The combination of state policies and general sentiment has led to heightened debate over the merits of marijuana legalization at the federal level. Another bill proposes the establishment of a National Commission on Federal Marijuana Policy that would review the potential revenue generated by taxing marijuana, among other things. This report focuses solely on one aspect of the economic debate over federal marijuana legalization: imposing an excise tax on legalized marijuana. First, it provides a brief overview of marijuana production. Second, it presents possible arguments for taxes and, in some cases, estimates the level of tax suggested by that rationale. Third, possible marijuana tax designs are analyzed. As with the case of tobacco, these external costs are typically much smaller than the total costs. These numbers suggest that the external costs of marijuana range from $0.5 billion to $1.7 billion. The ONDCP report also provides estimates of $30 billion, $41 billion, and $60 billion (given various assumptions) for total U.S. expenditures on marijuana in 2010. Consumer demand is relatively unresponsive to changes in price. After legalization, it is estimated that the cost of marijuana will decrease significantly because more will be produced and the implicit costs of evading law enforcement will decline. According to an examination by the authors of some of the most-reviewed marijuana shops in Denver, a gram of marijuana is priced around $9 to $15, an eighth of an ounce of marijuana can be priced around $29 to $40, and an ounce can be priced around $190 to $350. Colorado prices provide some indication of falling prices with legalization, but prices appear not close to the cost of production. Although the range of projected prices in a fully legal market is wide, from a few dollars to $100 per ounce, street prices of $200-$300 per ounce suggest that there could be a wide scope for a tax rate designed to align legalized marijuana prices close to current street prices of illegal marijuana. Miron and Waldock of the Cato Institute estimate that a federal excise tax could raise $5.8 billion (in 2008 dollars) annually in excise taxes if marijuana is taxed at a rate equal to 50% of its price to consumers. To illustrate the potential effect on revenue assume a fully legalized industry nationwide, assume a pretax price of $50 per ounce, a state tax of $50 per ounce, and the consequences of a federal tax of $50 per ounce. Design Issues for a Federal Marijuana Excise Tax

Aside from the general level of the tax, there are a number of design issues for an excise tax discussed in this section. Other Options

Various methods of taxation could also be combined. Production Limits

Production limits could be enacted based on the total market size or per grower. The Marijuana Tax Equity Act of 2013 ( H.R. Effects of Federal Marijuana Laws on State Tax and Regulatory Regimes

Some experts have also noted that the decision, or delay, of legalization at the federal level could have significant effects on the development of marijuana tax policy at the state level. This uncertainty surrounding the relationship between alcohol and marijuana use is important because it limits the plausibility that a marijuana tax could be initially levied based on the external costs to society. For example, marijuana legalization could impose significant external costs or savings on society, even if marijuana consumption has a minor effect on the demand for alcohol due to the relatively large external costs of alcohol consumption. In the 113 th Congress, the Small Business Tax Equity Act of 2013 ( H.R.
The combination of state policy and general public opinion favoring the legalizing of marijuana has led some in Congress to advocate for legalization and taxation of marijuana at the federal level. The Marijuana Tax Equity Act of 2013 (H.R. 501) would impose a federal excise tax of 50% on the producer and importer price of marijuana. The National Commission on Federal Marijuana Policy Act of 2013 (H.R. 1635) proposes establishing a National Commission on Federal Marijuana Policy that would review the potential revenue generated by taxing marijuana, among other things.
This report focuses solely on issues surrounding a potential federal marijuana tax. First, it provides a brief overview of marijuana production. Second, it presents possible justifications for taxes and, in some cases, estimates the level of tax suggested by that rationale. Third, it analyzes possible marijuana tax designs. The report also discusses various tax administration and enforcement issues, such as labeling and tracking.
Economic theory suggests the efficient level of taxation is equal to marijuana's external cost to society. Studies conducted in the United Kingdom (UK) and Canada suggest that the costs of individual marijuana consumption to society are between 12% and 28% of the costs of an individual alcohol user, and total social costs are even lower after accounting for the smaller number of marijuana users in society. Based on an economic estimate of $30 billion of net external costs for alcohol, the result is an external cost of $0.5 billion to $1.6 billion annually for marijuana. These calculations imply that an upper limit to the economically efficient tax rate could be $0.30 per marijuana cigarette (containing an average of one half of a gram of marijuana) or $16.80 per ounce. An increased number of users in a legal market would raise total costs, but not necessarily costs per unit.
Some could also view excise taxes as a means to curtail demand, particularly as the price of marijuana can be expected to drop from current retail prices of up $200-$300 per ounce to prices closer to the cost of production at $5-$18 per ounce, if broadly legalized. The demand for marijuana is estimated to be relatively price inelastic, meaning that consumer demand is relatively insensitive to price changes. Although previous studies of marijuana demand largely examine consumers willing to engage in illegal activities, it appears that higher tax rates would have a minor effect on reducing demand. With this said, tax policy, coupled with adequate law enforcement, could be an effective tool to limit marijuana consumption among youth, as empirical studies indicate that their demand is more sensitive to price than non-youth.
Excise taxes on marijuana could also be levied primarily to raise revenue, as has been historically the case with tobacco and alcohol. As an illustration, assuming a total market size of $40 billion, a federal tax of $50 per ounce is estimated to raise about $6.8 billion annually, after accounting for behavioral effects associated with price decreases following legalization.
The choices in administrative design could affect consumer behavior, production methods, evasion rates, or the tax base of a federal marijuana excise tax. Some of the more significant choices include whether to exempt medicinal uses or homegrown marijuana from tax.