George Boardman: Getting medicated in Nevada County with the Laffer Curve | TheUnion.com

George Boardman: Getting medicated in Nevada County with the Laffer Curve

George Boardman
Columnist

The way things are shaping up in California, it will be cheaper to get drunk on wine or beer than it will be to get high on legal marijuana.

That's a factoid the county Board of Supervisors should keep in mind as it ponders whether to place a county marijuana tax proposal before the voters, a subject that's likely to come up at Tuesday's discussion of cannabis regulation.

The fact that the supervisors are even suggesting that a local tax be levied is somewhat of a novel development. Board members almost break out in a rash when the word is even mentioned, and generally wait for others to propose tax increases.

Of course, a majority of the current board would rather we not have legal pot, and the cynics among us might get the idea the board wants to tax legal pot out of business. But whether the aim is prohibition or just to raise more revenue, we run the risk of killing the legitimate market a lot of Californians had in mind when they passed Proposition 64.

For starters, the state imposes an excise tax of 15 percent on the purchase of cannabis and cannabis products. (The excise tax on beer is 1.5 percent and just 0.25 percent on wine.) Then there's the cultivation tax on cannabis flowers, leaves, and "fresh" plant, defined as a plant that is weighed within two hours of harvesting.

Then you can add on the state's sales tax (8 to 10 percent, depending on where you live) and city and county taxes on top of that. In Oakland, for example, that means a tax of over 34 percent on every ounce of recreational pot sold. Taxes on medical marijuana, the only type that will be legal in Nevada County for now, is taxed at a lower rate in the counties that have implemented such levies.

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Nevada City is getting ready to enact its own tax ordinance, and if you add a county tax onto that, you're creating the opportunity for a black market in a county that produces way more pot than will ever be legally consumed here. Just like the old days.

As it is, just a small percentage of cultivators in the state have obtained licenses, according to a recent report by the California Growers Association. Much of the problem is the heavy hand of the state. "The incredible volume of regulation is part of the issue," according to the report. "Consultants and attorneys are often a major cost for small businesses." The division of responsibility among the state's numerous regulators also creates confusion and complications.

"Taxes were identified as the single greatest barrier to entry for small businesses," according to the report. Total taxes in California are trending higher than in nearby states like Oregon (18 percent), Nevada (33.1 percent) and Washington (37 percent).

One of the problems with every tax is figuring out where benefits end and oppression begins. If you set marijuana taxes too low, it makes the stuff more appealing to youth. If you set the taxes too high, you increase the opportunities for a black market. Voters in California didn't want either one of those things to occur.

Taxes can also have unintended consequences. Some researchers at the University of Oregon recently took a look at the recreational pot market in the western states where it's legal and found that states that tax cultivated cannabis by weight (like California) may be creating another problem:

"As the amount of taxes in (Alaska and California) does not change in response to the price of the wholesale marijuana sold, these taxes are relatively high for cheaper marijuana, which tends to be of lower quality and potency. The tax regime … may thus incentivize suppliers to produce higher priced and higher potency marijuana."

As the supervisors ponder how much of a pot tax to propose, they may want to consider one of the pet theories of conservative economists since the 1970s, the Laffer Curve.

First outlined by supply-side economist Arthur Laffer (supposedly on a napkin for the benefit of Dick Cheney and Donald Rumsfeld), the theory holds that there is an ideal tax rate at which governments can maximize revenue. Set the rate too low and you won't realize the revenue possible. Set it too high and people will find ways to hide income, avoid taxes, and not work as hard.

That, of course, prompts the question: What is the ideal tax rate for cannabis? The legal industry isn't old enough for anybody to come up with an accurate answer, but we do know that Washington, Oregon and Colorado increased their marijuana tax revenue after dropping the initial tax rates. Washington, for example, saw its revenue increase $130 million to $319 million in 2017 after it replaced a three-tier tax system with a 37 percent excise tax.

We also know that Gov. Jerry Brown has predicted the state will collect $643 million in pot taxes this year, and first quarter tax revenue indicates the take will be a lot lower than that. Part of the reason may be the slow ramp-up for the reasons indicated above (just look at Nevada County), but the other part of the reason may be sticker shock over the high taxes.

Nevada City and the county should keep that in mind as they ponder the taxes they want to levy. High taxes will keep the black market in business and encourage law-abiding medical marijuana users to make their purchases down the hill, where they spend too much money already. The county can't do anything about the state rate, but local taxes that incentivize a black market will cost us more in law enforcement than we gain in revenue.

In the meantime, the new sheriff should probably keep the Narcotics Task Force at full strength.

George Boardman lives at Lake of the Pines. His column is published Mondays by The Union. Write to him at ag101board@aol.com.

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