Most of the states legalizing recreational cannabis are doing so while seeing big dollar signs. Exorbitant cannabis tax rates make consumer prices barely competitive with black-market offerings, so the street trade continues to thrive. In November, Massachusetts residents are voting on an interesting alternative. Currently, Massachusetts’ state sales tax is 6.25 percent. Voters will be deciding whether to legalize cannabis for adults to consume at their own discretion and set the additional cannabis tax at just 3.75 percent, for an effective tax rate of 10 percent.
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The few states that have legalized recreational/discretionary cannabis have tax rates that are considerably higher. Colorado has a very low 2.9 percent sales tax but adds 10 percent for cannabis. That’s almost 13 percent; and Oregon’s effective rate of 25 percent and Washington’s 37 percent are, by contrast, astronomical.
An extra tax is justified because, as long as we deny that this is just a plant that grows from the earth, newly legal cannabis requires a whole new hierarchy of officials and inspectors and regulators. To a lot of commonsense folks, building and funding a whole new body of government to control one particular plant species seems pointless and wasteful at best. But cannabis is still considered a drug, not a food, so it can’t just be regulated as produce. And it’s cultivated, so the agricultural commissions have to ensure that deadly pesticides are not used. Add the laboratories needed to test levels of tetrahydrocannabinol (THC), cannabidiol (CBD), and other cannabinoids, and there are a lot of people who require an income.
So, why is Massachusetts considering a much lower tax rate? Simply put, they want to make it next to impossible for illegal suppliers to stay in business. In high-tax states like Washington and Oregon, dealers can still sell cannabis on the black or gray market and make plenty of money by undercutting the state dispensaries’ prices. As a result, young urban dwellers are still drawn to the drug trade, and still get arrested for it—at a much higher rate for non-white offenders than those of European descent—which has been the actual goal of “marijuana” prohibition from the outset. Seen in this way, prohibition itself fosters criminality, mistrust of law enforcement, enormous waste of taxpayer dollars, and systemic racial discrimination.
Going after the “black” market
Massachusetts voters have an opportunity to slash the black market’s profit margins, in hopes of having nearly all cannabis sales in the state occur under regulation. This is a smart option. Massachusetts already has a fairly high taxation rate compared to other states and so ought to be able to rationalize only a slight increase to help pay for the necessary increases in payroll and regulations.
It will be interesting to see how the various states’ approaches pan out in the long run. Oregon collected just over $25 million in six months, but will they consistently reach or exceed that number each year? And if other states continue to follow in their footsteps, will interstate “cannatourism” dollars dry up? Colorado kept 85 percent of the cannabis tax collected and grossed over $26 million, while allowing the local jurisdictions to keep the remaining 15 percent.
Much of the surplus money in Colorado has been earmarked to help with the homeless population and their school systems. These funds are being put to great use and are helping those folks who need it the most and helping the state invest in its greatest assets, its people.
We look forward to seeing what Massachusetts decides to do with their newfound surplus.