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What Is A Fair Tax Rate For Marijuana?

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irs logoShould Marijuana Be Taxed? If So, At What Rate?

The momentum to end cannabis prohibition is growing everyday. The polls prove that, and anyone who wants to deny the reality that marijuana prohibition has failed needs to get their heads out of their butts. Part of the reason that ending cannabis prohibition is becoming more popular in society is due to the financial crisis. There are a lot of people that I have known for decades that never supported marijuana legalization in the past, but do now because they feel it will get us out of this crisis if we just legalized and taxed marijuana.

This new phenomenon has troubled some members of the marijuana community. One activist told me that he will never, ever support taxing marijuana because it’s a plant, and after all, we don’t tax other plants in our backyard gardens. I have always played the devil’s advocate since I was a little kid, and I can’t help but point out to my friend that if we don’t compromise on this area of ending cannabis prohibition, we will likely lose a lot of the votes that we would have otherwise had.

Now I’m not saying that we should tax marijuana to death just to make it legal. Taxing marijuana too much has been a strong fear of mine since before we ever started this blog. I saw the potential writing on the wall when I started hearing politicians throwing around enormous tax rates as selling points for legalization. The last thing I want to see happen is marijuana prohibition end, and it doesn’t work as well as it should because there’s a 25% tax every time you turn around. Marijuana taxes need to help the government, but just as any industry, the government can’t place too high of a tax burden that will hinder the industry.

The marijuana industry will generate a lot of tax dollars if there is the right balance. The purpose of this article is to discuss what that hypothetical tax rate should be. Is it 1%? 10%? Higher? Before people blurt out some knee-jerk response, there are some important things to consider. Taxes are very complicated. Some states heavily rely on purchase related taxes like Nevada. Some other states like Oregon have no sales tax. This can be a possible source of tension that a lot of people don’t think about when they declare how they feel about taxing marijuana. The tax structure of a state will no doubt have an effect on the way voters feel about taxing marijuana, and it poses unique issues for each state that will have to be worked out if cannabis prohibition is ended.

Of course, each state could place a ‘vice tax’ on marijuana, which wouldn’t interfere with other tax structures. But realize that vice taxes are the highest rates in the nation. Also, is all marijuana consumption considered a ‘vice’? I know when my tendinitis is flaring up after a long day on the computer, the topical cannabis lotion I use for pain relief doesn’t seem the same as say using alcohol or going to a strip club. A vice tax wouldn’t differentiate between the two, and as a medical marijuana patient, I am not comfortable with that.

The only example we have for taxing marijuana is medical marijuana in California and Colorado, which have passed legislation allowing the taxing of medical marijuana sales. I personally think that legalization would be a larger, different animal and therefore would have a different tax structure, but maybe not. Steve DeAngelo told the Huffington Post that, “Harborside operates as a nonprofit corporation while paying state sales taxes and a 5 percent local tax to Oakland — for a total of $3.1 million this year (2011).” Oakland dispensaries have been operating at that rate for a couple of years now, and it seems to be working. Would a 5% tax rate work with a full legalization model, that will no doubt bring many more operations?

I want to go back to the theory of never supporting a tax on marijuana. If you were presented with two options, putting everything else aside, how would you choose? One option is the end of prohibition with a 5% tax on marijuana. The other option is our current situation of medical marijuana legalization in some areas with differing levels of success and full on prohibition everywhere else. Which would you choose? I wish I could somehow get real facts about how people truly feel about this issue so I could make some nerdy Venn Diagrams. I would love to see the shift if I changed the first option to 4% or up to 6% and so on. What would be the tipping point between 51% voting yes? I guess every marijuana supporter in America would also like to see that too I’d imagine. What do readers think? No tax, period? 1%? 5%? 25%? I look forward to your responses.

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  • If marijuana is used in a religious ceremony, the tax should be zero.

  • Mostly_coastly

    Govt. income from marijuana and/or hemp should be taxed based on its use and the state’s current tax system.  It would avoid long drawn out debate over new regulations.  If it’s going to be used as a food then it should be taxed as a food and if a medicine then taxed as a pharmaceutical. Clothing from hemp should be taxed as clothing.

  • mysteryshrimp

    The first anti-marijuana law was in 1937, basically taxing it out of profitability, so this is a tricky subject. Without tax money, there’s less financial incentive for the government to legalize, but letting them tax at will opens the door to be impossible to comply (as they’re doing to California despensaries as we speak). My biggest issues are the ability to cross state lines with it, buy from across state lines and through the mail, and little or no taxes on seeds. As long as we are not enslaved to our particular state’s laws, we’ll be fine.

    To answer the question directly, sales tax again or thereabouts for retail sales. A total of 15-20% including the sales tax. Again, far less for seeds.

  • Marley King

    I would not like to see the same situation applied to Marijuana as is applied to tobacco and alcohol, with the govt having such a legal stranglehold and imposing huge taxes (or duties). This is because they need the tax revenue, and have a captive buying public they can hold to ransom… like petrol (gas), we all need(?) it, so they put a huge tax on it… Cannabis should not become the new cash cow to be milked and milked… 5, maybe 10% tax, enough to cover the program / admin costs, no more… One of the biggest hurdles legalisation of Cannabis presents for govt is people will grow their own, and the govt misses out… who makes their own booze, or fuel…? Not many – Cannabis has a production model that govt cannot control easily ;)

  • This will give you an idea of current tax rates on ciggs liquor    http://www.taxfoundation.org/taxdata/show/245.html

  • i think between 5%-7% is fair. that’s typical of other sales taxes