5 Hurdles Facing Marijuana Tax Implementation

Angel Abcede, Senior Editor/Tobacco, CSP

Smoking weed

WASHINGTON -- For retailers watching how marijuana laws evolve in other states, the lessons those states have learned could provide guidance for lawmakers facing similar issues, according to a tax-focused nonprofit organization.

With eight states legalizing recreational marijuana, the Washington, D.C.-based Tax Foundation has published several tips for lawmakers …

1. There is such a thing as too high

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The marijuana tax rate should not be so high as to prevent elimination of the black market. Colorado, Washington and Oregon have all taken steps to reduce their marijuana tax rates. Colorado concluded with strong evidence that its 30% tax rate did not sufficiently reduce the black market, and more recent ballot initiative proposals all over the country propose rates of 10% to 25%.

2. Retail sales taxes are the easiest to implement

Marijuana store

Tax rates on final retail sales have proven the most workable form of taxation. Other forms of taxation have faced implementation difficulties.

3. Consider transitions involving medical and recreational

Medical marijuana despensary

Medical marijuana is usually more loosely regulated and less taxed than recreational marijuana. In Washington, moving nonmedical sales to the retail market has proven difficult given the enormous differentials in tax rates and regulatory structure, and officials there wish the two systems had been tackled simultaneously.

4. Be cautious with revenue estimates

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While the revenue can be in the tens or even hundreds of millions of dollars, it takes a lead time to develop. Estimating the size of an illegal market is difficult, as is estimating how many consumers will switch to the legal market when it is available. Revenues started out slowly in Colorado and Washington, both as consumers became familiar with the new system and after state and local authorities spent time and money setting up new frameworks and regulatory infrastructure.

5. Consider all related issues

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Resolve health, agricultural, zoning, local enforcement and criminal penalty issues. These important issues have generally been unaddressed in ballot initiatives and left for resolution in the implementation process.