2013 Ballot Questions- Part 3: Colorado's Marijuana Tax

In 2012, Colorado approved the sale of recreational marijuana which was sold to the public as a revenue generator for the state and local governments. That ballot question authorized the legislature to pass and enact an excise tax on marijuana from suppliers to retailers. Proposition AA is the legislative follow up to Proposition 64, the initiative that authorized the sale of recreational marijuana.

The result is a proposed 15% excise tax along with a 10% sales tax on commercial marijuana, although Proposition 64 says nothing about a sales tax. This would be a special sales tax at the retail level on top of the state’s regular 2.9% sales tax. It also needs to be noted that local governments can also establish sales taxes and, in fact, Denver has a question whether they should charge an additional 3% sales tax for marijuana sold within its jurisdiction.

The state estimates this will bring in $70 million annually based on the sale of 2 million ounces of pot. The first $40 million is automatically slated for a fund to build new schools. Local governments would be entitled to 15% of the sales tax collected by the state with the remainder going into the state’s coffers. This effective 25% tax was proposed and pushed in the legislature by the Democratic majority arguing that when Proposition 64 was approved, citizens wanted it taxed steeply. They argue that the rate is legitimate in light of other sin taxes and that it would deter black market sales of marijuana. Although the cost at a state-licensed store would be higher than on the street, the Democrats argue that the consumer would be assured of what they were buying, it would be of better quality, and there would be no additives.

Opponents of the measure note that these taxes are onerous and would do nothing to deter a black market in the sale of pot. The state would be effectively pricing itself out of the market. They further state that the tax rate is not in line with other sin taxes and should be more in the area of 1-3%. Furthermore, the excise tax would effectively result in a supplier taxing itself if there is vertical integration. That is, the supplier (grower) and the seller (retailer) may be the same entity, but still be subject to the excise tax. From the state’s viewpoint, it is somewhat disingenuous to assert that excise taxes occur at the wholesale level and are not passed on to consumers. In effect, opponents of the proposal argue that the tax rate would serve as a huge disincentive to enter the business or market as the bulk of any profit margin would be eaten up in taxes.

There is also the question of how the remaining $30 million of the anticipated $70 million annually will be spent. We know that $40 million is for school construction. Some will be kicked back to local governments (15% of the sales tax portion). The state contends that $9 million will be spent annually on regulation and enforcement, but currently Colorado spends considerably less on alcohol enforcement whose use is more prevalent than pot. They spend $2 million annually on alcohol regulatory enforcement.

The state has additionally argued that the relatively high tax rate will keep the federal government at bay. However, opponents counter that the federal government has largely stayed away from Colorado’s medical marijuana industry. This is a somewha bizarre stance to take. The state’s high tax rate is being used as a justification to keep the federal government at bay. In short, they are undercutting their own rationales whether that is revenue generation or drying up the black market.

Personally, my views regarding legalizing the sale of recreational marijuana have been fairly steady over the years, although it is not an issue I get upset about or involved in. If states want to experiment in the commercial sale of pot, then go for it. One can easily get the federal government out of the mix by rescheduling the drug with the FDA. Most of what I read is that after regulatory costs and enforcement and such, it would be a small money-maker for the states. Where the states would benefit is by saving the costs of litigation and incarceration. That would make it a “money maker” by saving money in another area. The only way to make it a true money maker would be to exorbitantly tax it and a 15% excise tax plus a special 10% sales tax in addition to the regular 3% sales tax would appear exorbitant.

Today in Colorado, a 1/8 ounce bag of pot sells for an average $32.38. Using this as the starting point, after all taxes are paid (and the excise tax is passed onto the consumer), the final cost would be $42.74. This would be the equivalent of buying 6 packs of Marlboro cigarettes or a case of 12-oz beer in Colorado. One has to ask whether your average pot user is going to pay $43 for an eighth of an ounce at a retail location, or $33 on the black market. The state argues the user will opt for the $43 option because it is (1) hassle free and (2) they are assured of what they are purchasing. However, they are overlooking an important fact. Obviously if there is 2 million ounces of pot being diverted from the black market to retail sales, current pot users don’t find it a hassle now at $33 a bag and they seem rather assured now of what they are purchasing.

There is another question of a legal nature that may very well be justification for voting down this proposal. Nowhere in the original proposition- number 64 in 2012- is there an authorization for a sales tax, only an excise tax. Whether that sales tax will stand assuming Proposition AA passes is another question altogether. Regardless, one could expect litigation in this area delaying the process even more.

Thus far, polls indicate almost unwavering support for Proposition AA with close to 77% of those polled indicating they would vote “Yes.” With taxation comes regulation and many fear that the regulations themselves, still to be hammered out, may be a further deterrence against anyone entering the market as a wholesaler or retailer.

From a personal standpoint, one needs to get back to the original purpose for passing Proposition 64 in 2012. If the idea was to create a revenue source for the state and local governments, then obviously a steep tax rate such as this is the way to go. If the purpose was to dry up the black market, then a steep tax rate is working against that outcome. Additionally, we have seen another related phenomena in other taxed areas, most notably with gasoline taxes. The state “sells” a tax as being targeted towards a specific program. With gasoline taxes, it is road construction and upkeep; in Colorado it is building schools. However, every state uses those funds for other purposes all the time by simply diverting the money to another, more urgent need at the time (like balancing a state budget on paper).

In the end, whatever the Colorado voters decide likely will not have a huge effect nationally.

Suggestion to Colorado voters: Who cares? It is your decision. My guess is that the black market will continue to do just fine. One can also surmise that the revenue expected to materialize for the state will fall short of expectations.

Next: Part 4- Colorado’s Tax Increase for Education