It’s a question straight out of economics 101: What’s the optimal tax rate on legal marijuana if the goal is to eliminate the black market?
That’s being debated on the West Coast as legal marijuana moves into the mainstream. There are signs that California, with its longstanding pot culture and thriving black market, is taxing weed too much, while Washington state has already moved to lower its rate.
Now, New Jersey could be entering the fray, prompting a conversation about just how elastic the demand is for cannabis on the East Coast. Put another way, how much more are consumers willing to pay to buy pot legally in a retail store?
The argument for marijuana legislation, generally speaking, is that a lot of people are already consuming cannabis, so it’s better public policy to legalize and tax it, especially when there are roads and schools to repair. Lawmakers debating the issue are typically trying to balance two goals: generating revenue to boost state coffers while also creating a legal market that will put street dealers out of business.
‘Price Matters’
“You have to give people an incentive to come in from the cold,” said Scott Hammon, a California accountant and chief operating officer of the MGO-ELLO Alliance, which offers tax and accounting services to the cannabis industry. “For anybody who uses cannabis, at some point price matters.”
The tax issue could be the final hurdle for New Jersey, which is poised to become the second East Coast state to legalize the sale of recreational marijuana. The legislature has advanced a bill that would set the tax rate at 12 percent, while giving local towns the right to tack on an additional 2 percent. Governor Phil Murphy, a Democrat, has said he prefers a 25 percent rate.
He campaigned on a promise to legalize pot and estimated the industry could generate $300 million in tax revenue. Murphy hasn’t weighed in on the legislature’s bill, which could be approved this month. The first retail pot stores on the East Coast opened recently in Massachusetts, where voters passed a marijuana law with a 12 percent tax rate, which the state government subsequently increased to a total of 20 percent. Washington taxes marijuana at 37 percent, while Colorado’s combined levies total 30 percent. California taxes can run as high as 40 percent when local fees are included.
The economics of elastic demand hold that consumers will buy less of a product as it gets more expensive, and the theory is being tested in the various legal markets around the U.S.
The tax issue will get more attention once a critical mass of East Coast states have legalized marijuana, industry observers said. And while New Jersey would be among the lowest-tax states if the legislature gets it way, it could be looking ahead to a time when legal marijuana is widely available in New York, Pennsylvania and Connecticut, putting pressure on prices.
East Coast Economics
The economics of marijuana are different on the East Coast, which is farther removed from places like Oregon and California where cultivation has thrived historically. Those states, where weed prices have always been lower on the street, have struggled to eliminate the black market, in part because high tax rates and regulatory red tape have made it attractive for some producers, sellers and customers to stay underground.