“I’ve tried very hard not to assume a tax rate that looks as though its just going to drive the market back underground, because then of course then you’re just going to get zero,” Miron says.
To determine the tax structure of a legal marijuana industry, you need to look at alcohol, says Bill Ahern, Director of Policy and Communication for the Tax Foundation in Washington. For starters, alcohol, unlike tobacco, was once illegal in the U.S.
“Coming out of prohibition, the states basically laid claim to the business," says Ahern. "They said well if we are going have alcohol legal, we’re going to control the sale of it in the state, either with much stricter regulations than we have with anything else or by outright running the industry.”
Right now, 16 of the 50 states are so called “control states”, in which there is a department of state government that sells liquor.
In Maryland, for example, the alcohol business is privately run, but the state generates revenue through hefty license fees. In addition, customers pay tax at the retail level, or, as is most often the case, the tax is levied when the store buys from the wholesaler.
On the other hand, Virginiahas neither income source. Instead, the government buys liquor from the world’s manufacturers and resells it to its citizens. Whatever profit they have running that business, is their revenue. In Virginia, prices are set by the Alcoholic Beverage Control Board and liquor stores are called ABC stores. If marijuana were to be folded into the equation here, the stores would be run by the Alcoholic Beverage Control and Marijuana Board, Ahern suggests.
The Marijuana Policy Project, MPP, believes taxing and regulating marijuana like alcohol is the best way to set up the industry, with government setting sales tax rates.
“Marijuana is the largest cash crop in the county," says the MPP's Mike Meno. "It is a 36-billion dollar a year industry, bigger than corn and wheat combined. The notion that our largest cash crop should go untaxed and unregulated, especially in such tough economic times, is nothing short of insane,” he says.
“States are desperate for revenue right now because we are coming out of a recession," Ahern. "And in some states, like California, where they are pushing for legalization already, the public finance aspect and potential tax revenue is a major motivator."
The Tax Foundation estimates that in the 2009 fiscal year, Maryland and Virginia collected $29.2 million and $180.1 million, respectively on alcoholic beverage sales. Florida’s collections totaled $590.4 million, California's $323.9 million.
Taxation, however, is a bit of a science and can succeed or fail, based on consumer behavior.
Some say anything more than the usual retail sales taxes will backfire.
“I don’t think we want to apply a special tax because that will just fuel a crime-plagued black market as it has with cigarettes," says Chris Edwards of The Cato Institute.