Tax Policies for Legalized Marijuana in California

Abstract:     
This November, the citizens of California will be called to the polls to decide on a referendum which would legalize, regulate, and tax marijuana. How this regulatory and tax framework will be imposed has yet to be decided. The lure of new revenues from marijuana taxes are often cited in the debate; however, studies measuring the magnitude of tax revenues lack the methodology for proper estimation and fail to examine the effects of different tax structures given the specific nature of the marijuana market. In this paper, we propose and analyze the effects of two alternative tax structures on the California marijuana market. The first, where marijuana would be taxed at 50% of the post-legalization purchase price on the first $100 per ounce (or ounce equivalent), and 100% of the price for amounts above $100 per ounce, would generate tax revenues for California of approximately $1.6 billion annually. At the same time, this tax mechanism would stabilize consumption, as prices would not decline substantially from current levels, and limit the continuance of an illegal black market by providing consumers a reasonably priced and legal alternative. If California chose instead to establish state-run marijuana stores, it could generate up to $2.4 billion in profits for the state.

We do not suppose to have designed the “perfect” post-legalization structure for marijuana use, nor are we supporting or condemning the legalization of marijuana itself. However, in the event that California chooses to legalize marijuana this November, it is imperative that discussion happens now to decide what the policy goals of taxation and regulation are, and design solutions that are ready to satisfy these goals. We hope that the issues addressed in this paper motivate further discussion on critical aspects which must be addressed before marijuana is legalized.

Number of Pages in PDF File: 19

working papers series