Colorado Marijuana Tax
Alyssa Chiumento, Luke Hanson, Brynn Saunders
Although the use, sale and possession of cannabis remains illegal under federal law, recently several states have made exceptions – mainly for medicinal use, but a few states for recreational purposes. Colorado and Washington were the first adopters of the recent push for marijuana legalization; voters in both states approved non-medicinal marijuana use in November 2012. In Colorado, pot is taxed in several layers: a 15% excise tax on cultivators; a 10% special sales tax; a 2.9% standard sales tax; and possible additional local sales taxes which can total up to 30% in markups.
As a necessity for those who consume it (there aren’t any substitutes), marijuana is relatively inelastic. Therefore, the rationale behind Colorado imposing such a large tax is that behavior will change little because people need it, just like tobacco. People who use marijuana will continue to buy it in light of the fact that there aren’t any substitutes and their behavior is unlikely to change.
As with most other excise taxes, the tax on marijuana is regressive, since low-income users pay more as a share of their income than high-income users. Additionally, recreational users pay a substantially higher amount in taxes than medicinal users. In this way, the horizontal equity may be less than ideal. Yet there is an argument to be made that those who are legitimately suffering should not have to pay an exorbitant tax on medicine that helps them deal with their pain.
The marijuana tax also enjoys high political and administrative feasibility, despite its high visibility that results from multistage taxation and lots of national media exposure. This high feasibility is due largely to two things: the tax’s potential for exportation (one state-commissioned study shows that 90% of the recreational marijuana sold in some ski towns was purchased by tourists) and the low administrative and compliance costs associated with sales tax collections. Currently, Colorado benefits from being one of only a few places in the world in which marijuana sales and use are legal. If the situation remains as such, the potential for tax exportation will also remain quite high.
The revenue raising capacity of the marijuana tax is quite robust after one year of legalization. Colorado generated $63 million in tax revenue in year one. The marijuana tax revenues have been steadily increasing during the first year of legalization. The Colorado Department of Revenue keeps continual updates of their monthly marijuana tax revenues. The latest projections by the Colorado Legislative Council anticipate the total marijuana tax revenue to exceed $94 million within next two years. Although the revenue seems quite robust currently, the stability of this revenue could be called into question as other states introduce legalization. As more states legalize recreational marijuana, Colorado could lose out on the revenue gained by outstate residents purchasing marijuana in Colorado.
In addition to the four evaluation criteria, it is important to consider Colorado’s unique tax legislation, the taxpayers’ bill of rights, or TABOR. For more information, listen to this NPR story.
And for a lighter take on the issue, check out this story by CNN’s Anderson Cooper.
An itemized receipt for purchase of recreational marijuana in Denver, Colorado.