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Are Sin Taxes on Marijuana a Price Worth Paying for Reform?

David Godow
October 13, 2010, 9:00am

Advocates of Proposition 19, the pending California referendum that would legalize the small-scale production and use of marijuana, have made new consumption taxes on cannabis a major selling point for their measure. Proponents claim that tax measures would bring in $1.4 billion for local governments and that marijuana use would be safer under a regime of taxation than prohibition.

Rosy revenue numbers and a promise to remedy social ills are always trotted out to justify new sin taxes; these arguments have been fitted to alcohol, cigarettes, and other unhealthy or otherwise unpopular products for years. Fiscal conservatives like myself counter that sin taxes are regressive, not reliable revenue generators, and fundamentally a bad tax policy tool.

Still, let's be clear that the drawbacks of a potential marijuana tax shouldn't be an impediment to legalization. Removing the legal barriers to responsible marijuana use would be a watershed moment in California and U.S. drug policy, and if new sin taxes are the price for that, that price is certainly worth paying. Still, in the long run, policymakers should remember that a sin tax on cannabis will hurt the poor, hurt the sick and provide little relief for California's perennial budget troubles. 

Much ado has been made about the revenue potential of new levies on marijuana, but sin taxes are notorious for failing to meet fiscal expectations. This problem is magnified in the case of cannabis, because no one knows what the equilibrium price or demand of pot will be after decriminalization. Naturally, California tax administrators have every incentive to highball their guesses. Still, a sobering RAND Corporation study suggested price could drop from $375 per ounce to as low as $38, cutting $400 million in potential sales tax accruals from state $1.4 billion revenue estimate.

Revenue issues aside, the debate has unfortunately glossed over the equally compelling reasons that sin taxes are regressive and unfair. Indeed, one anti-tax argument should be of special interest to reformers that seek to help the poor and helpless: sin taxes almost always have a regressive incidence that draws on the most vulnerable segments of society to pay for general government services.

No estimates of the effects of a marijuana tax address its potential regressivity; lawmakers need to be asking about this. If the poor spend a higher proportion of their income on cannabis than the rich, as is the case with tobacco, soda and almost all other "sinful" products, much of a cannabis tax's revenue would come out of the pockets of California's least well off citizens. Disturbingly, this means that the current drug prohibition regime, responsible for putting so many poor people in jail, may well be replaced by a system that will continue to disproportionately target them.

We've already seen examples of how marijuana taxes can be used to target narrow, vulnerable segments of the population. Take the enthusiasm for taxing medical marijuana. As drug reform pioneer J. Craig Canada has pointed out, even pro-marijuana legalization organizations have advocated these discriminatory levies on medicine, which further inflate the spiraling medical costs of seriously ill people. This, of course, is a strategic move meant to legitimize marijuana use: if government taxes a good, it also tacitly places that good, and users of it, under the aegis of the law. Nonetheless, there's no getting around the fact that the burden of these taxes falls squarely on the sick and vulnerable, who will shell out more for medicine they desperately need.

It makes sense why marijuana advocates push the tax argument. New tax revenue serves as a powerful draw for legislators concerned about spiraling deficits or worried about being seen as "soft on crime." Moreover, the likelihood of new taxes on marijuana won't and shouldn't inhibit the march towards legalization; it is certainly better to have taxed, legal marijuana than remain with the status quo. Still, we should continue to strive for a future in which Californians can legally, safely, and cheaply use cannabis without the regressive and unfair burden of government sin taxes.


David Godow is Research Assistant


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