and lots of people grow it. The legal system has been unable to control marijuana production under prohibition; they can’t control it under a ‘regulate and tax’ system unless they make the legal market more attractive than the illegal market.

The purpose of legalized marijuana is to eliminate the illegal unregulated market, not to produce a tax windfall for local and state governments—which brings this discussion to Chris Christie, governor of New Jersey and candidate for the 2016 Republican presidential nomination.

Chris Christie opposes marijuana legalization and if elected president, is committed to enforcing federal law in states that have legalized marijuana. He does not seem to understand that as president, he cannot compel state and local police to make arrests for marijuana use. Certainly he can shut down legal marijuana production and sales under federal law.

However, this would just produce an economic boom for illegal cultivation and sales—transferring all the legal, regulated and taxed commerce to the illegal, unregulated and untaxed market. The illegal marijuana market, threatened by state-level legalization, would be the greatest benefactor of Christie’s proposed reaction to state-level marijuana legalization.

Another problem in Christie’s argument about marijuana is that he claims that states lose out from legal marijuana because businesses circumvent the payment of taxes by relying on cash exchanges, allowing them to evade charging and paying taxes. Christie does appear to understand that it is federal banking laws that force marijuana stores to work on an exclusively cash basis.

Christie’s main argument is that legal marijuana costs society more than the tax revenue it produces.

This goes to the heart of the debate over marijuana. The flaw in this proposition is a common one when the economics of policy proposals are discussed. It involves using selected costs and benefits—people tend to leave out costs and benefits that don’t fit their argument. Here, Christie fails to address the costs of prohibition and the monumental fact that prohibition preserves an illegal market that provides a steady, persistent and unrelenting supply of marijuana to the American public, particularly to underage users. Christie worries about the message sent by marijuana policy.

Prohibition sends an outrageous message that America is open for business for criminal enterprises. This is the greatest tax of all, and it taxes credulity that any responsible politician would so favor policies that benefit illegal markets.