California's Legislative Analyst's Office issued this report with the above title yesterday.
Proposition 64 (2016) directed our office to submit a report to the Legislature by January 1, 2020, with recommendations for adjustments to the state's cannabis tax rate to achieve three goals: (1) undercutting illicit market prices, (2) ensuring sufficient revenues are generated to fund the types of programs designated by the measure, and (3) discouraging youth use.... While this report focuses on cannabis taxes, nontax policy changes also could affect these goals.
* * *We view reducing harmful use as the most compelling reason to levy an excise tax. Accordingly, we recommend that the Legislature replace the existing retail excise tax and cultivation tax with a potency‑based or tiered ad valorem tax, as these taxes could reduce harmful use more effectively. If policymakers value ease of administration and compliance more highly than reducing harmful use, however, the Legislature might prefer to keep the existing retail excise tax. In contrast, we see little reason for the Legislature to retain the weight‑based cultivation tax.
Readers might be wondering if alcohol is taxed by potency. Sort of. Here is a chart I put together with rates from the Treasury Dept. and approximate alcohol-by-volume (ABV) numbers:
Distilled spirits are truly taxed by potency. A "proof gallon" is the amount that has an alcohol content equal to a gallon of 100 proof, which is 50% ABV. So for spirits the tax rate of 21.1 cents per ounce of ethanol is exact, not an approximation.
Beer is just taxed flatly by volume with no reference to alcohol content. Wine has tiered rates to raise the tax per gallon for the higher alcohol varieties, but most wine is included in the first tier. The alcohol in a 12% ABV wine is taxed only one-third as much as in spirits. The wine industry has a strong lobby. I didn't include sparkling wines in the chart. They are taxed comparably to spirits.
Getting back to the LAO report (italics added):
Higher Taxes Could Reduce Youth Use, Depending on Availability of Illicit Cannabis. As discussed above, higher taxes would reduce legal cannabis consumption, but we do not know how much of this reduction would consist of substitution to the illicit market and how much would consist of reductions in actual consumption. This uncertainty extends to the effects of changes to cannabis taxes on youth use. If youth easily can acquire cannabis from the illicit market, tax increases on legal cannabis might not substantially raise the actual prices that youth pay. If taxes do not substantially raise actual prices paid by youth, they very likely would have little effect on youth use. That said, if the illicit market becomes less active over time--for example, as a result of more active enforcement--taxes could become a reliable tool for reducing youth use.
The pro-pot crowd calls for lower taxes to undercut the illegal market, but doing so would increase youth use to some extent. Personally, I think reduced use generally is a desirable result, but that is particularly true for young people. It is most important of all for the involuntary "use" by unborn children. The optimum result would be achieved by increasing the tax and using the additional revenue for more vigorous enforcement. While the illegal sellers would not pay tax, they can be made to pay in the form of fines, forfeitures, and imprisonment.
Nontax Policies Also Affect Legal and Illicit Markets, Revenues, and Youth Use. The scope of this report is limited to state cannabis taxes. These taxes, however, are only one of many state policies that could affect revenue, the illicit market, and youth use. Examples of other such policies include increased criminal or civil penalties for participating in the illicit cannabis market, additional state or local resources devoted to enforcing state laws, changes in state licensing requirements, changes to local governments' authority to ban cannabis businesses, and resources devoted to youth education on the effects of cannabis use. For instance, enhanced enforcement would make it more difficult and costly for businesses to operate in the illicit market. This likely would shift activity from the illicit market to the legal market, thereby increasing tax revenues. Additionally, it likely would affect youth use by making it more difficult and expensive for them to access cannabis through the illicit market.
Right.
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