In a recent post, we noted that New Jersey appeared very close to legalizing cannabis, and now … New Jersey is still very close to legalizing cannabis.
What’s the holdup? There’s more than one, but a major sticking point has been reaching agreement on taxation levels. And it appears that a deal has indeed been reached, with an unusual solution: New Jersey will impose a $42-per-ounce flat tax on marijuana. What makes it unusual is that most other states have imposed their taxes on a percentage basis.
That sets up an interesting scenario: at current average levels of $300 an ounce, that’s a relatively reasonable 12 percent tax rate. But should future supply levels lead to prices falling to, say, $200, it becomes 21 percent. Considering that the governor’s original idea was a flat 25%, maybe consumers are getting off easy.
The taxation issue has been a major hurdle to legalization nationwide, with state governments quite naturally wanting their cut of potentially huge revenue streams. Rates for medical marijuana tend to be lower than those for recreational marijuana, with some states not taxing the former at all.
But the law of unintended consequences is very much in play here: the whole idea of legalization is to shut down the criminal element in marijuana sales, and the taxation issue seems to have a hand in doing just the opposite. A recent Boston Globe story estimates that more than two years after marijuana was legalized in Massachusetts, some 75 percent of sales in 2019 will still be via the black market. A scarcity of licensed shops is a primary culprit here – incredibly, the entire state still has only eight stores – but higher pricing is also a factor.
States walk a fine line in deciding the right path to taxation, and there have been nearly as many different solutions as there are states. Legalizing cannabis involves putting systems and controls in place to ensure quality, safety and the reputability of the businesses handling sales. All that administration has to be paid for, so states are going to take their cut.
But too big a cut means high prices passed down from seller to consumer. And then the consumer turns to the very people the states are trying to put out of business.