Will Colorado's Pot Taxes Preserve the Black Market?


No Over Taxation

In less than a month, Colorado voters will decide whether to approve Proposition AA, which would authorize an excise tax of 15 percent and a sales tax of up to 15 percent on the marijuana that state-licensed stores are expected to start selling early next year. At the same time, Denver voters will decide the fate of Question 2A, which would authorize an additional sales tax of up to 15 percent imposed by the city. Those levies are in addition to the standard state sales tax of 2.9 percent and local sales taxes, which in Denver total 8 percent. If all these taxes are approved and legislators set them at the maximum authorized levels, legal pot in Denver—home to most of the state's medical marijuana centers, the only businesses that will initially be allowed to serve the recreational market—will be hit by a total sales tax of 38 percent, plus an excise tax of 15 percent. That's way too much, says Denver attorney Rob Corry, who calls the proposed weed levies "the largest tax increase in Colorado history." 

Corry, who kicked off the No on Proposition AA campaign with a joint giveaway ("Free the weed!") at the Denver Civic Center last month, notes that Amendment 64, the state's marijuana legalization initiative, proposed taxing cannabis "in a manner similar to alcohol." Colorado's tax on beer is 8 cents a gallon, which adds maybe a penny to the price of a 12-ounce bottle. An 8 percent sales tax adds another 56 cents to the price of a $7 six-pack, so taxes represent 8.2 percent of the final price. What will the comparable figure be for marijuana at the maximum tax rates? Last April researchers at Colorado State University (CSU) estimated that a 15 percent excise tax plus a 15 percent sales tax would add about $29 to the price of an ounce. Based on their figures (which rely on assumptions about production cost and markup that may or may not prove accurate), a municipal marijuana tax of 15 percent and a standard sales tax of 8 percent would add another $36, for a total after-tax price of $222 per ounce, of which taxes would account for 29 percent. Is 29 percent "similar to" 8.2 percent? Corry thinks not, and he worries that excessively high taxes will perpetuate the black market.

The Medical Marijuana Industry Group and other backers of Proposition AA argue that the taxes are necessary to pay for the effective regulation that Amendment 64 promised and the Justice Department is demanding as a condition of letting Colorado's experiment proceed. To the contrary, Corry argues in a recent letter to John Walsh, the U.S. attorney for Colorado, high taxes will undermine regulation because "over-taxation creates a marijuana market ripe for takeover by the unregulated, untaxed, underground market." Corry wants Walsh to dispel the notion that the Justice Department favors a yes vote on Proposition AA. He argues that "specific past guidance from the U.S. Department of Justice would seem to indicate that in fact a 'No' vote on Proposition AA is favored by the Department."

While Corry is unlikely to get a response from Walsh, his concern that an overtaxed marijuana industry will have a hard time competing with black-market suppliers should not be lightly dismissed. From a consumer's perspective, something has gone terribly wrong if legal marijuana prices do not end up being substantially lower than black-market prices. But the extent of the continued black market will depend on several factors that are hard to predict. Will the state legislature and the Denver City Council raise taxes as high as authorized by voters and keep them there, or will they adjust the rates based on experience? Will the production cost for legal marijuana be as low as the CSU report assumes (around $600 a pound) or closer to the numbers used in projections by BOTEC, the consulting firm advising Washington's marijuana regulators (about $900 in one estimate, $1,400 in another)? According to one BOTEC projection, the after-tax retail price of marijuana in that state, which is imposing a 25 percent tax at the farm, wholesale, and retail levels, will be something like $482 an ounce. Another estimate, based on a higher production cost, puts the price of an ounce at $723. Those numbers are far higher than the prices reported by current marijuana buyers in Washington and Colorado ($238 on average for high-quality cannabis, according to the Price of Weed website). If the actual prices are anything like the projections, concedes BOTEC CEO Mark Kleiman, "that's a big problem." Given the tax rates permitted by Proposition AA and Question 2A, Colorado is asking for a similar problem.

NEXT: 300-Pound Cop Shoots and Kills 12-Pound Dog During Probation Checkup

Editor's Note: We invite comments and request that they be civil and on-topic. We do not moderate or assume any responsibility for comments, which are owned by the readers who post them. Comments do not represent the views of or Reason Foundation. We reserve the right to delete any comment for any reason at any time. Report abuses.

  1. If it’s not less than $200 an oz, the black market will still thrive. The black market price will probably go down if there’s legal cover to grow weed and sell it out the back door.

    1. Exactly. With home grow now as an option black market weed will almost certainly go down in price. Or people will just grow their own. $222 an ounce tax? They’re out of their minds. I can easily buy an ounce of indoor for that in the northeast right now.

      From what I understand “medical” cannabis won’t be subject to these taxes, and no doubt most of the regular smokers in Colorado already have a card.

      Just bad news all-around for the “tax and regulate” crowd, hahaha.

  2. Of course it will preserve the black market. Taxes should be called Black Market Preservation Acts.

  3. It will most likely be the same here in WA. The State Liquor Board and the state have shown that they are perfectly willing to tax the shit out of “sin” products (our spirits tax is 20.5% plus another charge per liter for volume), but unless you want to make your own still, you don’t have a lot of choice. But taxing the shit out of a plant that a ton of people already grow and sell?


  4. The Indian Reservations will make a fortune.

  5. If it’s $222 an ounce for stuff that normally goes for $400 oz. then it sounds pretty good to me.

    1. The $222 is just the tax. According to this article the total cost would be between $482-$783 for weed that currently goes for around $238 total on the streets of Denver today.

      1. Even if the total amount were less than current black market prices, I’d never pay a $222 tax on it out of principle.

      2. The $222 I got was from this part:

        a municipal marijuana tax of 15 percent and a standard sales tax of 8 percent would add another $36, for a total after-tax price of $222 per ounce, of which taxes would account for 29 percent.

  6. I’m believing the restrictions, such as high taxes, etc that are placed on pot is a ploy by some who are against legalization. If the taxes are too high and it continues to generate an underground market those who are against can say, “see? legalization has just added to the problem. It hasn’t had the result those for legalization said it would.” Especially if crime is associated with the continued prohibition. They are trying to set it up for failure.

  7. so the way this works is the government makes an argument that a particular substance is so detrimental to the public welfare that they must deny the right to access to it in order to save the population from the terrible effects. Then the government says “We’ve decided that we will remove the restrictions that have been placed on this substance, but we are going to demand money from people that choose to use it.

    So the big lie, that the government ever restricted the substance in the first place in order to protect the populace, is revealed. They just need to make their money first.

    1. That’s not surprising. The gov’t makes billions relying on cigarette taxes all the while pretending they want people to quit. The gov’t doesn’t want people to quit smoking, it’d loose billions. Originally it was banned because of racism, now anything the gov’t can’t make money off of is bad.

  8. I thought one of the benefits of legalization was the revenue from drug sales?

    The “drug war”, as it were, is unlikely to ever end. The police and DEA will still have to make sure minors, pregnant moms, and criminals (depending on local regulations) don’t get the stuff, and arrest individuals who sell unlicensed stuff on the streets.

    I’m not so sure the drug cartel can’t infiltrate Latino rich markets where dealers and mules can operate with freedom.

    The raids on illegal marijuana farms may actually increase. Otherwise, how will legal pot shops make money?

    I never understood the allure of pot. When I see kids smoking dope on park benches, they don’t look relaxed or stoned AT ALL. Their eyes never leave their smartphones.

    1. Isn’t that what all kids do with or without pot?

  9. Tax = Rent on property you own and no other person has any claim over.

  10. After all the Government is the new Mafia they want there cut.

Please to post comments

Comments are closed.