Pubdate: Sun, 21 Aug 2016
Source: San Francisco Chronicle (CA)
Copyright: 2016 Hearst Communications Inc.
Author: Beau Kilmer
Note: Beau Kilmer is co-director of the Rand Drug Policy Research 
Center and co-author of the recently revised book "Marijuana 
Legalization: What Everyone Needs to Know," (Oxford University Press, 2016).


In less than three months, Californians will vote on legalizing 
production, distribution and possession of recreational cannabis. Tax 
revenues are central to that debate, but the really important 
question is not so much what taxes would be best today but how those 
taxes should evolve over time.

What many people don't realize is that even if voters reject 
Proposition 64, state and local officials will still need to deal 
with cannabis taxes because California's medical cannabis market is 
undergoing enormous reforms. The new regulatory regime is expected to 
start licensing for-profit firms to supply medical cannabis in 2018.

There are ongoing debates about whether and how to tax medical 
cannabis. While some argue that medicine shouldn't be taxed, others 
counter that much of the medical market product is not actually being 
consumed for medical purposes.

Both inside and outside of California, decisions about cannabis taxes 
are being made that will affect the size of the black market, 
government revenue and consumption.

Can I let you in on a little secret? No one knows the best way to tax 
either medical or recreational cannabis. Every option has trade-offs.

What should the tax be based on? What should the rate be?

Consider a price-based tax such as 25 percent at the retail level. 
While it would be easy to implement, the effective tax per joint 
would decrease as the price declines - something expected to happen 
as competition, innovation and scale-economies push down costs.

Taxing by weight, say $2 per gram, would also be easy to implement, 
but it means lowand high-potency products face the same tax. This 
creates incentives for producers to sell more potent cannabis to 
minimize the tax per hour of intoxication. Some public health 
researchers worry that more potent cannabis is associated with more 
health problems, an issue that is the subject of serious debate.

One innovative option, suggested years ago by Rob MacCoun, a Stanford 
Law School professor, is to tax cannabis based on its power to 
intoxicate, such as levying a tax of $12 per gram of 
delta-9tetrahydrocannabinol (THC, the cannabinoid most responsible 
for getting users high). To the extent being intoxicated increases 
the probability of harm, using taxes to control THC consumption could 
be a critical policy lever.

Of course, the THC tax would totally depend on the accuracy of 
cannabinoid testing.

Over time, insights will be gained about cannabis taxes as more 
jurisdictions liberalize their laws. Also, researchers will learn 
more about the various chemicals in the cannabis plant.

But policymakers at the state, county and city levels are making 
decisions about cannabis taxes right now. What should they do?

Given the uncertainty, it would be wise to avoid getting locked into 
a particular type of tax base or rate. What makes the most sense 
today may be far from ideal in five years. For example, if the 
primary goal now is to drive out the black market, it may make sense 
to consider phasing in taxes by initially keeping them low (possibly 
giving up some revenue) and increasing them over time.

Flexibility in taxation is important, but it can be a double-edged 
sword in an environment with profit-maximizing firms. If the cannabis 
industry ends up operating like the alcohol industry, or for that 
matter almost every other industry, lawmakers can expect to be 
strongly lobbied to keep tax rates low.

The proposition Californians will consider in November requires the 
state Legislative Analyst's Office to recommend tax rate changes to 
the Legislature two years after implementation. Whether the 
Legislature will take action is another story.

One option to consider is creating an independent board or commission 
- - with absolutely no industry ties - that would be in charge of 
setting and updating cannabis taxes. Another option would be phasing 
in a tax that would automatically change after a specified date. 
Hypothetically, for the first year it could be 10 percent of price at 
retail, the second year 20 percent, the third year 30 percent. After 
that, the tax could be based on THC content or by weight for cannabis 
products where THC remains difficult to measure.

Some may oppose setting cannabis taxes through an independent body 
because we don't do that for alcohol. But there is no law or 
principle dictating that jurisdictions allowing a new industry that 
sells an intoxicating substance be limited to what was done in the 
past. Furthermore, creating a better approach for cannabis - whether 
it is for taxation or other policies - could set a precedent that 
eventually could be carried over to alcohol.

Setting the cannabis tax should not be considered a one-time event. 
Smart jurisdictions will revise their decisions over time to 
incorporate new information about taxes, testing and the cannabis 
plant itself. Smarter jurisdictions will update taxes based on these 
data while not being influenced by those seeking to maximize profits.
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MAP posted-by: Jay Bergstrom