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California Voters to Consider Legalizing and Taxing Marijuana

2 min readBy: Joseph Bishop-Henchman

On November 2, California voters will consider Proposition 19, which would repeal state laws prohibiting the possession of up to one ounce of marijuana by individuals over the age of 21, the use of marijuana in a non-public place, growing of marijuana in a private space up to 25 square feet in size, the sale of marijuana by stores subject to local government hours and location regulations, and the transportation of marijuana within the state. The proposal would also permit the taxation of marijuana by state and local governments.

A similar proposal from State Rep. Tom Ammiano (D) proposed a $50 per ounce excise taxAn excise tax is a tax imposed on a specific good or activity. Excise taxes are commonly levied on cigarettes, alcoholic beverages, soda, gasoline, insurance premiums, amusement activities, and betting, and typically make up a relatively small and volatile portion of state and local and, to a lesser extent, federal tax collections. on marijuana, that he estimated would bring in $1.3-$1.5 billion per year. A very recent Rand Corporation study estimated that the making marijuana legal would reduce its cost, since suppliers would no longer have to take the risks (and charge the risk-premiums) associated with operating in the black market. Rand, looking at comparable experience in the Netherlands and parts of Australia, estimated that the current price of $300-$450 per ounce could drop to around $38 per ounce. Rand figured taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. revenues could be between $650 million and $1.49 billion. They also estimated reduced state expenses on enforcing marijuana laws of around $300 million.

If current illicit marijuana users are putting down $300+ per ounce, a $38 sticker price plus $50 tax ($88 total) would certainly be cheaper. But if other states follow the lead, that tax may have to come down to something less than 131% of the price. Also, given that marijuana cultivation, sale, purchase, and possession are still against federal law, the revenue benefits that will result from Proposition 19 may be overstated.

There are some existing taxes on illegal drugs in the United States. Oakland, California has a 1.8% tax on medical marijuana sales, and in the late 1980s and early 1990s, over 20 states adopted hefty taxes on illegal drugs (~$99/oz. on marijuana, ~$5,600/oz. for other controlled substances). Unlike current proposals, the purpose of these taxes was law-enforcement: those arrested for drug crimes would not only have to do their prison time and pay their criminal fines, but could also be charged with tax evasion and pay hefty tax penalties (twice the tax owed, plus fines). Few drug traffickers, obviously, notify authorities about their illegal merchandise and pay taxes on it.

Some of these laws have been ruled unconstitutional on self-incrimination and double jeopardy grounds. Tennessee ruled that a state cannot impose an excise tax, which is on the privilege of using a product, if the product is illegal. You can collect drug tax stamps, though.

Back to California, the lineup on Proposition 19 is interesting. Supporters include the California NAACP, former Orange County Judge Jim Gray, the Communications Workers union, the American Federation of Teachers, and various marijuana activist groups. Opponents include Democratic and Republican nominees for Governor, Attorney General, and U.S. Senator, DARE, the California Chamber of Commerce, and MADD.

The latest Field Poll found 44% of voters in support with 48% opposed, and the latest SurveyUSA poll found 50% in favor and 40% opposed.