Congressional Research Service Report on Taxing Legal Marijuana
The report looks at not only the potential revenue that could be gained from marijuana, but also the pros and cons of the multiple ways marijuana can be taxed such as: by weight, by price, by THC content, and/or special occupational taxes on businesses.
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.
Their research implies that a tax of $16.80 per ounce would potentially cover the negative social cost of legal marijuana use, but with all things related to marijuana research there are still many unknowns thanks in part to its decades of criminalization.
Of course achieving the economically efficient tax rate is often not the main goal of policy makers. Excise taxes are often used primarily to raise revenue or discourage use.
Jon Walker is the author of After Legalization: Understanding the future of marijuana policy on sale for just $0.99