High Marijuana Taxes May Perpetuate Black Markets

Leave it to politicians

Opponents of marijuana prohibition had one heck of a year in 2012, as voters in both Washington and Colorado passed ballot initiatives legalizing recreational use of the drug. One of the central arguments these folks used in their anti-prohibition campaign was to point out what an excellent revenue source a well-regulated and heavily taxed marijuana industry could be for states. And in a time when the federal and state governments are so hard up for revenue, the tax receipts legal marijuana could bring in, plus reduced strain on law enforcement, could be significant. A 2010 Cato Institute study of the issue estimated that if marijuana prohibition were ended nationwide, it would save state, local, and federal governments $8.7 billion annually in reduced law enforcement costs, and bring in another $8.7 billion in tax revenues.

But as it turns out, actually figuring out an appropriate marijuana tax policy is more complicated than it sounds. The cannabis industry is an easy target for legislatures to saddle with heavy taxes. In Washington State for instance, there is a 25% tax at three different stages of cannabis production: from the grower to the processor, from the processor to the retailer, and the retailer to the customer. These taxes are in addition to any other state or local sales taxes that might apply.