Not you, not me, tax the man behind the tree.
Unfortunately, discussions of tax policy sometimes never get beyond this point, but setting tax policy is like building infrastructure. It is the way to get from where you are to where you want to go, and once in place, it tends to be fairly stable. If what you want to do is to eliminate the black market, tax policy is a powerful tool.
Oregon has the chance to get it right, based on the experience of Colorado and Washington, but two things are essential:
- The ultimate price of both recreational and medical marijuana should be comparable to the “street” price, and
- The price of medical marijuana should be about the same as the price of recreational marijuana to eliminate an incentive for medical fraud and to avoid unregulated secondary sales that would essentially become a new black market.
Consumer behavior depends on more than price, of course. Price also depends on more than regulatory fees and taxes, but taxes are a big part of the picture and they are relatively easy to manipulate in order to create the kind of flat market that would discourage crime.
The marijuana industry in both Colorado and Washington has had some growing pains. At Denver dispensaries in Colorado, the price of an eighth of an ounce of recreational marijuana in April was about 50 percent higher than the price of the same amount of medical marijuana. The difference was at least partially attributable to the far greater tax burden. Medical marijuana sold in Denver carries a sales tax of 7.72 percent. Recreational marijuana carries an additional 10 percent marijuana state sales tax and 3.5 percent marijuana sales tax from the City and County of Denver applied at the point of sale.
In Washington, the relatively unregulated medical marijuana market has seriously undercut the development of the recreational industry and the state may consider a bill that would integrate the medical and recreational systems into one.
Oregon has no sales tax, but various localities are contemplating taxing recreational marijuana at a rate higher than medical marijuana, high enough in the city of Fairview to keep recreational marijuana businesses out of town.
There are compelling humanitarian arguments for keeping the tax rate on medical marijuana low. Many argue that medical marijuana should be exempt from sales tax as prescription medicines are. Paying taxes on medicine can pose a hardship, especially since medical marijuana is not covered by insurance.
The price differential, however, can create an incentive for individuals to apply for medical cards who are not in need of medication. This undermines public faith in the proposition that marijuana has valid medical potential. It also creates an incentive for unregulated re-sales, though this is probably made less likely by quantity limits.
Uruguay has faced this issue by socializing the market and setting the price at about $1 per gram. This is a highly unlikely scenario for this country, but the focus on the state tax revenues to be generated by a legalized marijuana industry may kill the goose that lays the golden egg if high prices drive consumers to the black market.