States May Be Stuck with Second-Best Marijuana Taxes

6 Pages Posted: 19 Jun 2014

Date Written: June 2, 2014


After marijuana is legalized, the costs of producing and selling it will collapse and a windfall economic gain will be up for grabs. Policymakers might allow that gain to go to consumers (encouraging consumption) or to cannabusinesses (encouraging production). Or, through revenue measures, they might direct the gain to society as a whole.

The safest, correctable way to distribute an intoxicant is government monopoly, but the federal government prohibits, at least nominally, the sale of marijuana, so state sales of marijuana would face harsh federal scrutiny. It’s not clear that a work-around, keeping state control over location and price while assigning sales concessions to businesses, would avoid a federal crackdown.

Taxing private enterprise, Colorado and Washington style, may be a second-best solution, but the federal government is tolerating it, so far. Taxation requires choice of a tax base. Taxing by THC potency is theoretically appealing, but unworkable. A price tax base has several pitfalls. Even a weight base is problematic.

Three other legalization models are possible: auctioning licenses, collective farming, and sales by nonprofits.

Because no one really knows how to legalize, flexibility to change course is of the utmost importance. Because monopoly may be the safest and most flexible path, it’s crazy for the federal government to bar it for states — and to treat states worse than profit-seeking marijuana businesses.

Keywords: tax, excise, marijuana, alcohol, tobacco

JEL Classification: A13, D40, E61

Suggested Citation

Oglesby, Pat, States May Be Stuck with Second-Best Marijuana Taxes (June 2, 2014). State Tax Notes, Vol. 72, No. 9, 2014, Available at SSRN:

Pat Oglesby (Contact Author)

Center for New Revenue ( email )

1830 North Lakeshore Drive
Chapel Hill, NC 27514


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