Buzz-kill: Denver proposes 5% tax on marijuana sales

Remember when marijuana activists argued that legalized pot could help control budget deficits by reducing police costs and raising tax revenues?  Putting that into practice in Denver has proven a bit difficult.  Advocates for legalization are now balking at a 5% tax on marijuana purchases, possibly going to 10% to match the state’s taxes on cigarettes:

Denver Mayor Michael Hancock wants to impose a tax on recreational marijuana to cover the costs of the coming industry that would be roughly akin to the tax burden on a pack of tobacco cigarettes.

But marijuana advocates fear excessive taxes could destroy the whole idea around voter-approved Amendment 64 and keep recreational pot users in the black market.

“If it is too much tax too quickly, it will kill the transition to the legal market,” said Michael Elliott, director of the Medical Marijuana Industry Group. …

Hancock is recommending a 5 percent tax in the first year but said the city should have the flexibility to increase the tax to up to 10 percent.

“We believe a 5 percent tax on recreational marijuana will fulfill the city’s needs to effectively regulate and enforce this new law while protecting our children and families, supporting public health and ensuring the integrity of our neighborhoods,” Hancock said in a statement.

The state has a referendum coming in November that would impose a significant tax on marijuana purchases — 15% excise tax, and a 10% sales tax — to which the city tax would be added.  That’s a big hit, er, large tax bite for recreational marijuana users.  On the other hand, it’s about what cigarette smokers end up paying for their fix, too.  Marijuana users might complain that tobacco has more health impact than marijuana, but that’s not going to be a terribly effective argument coming just after Colorado legalized pot for recreational use, nor is it necessarily supported by science.

Both habits are similar in terms of environmental impact, and with any kind of taxation, in terms of enforcement.  That’s why the argument that legalization would eliminate the waste of police resources was always nuanced.  Cigarettes have always been legal, but significant trafficking of untaxed cigarettes plagues law enforcement in most states with vice taxes, especially those adjacent to low-tax states (like Minnesota). Taxation is even more necessary for marijuana in order to pay for the extra cost of dealing with intoxication, which cigarettes don’t generate.

While legalization means less interdictive law-enforcement activity, it probably means more intoxication and more after-the-fact involvement than before, as well as new efforts to keep now-legal marijuana out of the hands of minors. The city estimates that the expected market of $128 million in legal sales will cost the city nearly $10 million for law enforcement and health-related spending, and it makes the most sense to tax the activity that produces the cost.  That’s more than 5%, but it’s less than the 10% — so far.  That’s why Mayor Hancock wants the flexibility to scale up the tax if the costs get out of hand.  That may be a buzzkill to marijuana advocates, but it’s a rational basis for taxation, if those calculations are correct.

Update: Of course, people can’t usually grow their own tobacco.  That’s not true of marijuana, which as reader David K pointed out in an e-mail to me, is called “weed” for a very good reason.  Now that marijuana has been legalized, David thinks there will be little appetite to bust people for growing their own supply — but if it’s being done to avoid paying taxes, I’m not so sure.  Ask the citizen distillers in the South how they handled the “revenuers” back in the day.