Are Illegal Drug Taxes Good Tax Policy?

June 7, 2005

To an economist, it’s hard to see how taxing illicit drugs could provide a broadly based and stable basis for government revenues. But that hasn’t stopped states from trying.

According to the National Conference of State Legislatures, twenty three states now have “controlled substance” taxes, up from just eleven in 2004. Why? Drug taxes provide states with another tool for cracking down on suspected drug users, while generating easy revenue in the process.

State drug authorities like drug taxes because they can be levied without a criminal conviction. And since drug tax evasion is a civil rather than criminal offence, the burden of proof is lower for conviction—allowing states to easily penalize and seize assets of suspected drug offenders.

However, as drug taxes spread they’re raising important ethical and legal questions. From Tennessee, the latest state to tax drugs:

Police suspect that Michael Garcia used his car in April to run interference for a drug dealer who was later caught transporting 10 pounds of marijuana… He wasn’t arrested, but six days later the 30-year-old landscaper received a letter from the state Department of Revenue demanding that he pay $17,592 in taxes he owed for his role in drug trafficking.

He figured it was a mistake or maybe a joke. “The revenue guys showed up with the bulletproof vests and the guns and stuff, and that’s when I knew it was for real,” Garcia said…

Some defense attorneys say the new law is quickly becoming an example of government running amok, with innocent residents who have not been convicted of crimes, or even charged, being bullied into paying thousands of dollars in taxes.

“That’s the biggest beef the attorneys and citizens have with this is that you’re guilty until proven innocent,” said Nashville attorney Erik Herbert, who represents Garcia. (Read full story.)

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