Pubdate: Sun, 25 Aug 2013
Source: Albuquerque Journal (NM)
Copyright: 2013 Albuquerque Journal
Author: Rob Hotakainen, McClatchy Washington Bureau
Page: C6


Congress Wrestles With Regulating an Illegal Business That's Gaining
Legitimacy Around the U.S.

WASHINGTON - As Congress wrestles with big budget cuts, one budding
industry wants to help out the federal government with a novel
message: Tax us, please.

Marijuana businesses and their backers say legalizing the drug and
taxing it like alcohol would add billions to the federal treasury.

Some analysts dismiss a pot tax bonanza as far-fetched, neither likely
nor lucrative. But the idea is stirring newly serious debate on
Capitol Hill.

The Senate Finance Committee, for instance, included marijuana taxes
in an "options paper" listing fresh possible sources of revenue.

In the House of Representatives, legislation is pending on two tracks.
The first would legalize marijuana, tax it and regulate it on a
national scale. Even advocates don't expect that to pass anytime soon.
A less ambitious bill called the Small Business Tax Equity Act would
allow the Internal Revenue Service to provide immediate breaks on
federal income taxes for marijuana businesses.

Legal, but outlawed

As Congress sorts through the proposals, members must confront a
central irony: As pot is growing in popularity - and is given a legal
OK in some states - that puts marijuana businesses in a stronger
position to argue for tax breaks for selling a drug that's still
outlawed nationally.

Some warn that if Congress doesn't treat pot sellers like other
businesses, state plans to tax and regulate marijuana for recreational
use in Washington state and Colorado are doomed to fail when they
start next year.

"How can you run a business if you're not receiving the same tax
breaks?" asked Rep. Adam Smith, D-Wash., one of 13 House members who
are promoting the bill that would authorize the deductions for
marijuana businesses. There are plenty of skeptics. "There's just so
much utter nonsense about this issue," said Jeffrey Miron, the
director of undergraduate studies in the department of economics at
Harvard University and a senior fellow at the libertarian Cato
Institute in Washington, D.C. He specializes in the economics of
illegal drugs.

"If they don't like the fact that they can't take certain tax
deductions because they're in an illegal business," he said, "then
they should go in some other business where they can take tax

Taxed by the ounce

Under the legalization bill, introduced by Democratic Reps. Earl
Blumenauer of Oregon and Jared Polis of Colorado, marijuana would be
taxed to help pay for substance-abuse treatment and law enforcement
and to reduce the federal debt.

They estimate that a $50-per-ounce tax could raise up to $20 billion a
year. By comparison, the alcoholic beverage industry pays $7.9 billion
in federal excise taxes each year, while excise taxes on tobacco
totaled $15 billion last year, according to the federal Alcohol and
Tobacco Tax and Trade Bureau. Those totals don't include state and
local taxes.

"We're just waiting for that door to open and we'll happily come
walking in with lots of tax revenue," said Steve DeAngelo, who runs a
medical marijuana dispensary in Oakland, Calif., and helped the city
pass a 5 percent tax on cannabis related sales in 2010.

Rob Kampia, the executive director of the pro-legalization Marijuana
Policy Project, called it "a man-bites-dog story."

"Very rarely in D.C. will you see an instance where someone is saying
they want to be taxed," he said.

Walk first, then run

The narrower bill would make it legal for marijuana-related businesses
to deduct rent and other business expenses from federal taxes.

Rep. Smith called it an effort "to respect the law" that Washington
state voters passed approving recreational sales. While he favors the
tax breaks, Smith said he was opposed to the broader national
legalization bill.

"Let's walk before we run here," he said. "Let's see how it works in
the states."

Rob Mikos is a professor at Vanderbilt University Law School in
Nashville, Tenn., who teaches courses in federalism, criminal law, and
drug law and policy. He said the state legalization plans might
backfire on pot sellers because marijuana remained illegal at the
federal level.

Attorney General Eric Holder has yet to announce how the federal
government will respond to the state legalization plans. So, Mikos
said, marijuana sellers still could face prison terms or have their
assets seized. And he said sellers could provide federal authorities
with "the smoking gun" just by reporting their sales.

"If you're somebody who's reporting monthly to the Colorado Department
of Revenue or the Washington Department of Revenue exactly how much
marijuana you're selling," Mikos said, "that's very incriminating evidence."

He said states would be unable to block the federal government from
gaining access to those records.

FDA raids

Last month, federal Drug Enforcement Administration agents raided four
medical marijuana dispensaries in Washington, one of 20 states that
have approved the use of medical marijuana.

Some experts say that doesn't portend good news for Washington state
or Colorado pot sellers.

"It would be hard to imagine (federal authorities) not taking some
action against recreational providers if they're going after medical
marijuana providers," said Marvin Kirsner, a tax attorney in Boca
Raton, Fla., who works with Greenberg Traurig, an international law

As the states proceed with their plans, they're eyeing big money from

In Washington state, officials predicted that legalization could
produce $1.9 billion in revenue over five years. Backers sold the plan
by promising to impose taxes of 25 percent at three levels: on
producers, processors and retailers.

Opponents say any revenue from marijuana would constitute just a
trickle, with the government facing a debt of $17 trillion.

"Even if it is going to be billions of dollars, that's still nothing -
a billion is one-thousandth of a trillion," Harvard's Miron said.

But Kampia, the legalization advocate, said he was confident that
marijuana taxes could make a difference.

"I would never say that marijuana is going to solve the budget
problem, because that would be an absurd statement," he said. "But
we're talking about a few billion dollars at the federal level. ...
That's real money."

DeAngelo, the executive director of the Harborside Health Center
marijuana dispensary, said he was the No. 2 retail taxpayer in
Oakland. He forked over $1.5 million to the city last year. But he's
at odds with the federal government, and he said he had "an immediate
stake" in the battle as he challenged a $2.5 million tax bill from the
IRS. Even though the drug is illegal at the federal level, medical
dispensaries must pay federal taxes.

"We were denied all of our deductions on the grounds that we're a
drug-trafficking organization," DeAngelo said.

DeAngelo said Congress should move quickly to legalize marijuana for
medical and recreational purposes, saying it was "the perfect moment"
as the nation faced its fiscal crisis.

"There's not really any other industry in the country - let alone one
that can bring in tens of billions of dollars in tax revenue - that's
standing up and raising its hand and saying we're ready to step up to
the plate and help the country solve its problems, but we are," he
said. "We hope that Congress will hear us."
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