Marijuana Taxes on 2016 Ballots

A non-California-centric condensation of Best Marijuana Taxes Yet: California’s Proposition 64.

Marijuana legalization is reaching new heights of public approval, and voters will see new ballot proposals in five states this November. Weak taxes taint four of the initiatives — Arizona’s Proposition 205, Maine’s Question 1, Massachusetts’s Question, and 4 Nevada’s Question 2.

But California’s Proposition 64 contains the strongest marijuana tax structure voters have ever seen. Only California avoids the trap of tying tax collections directly to sure-to-fall prices, and the trap of collecting next to nothing from reportedly-medical users. But is it flexible enough?

The dangers of price taxes

The early legal market will face a price war from the black market, but then pre-tax prices will drop, as the legal market is liberated from the “prohibition premium” — the extra costs and risks of operating illegally. As the legal industry grows and becomes efficient, pre-tax prices will go down – way down.

A tax based on the price of marijuana will start strong. Then, as pre-tax prices collapse, so will price-based tax collections.

And declining revenue is not the only worry. Wherever pre-tax prices may end up, a collapse in after-tax prices would bother parents and health workers, who worry about youth use and perceived abuse.

There’s yet another problem with price-based taxes: They prove slippery. Think employee discounts, and “Free Pot with Pipe” bundling.

But price-based taxes are easy to start up, and they’ll work in the short run. Sure enough, all five 2016 initiatives have them. Four tax at retail: California and Arizona at 15 percent; Massachusetts and Maine at 10 percent total. Nevada taxes 15 percent of wholesale price.

But another kind of tax, taxing by weight, will survive a price collapse.

This year, only California has a weight tax — $9.25 per ounce of typically smoked “flowers.” That’s 33 cents a gram, lower than Colorado’s current 60-cent per gram rate, and much lower than Alaska’s enacted $1.76 per gram rate. But it makes sense to start low and go slow: A weight tax needs time to implement. Prop 64’s low rate is probably a better place to start; Alaska’s high rate a better place to end.

So are two taxes too many — belt and suspenders? No. Taxing twice lets the state keep track of product – and to see which way works best. If federal legalization is the ultimate goal, it makes sense to try different taxes, especially the quantity-based kind the federal government uses for tobacco and alcohol. Seeing what taxes work well will give Congress comfort.

Taxing everyone the same

Someday, medical components of marijuana may be isolated and prescribed. For now, though, most marijuana appeals to both legitimate medical patients and fun-seekers. But if medical marijuana were tax-free and available to anyone who wanted it, any marijuana tax would be a dead letter. Deciding who is sick may not be easy, but that’s ordinarily the work of insurance companies and relief agencies – not the Tax Man. So taxing everyone the same makes for a sound tax structure, avoiding the trap of tax evasion. Legitimate patients won’t suffer in the long run, so long as their after-tax prices are lower than pre-Legalization prices.

Medical users get a 100-percent tax exemption from new marijuana-specific taxes in four states. In Arizona, Maine, and Nevada, medical users pay only the standard retail sales tax that applies to nearly everything. In Massachusetts, they don’t even pay sales tax.

California, though, goes a long way toward avoiding the abyss of an untaxed parallel market. All users pay the 15-percent retail tax and the 33-cent a gram tax. The only tax that medical users avoid is California’s 7.5 percent sales tax.

The test of time

Taxing the embryonic legal marijuana industry is like buying clothes for an expected baby. Prepare for changes. The marijuana industry will evolve in ways we can’t predict.

So Legislatures will need to step in. In Maine and Massachusetts, the Legislature can amend initiatives at any time. But initiative-passed laws get special protection in other states. The Arizona Constitution allows no change to initiatives there without a ¾ vote in each Legislative House. The Nevada Constitution allows no change to initiatives there for three years.

California’s Proposition 64 allows amendments that further its “purposes and intent” to many provisions, including taxes, by vote of 2/3 of each Legislative House. That honors the anti-tax tilt of 1978’s Proposition 13, requiring a 2/3 supermajority for tax increases, which is sacrosanct to many California voters. Trying to override Proposition 13 could have been a deal-killer. And ordinarily, initiatives in California aren’t amendable at all, so Proposition 64 may provide as flexible a compromise as voters could hope for.


Some voters won’t care a whit about taxes. Some want weak taxes, to starve the governmental beast, or to make marijuana cheap.

Even the soundest tax structure won’t guarantee fiscal success. Enforcement of tax law is as necessary as sound structure, and enforcement will depend on the now-unknowable future actions of officials, citizens, and jurors. Long-term soundness will require the Legislature to dodge special interests, and to make mid-course corrections.

Voters should not vote for a marijuana initiative because of its tax structure alone – or even for revenue. But California leads the pack this year with a solid, even-handed tax structure that’s as amendable as California voters might reasonably expect. California’s Proposition 64 contains the soundest tax structure ever presented to voters.