Friday, October 22, 2010

Tax Dreams of Drug Decriminalization

My home state of California is on the verge of making history. Proposition 19, which currently has a narrow lead in the polls, would repeal marijuana prohibition. Supporters of the legislation have suggested that the law could generate over a billion dollars in revenue for the state. However, according to this article on Politico, these estimates are misleading.

    Supporters of legalization claim that treating marijuana like other legal vices – for example, tobacco and alcohol — could generate $1.4 billion in badly needed new tax revenue for California. This is more than alcohol and tobacco cigarette taxes, combined, now generate.

    Such claims could easily push Prop 19 over the top on Nov. 2. Unfortunately, the tantalizing revenue projections are high—“Up in Smoke” high.

    California is unlikely to collect $1.4 billion in marijuana taxes. Not yet, anyway. But it’s not because forecasters have grossly over-estimated Californians’ appetite for the drug. Commentators quibble about consumption data, but no one seriously doubts marijuana is a multibillion-dollar industry in the Golden State.

    Rather, the real problem with the revenue estimates is that forecasters have ignored how hard it would be to collect a marijuana tax.

    The state’s Board of Equalization, for example, has just assumed marijuana growers would pay any tax—100 percent of the time. That’s an audacious assumption. No tax has a 100 percent compliance rate. And the incentive to evade a marijuana tax would be particularly strong: the tax rate forecasters use is around 37 percent.

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