Pot taxes a sticky issue

Debate rages on how much to tax, regulate retail marijuana industry

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When Colorado voters approved the marijuana-legalizing Amendment 64 last year, they also granted permission to the legislature to enact an excise tax of up to 15 percent on all wholesale marijuana purchases. The first $40 million collected from such a tax would, each year, go to a fund dedicated to public school construction, and any additional taxes raised would go to enforcement agencies.

Counter-intuitively for tax-averse Colorado, the excise tax was a main selling point for Amendment 64. People who didn’t buy marijuana wouldn’t have to pay it, and revenues collected from recreational marijuana smokers would go to a good cause, while medical marijuana patients would be exempt from the new tax. Many viewed it as a win-win-win.

The tax is on the ballot this year as Proposition AA. However, in addition to the excise tax, the legislature also tacked on a sales tax, of which Amendment 64 made no mention. The sales tax would be set at 10 percent and could rise up to 15 percent at the whim of the legislature. Fifteen percent of the collected state sales tax would go to the local jurisdiction in which it was collected, with the remaining 85 percent going to the state. The sales tax would be in addition to the existing 2.9 percent state sales tax, as well as any local sales tax.

These two taxes make up Proposition AA: a 15 percent excise tax, the first $40 million of which annually would go towards school construction, and a 10 percent sales tax, which would be used for regulation and enforcement of the retail marijuana industry.

“It’s important that we demonstrate that marijuana is a product that is safely, effectively regulated, and this will allow us to have the oversight to do that,” says Brian Vicente, executive director of Sensible Colorado and the leader of a committee backing Proposition AA. “The first $40 million annually goes to public school construction. So it’s a way for this community to give back. … It’s the responsible path.”

Proposition AA has a long list of supporters, including Colorado attorney general John Suthers and Gov. John Hickenlooper. (Though the latter hasn’t given an official endorsement, as of press time he was slated to appear at an Oct. 2 Yes on Prop. AA campaign fundraiser at the Denver Brewing Company.) Some early polling showed the taxes had astronomically high levels of support among voters, making its passage seemingly foretold.

That doesn’t mean the proposition is without critics. The Colorado chapter of the National Organization for the Reform of Marijuana Laws (NORML) has come out against it, as has prominent marijuana advocate and attorney Rob Corry.

It’s difficult to predict the effective rate the two taxes will have for consumers of retail marijuana. Estimates have ranged from 21 percent to 33 percent. Regardless, opponents of the proposition say that the taxes are too high and could stifle the burgeoning industry or even drive people to the black market.

“It’s the largest tax ever proposed in Colorado history,” says Corry. “It’s excessive, it’s unnecessary. The premise is that we need these excess taxes to regulate marijuana. Alcohol is regulated with a less than 1 percent excise tax, and it’s regulated just fine.”

Corry also says that the tax burden just might be too high for retail marijuana businesses to make a profit. He points out that marijuana businesses already pay a higher federal tax rate than other businesses. Since marijuana is illegal under federal law, businesses cannot legally deduct business expenses. The Proposition AA taxes will just compound the excessive taxation, Corry says.

“The total tax bill is going to be crushing this industry, federal, state and local,” Corry says.

Vicente says that the tax is reasonable, especially compared to the taxes set by Washington state, the other state to legalize marijuana in 2012.

“At the end of the day, this is a fair and reasonable tax,” Vicente says. “[Washington state enacted] close to a 75 percent tax.”

The addition of the sales tax, which was not part of Amendment 64, rankled some would-be supporters of the excise tax.

“I’m OK with the excise tax,” says Rachel Gillette, executive director of the Colorado chapter of NORML. “I think we should have been voting on these issues separately. I’ve heard the analogy, you have this fabulous Ferrari, but welded to it is this really ugly-ass Pinto. Are you still going to buy the Ferrari?”

The state estimates that should voters approve the taxes, the sales tax will raise almost $40 million in 2014, which would be used for enforcement. That represents a huge increase in $9 million available to the Marijuana Enforcement Division, previously referred to as the Medical Marijuana Enforcement Division (MMED). It would also dwarf the budget of many other regulatory agencies in the state. For example, the Colorado Oil and Gas Conservation Commission, which is responsible for monitoring the tens of thousands of oil and gas wells dotting the state, has a budget of $9 million. The Liquor Enforcement Division of the Department of Revenue operates on about $2 million.

A state audit that came out this year said that the MMED was not properly regulating the medical marijuana industry. It said, among other things, that the “seed-to-sale” tracking system approved by the legislature did not effectively exist, and that the state was not keeping up with the paperwork generated by the industry. However, opponents of Proposition AA point to previous reports that the MMED was spending frivolously (on expensive office furniture and SUVs that went undriven, among other things) and that throwing more money at the regulators would not necessarily improve regulation.

“Robust regulation doesn’t necessary mean really expensive regulation,” Gillette says. “It just means effective regulation.”

Vicente notes that the retail marijuana market will be much bigger than the medical marijuana market, so more money will be needed for regulation. He points out that now, just a small percentage of the Colorado population holds medical marijuana cards, but 71.5 percent of the population is over the age of 21 and, therefore, potential purchasers of retail marijuana.

“I think it’s a learning process,” Vicente says of the MMED audit. “This was a product that was illegal, by and large, for 80 years. I think the regulators by and large did a pretty good job. … It’s the Department of Revenue, and we trust them.”

Opponents of AA say that the tax rates will drive people away from the legitimate retail marijuana businesses and back into the black market. Gillette says that NORML has figured that there could be as much as a $100 price difference for an ounce at retail stores versus the black market.

“People are going to go to the black market, especially if the price difference is $100 for an ounce,” Gillette says. “The government needs to be sensitive that this is not just an unlimited cash cow for them,” Corry says. “There is collateral damage to overtaxing an industry that only recently was in the black market and can easily go back to that.”

Medical marijuana dispensaries, which under Amendment 64 have the first crack at applying to become retail marijuana stores, have, for the most part, quietly supported the proposition.

The Medical Marijuana Industry Group (MMIG), which is based in Denver, endorsed the proposition.

“MMIG is endorsing Proposition AA to ensure proper and thorough regulation of this new industry, to fulfill the mandate recently set out by the Department of Justice, and perhaps most importantly, to provide sorely needed funds for Colorado schools,” Norton Arbelaez of MMIG said in a statement posted on the Yes on Prop AA website.

Dispensaries also see the taxes as a way to satisfy the feds. The Department of Justice released a memo on Aug. 26 saying that states legalizing marijuana must “provide the necessary resources and demonstrate the willingness to enforce their laws” — in other words, tax and regulate, says Shawn Coleman, a lobbyist who works for several medical marijuana dispensaries in Boulder County and beyond. “The industry is very much in support of Proposition AA, at least the more dogmatic, professional side of the industry,” Coleman says.

These arguments beg the question: What will happen to the retail marijuana industry should the regulations not pass? Corry contends that without what he considers overbearing taxes, the industry would flourish. There would be plenty of money available for regulation as well.

“It would certainly be well-regulated because it would also pay licensing fees up to $18,000 per store, so for every two to three stores, they could hire one employee.” Corry says. “The industry would flourish if Prop. AA fails. … It won’t be crushed by these extreme proposals.”

Vicente says that the money for the regulation would have to come from somewhere. If the licensing fees weren’t enough, then the legislature might plunder other government programs. It’s only fair that the other programs should not have to bear the burden of regulating marijuana, he says.

“We feel like the folks that use marijuana should pay for this program, and folks who don’t use it won’t have to worry about it,” Vicente says.

And might an underfunded regulatory arm draw the ire of the feds?

“I think the answer is absolutely,” Vicente says.

Boulder proposes separate taxes

Boulder voters will also vote on retail marijuana taxes this year. City Council has proposed an excise tax of 5 percent and a 3.5 percent sales tax to take effect in 2014. (Council could, in later years, raise each tax to up to 10 percent.) The city would use that tax revenue for “public safety, enforcement and administrative purposes” and for “comprehensive substance abuse programs.”

“The licensing fees don’t really cover the costs [of regulating retail marijuana outlets],” says councilman Ken Wilson. “We have costs associated with managing recreational marijuana and we’ll also have enforcement. … We want to spend some money on educating young people so it doesn’t become an even larger problem in the community with young people getting marijuana.”

While the proposed Boulder taxes are much lower than those proposed at the state level, Wilson says he doesn’t think the cumulative tax rates will increase the price enough to drive people to the black market.

He figures that the risk of buying it illegally doesn’t justify the increased cost of the legal route, and he compares marijuana to cigarettes.

“The tax on cigarettes is huge, but not many people do much to avoid that tax,” Wilson says. “You don’t see that many people ordering cigarettes out of Canada [to] avoid it.”

Coleman says that dispensaries are holding their breath on supporting the local sales tax. A lot hinges on the upcoming city council meetings that will create city rules for retail marijuana businesses.

The first drafts of Boulder’s rules contained aspects that many in the marijuana industry thought would prevent them from opening retail marijuana stores, and they made recommendations to council on how to fix them.

“We’re kind of ‘wait and see,’” Coleman says. “We’re going to see what the city council is going to do. And if the city council does go with the recommendations from the industry about the impacts of the ordinances on businesses … I think we’ll see stronger support from the industry. Until then, I think the support will be a little more tepid.”

Council members Suzy Ageton, Macon Cowles, Suzanne Jones, Lisa Morzel and Tim Plass did not return phone calls related to this story by press time.

Respond: letters@boulderweekly.com