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Tuesday, March 21, 2023

Start low and go… fast? How to tax weed in Minnesota

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Last week’s budget in St. Paul exposed a small but potentially significant disagreement between the governor of Falls and the DFL-controlled legislature on the subject of marijuana policy.

In announcing their legalization bill, DFL lawmakers proposed taxing cannabis sales at 8% on top of the current state sales tax of 6.5% (sales tax is higher in some cities). Walz has proposed nearly doubling the tax on marijuana to 15%.while also keeping the state sales tax on top of it.

This difference is likely to be ironed out as the legislation works its way through a lengthy committee process. But the differentiated tax rates are a reminder that marijuana tax policy is a relatively new topic for lawmakers to grapple with, and that no one has figured out a perfect or standard approach to it yet.

“No one knows the best way to tax cannabis,” explains Bo Kilmer, co-director of the Center for Drug Policy Research at the RAND Corporation. But, he says, “One option for Minnesota is to start with a low tax rate that increases rapidly over time. This could help consumers transition to the legal market”—and quickly undermine the black market.

The continued thriving black market has emerged as a concern in some other states that burden consumers of the legal product with high taxes. High taxes push consumers into the black market while hindering the profitability of legal producers.

In other words, “start low and go fast”—a change in the familiar mantra for first-time consumers. Minnesota’s legalization bill has the first half of that guidance in the bag. At 8 or 15%, Minnesota weed taxes would be among the lowest in the country, according to Data from the Urban-Brookings Tax Policy Center.

On the default $100 Minnesota ounce, you’ll pay about $22 in total taxes under the Waltz plan. By contrast, in Washington state that same ounce comes with taxes of about $50, while in Alaska it’s about $60.

This will almost certainly undermine the black market here more quickly than in most other countries. But taxes touch other aspects of pot politics as well. Higher taxes could be used to fund drug abuse programs, cover school coffers, or even reverse inequalities caused by decades of the war on drugs. For this reason, Kilmer and others like a tax approach that starts low to crowd out the black market, then ramps up in order to fund the new legal bureaucracy for cannabis as well as other vital programs.

One challenge, Kilmer notes, is that private companies that enter the market with a low tax rate are likely to reject any future tax increases, supported by the influential lobbyists that roam the Capitol. Lawmakers will have to plan for this, ideally by publishing a clear timetable for price increases in the future.

Nor was Kilmer keen on simply taxing marijuana as a percentage of sales, which is Minnesota’s proposition as well as the reality in most states. Marijuana prices tend to drop quickly when more players enter the market. This plant is amazingly easy to grow in almost any conditions—there’s a reason they call it “weed.” This makes it easy to overproduce relative to demand, causing prices—and therefore tax revenue—to fall with it.

That may not be an issue for Minnesota lawmakers, who have repeatedly stated they don’t see legal cannabis as a revenue driver. But it is a reminder that there are other models for taxing cannabis out there.

Some states, for example, tax THC content rather than price, thus tying revenue to how high consumers get.


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