How Tax Could Blunt The Growth Of The Legal Marijuana Market

Feb 20 2014, 3:43pm CST | by

The economics of the legal pot industry seem simple. Make it legal, tax it and let supply-and-demand take over. Soon enough, illegal drug trade should dwindle and state tax coffers should be filled.

In the real world, it’s not that simple. In Colorado, for example, where the commercial production and sale of recreational marijuana is now legal, the cost per ounce of high grade pot from a retail outlet is now more than double what it costs from an illegal drug dealer. Why? You guessed it. Tax.

Currently, pot sold legally in Colorado is subject to the state’s 2.9% sales tax, an additional 10% state tax on retail marijuana sales and a 15% excise tax on average market rate of wholesale marijuana. According to the Colorado Department of Revenue’s Division of Taxation, this last piece is calculated by multiplying the quantity of retail marijuana product by the average market rate at the time, then multiplying by the 15% (excise tax rate). The state even provides the following sample calculation on their website:

ABC cultivator transfers 3 pounds of flower, 5 pounds of trim and 8 plants to ABC store. At the time of transfer the average market rates are:

$1,876 for Flower
$296 for Trim
$9 per Immature plant

3 lbs. of flower  x $1,876  = $5,628
5 lbs. of trim      x $296   = $1,480
8 plants             x $9      = $72____
$7,180 x .015 = $1,077 in retail marijuana excise tax due


Once you get past the initial shock of reading a word problem about marijuana growers on a government tax site, the next reaction is how complicated this business is! Once you do the math, this tax equation means that a $30 eighth ounce of marijuana will have about $8.59 in taxes appended to it. In other words, a 29% tax rate.

Colorado projects about $67 million a year in new revenue from these taxes.

Will they reach that goal? With just over a month of regulated marijuana sales under their belts, the government officials responsible for the program say they are happy with the early results, but have yet to report details. The AP reports:

“Colorado’s top marijuana regulator, Department of Revenue head Barbara Brohl, said it’s too soon to know how much tax revenue legal weed is going to produce, but that Colorado appears to have avoided major public safety problems, at least in the six weeks since marijuana sales began.”

There are some very real obstacles standing between Colorado and their revenue goal.  According to NBC News, retailers in Colorado have been selling top-shelf marijuana at close to $400 an ounce. For some perspective, that’s about twice the price of medical marijuana. On the black market, an ounce of high-grade marijuana sells for about $237 in Colorado, according to priceofweed.com, a site that bills itself as the “global price index for marijuana.”

Once the novelty of retail pot wears off, will consumers continue to pay more than double the price in order to get something legally? Or, will the back-alley drug dealer come to be seen by consumers as a “tax free zone”? Additional social and economic considerations will play into the equation as well, such as the implications of becoming a location for drug tourism and cost of enforcement.

Other states are betting that the Colorado experiment will pay off. Washington State, for example is putting plans in motion to legalize pot with a 25% excise tax on all phases of production in addition to an 8.75% sales tax, which analysts expect will add 37% to the retail price of marijuana. Alaska, Arizona, D.C. and Oregon are said to be mulling loosened marijuana laws as well.

As more states entertain new marijuana legislation, the economic impacts will be a fascinating case study in the influence of taxes on consumer behavior.

Source: Forbes Business

 
 

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