Recommended 27% tax on 'tax and regulate' pot would help black market, other states

By Guy Page

November 15, 2018 - Just paying the State’s estimated $20 million operational costs of ‘tax and regulate’ legal marijuana would require sales and excise taxes of 27%, almost three times the 10% tax rate in Maine and 35% higher than the 20% rate in pot-legal Massachusetts, according to statistics provided in a Marijuana Commission taxation subcommittee report draft dated October, 2018.

A Vermont “tax and regulate” system also would face stiff competition from the zero-tax, no-license black market. This was true even before the Legislature allowed legal home cultivation and possession of marijuana earlier this year.

The 27% tax rate and recommended licensing fees would be “revenue neutral,” providing no revenue relief for other state services (education, highways, etc.). Having the highest tax rate in New England also would likely inhibit “pot tourism,” one of the economic selling points for Vermont expressed by the legal marijuana industry.

The executive summary of the Subcommittee on Taxation and Regulation report states:

“If sales of marijuana for recreational use are legalized in Vermont…...the Subcommittee recommends creating a tax structure that will, at a minimum, maintain a revenue-neutral balance sheet for the State. Retail sales of marijuana should be subject to a new 20% excise tax and the existing 6% sales tax. By imposing the State sales tax, the 1% local option sales tax will automatically apply in jurisdictions that have adopted such a tax.”

In other words - the subcommittee recognizes that just paying for the anticipated added costs of legal pot will require 27% taxation. If Vermonters didn’t know it before, they know it now: there will be NO revenue windfall from “tax and regulate.” Bigger states presumably can afford a lower tax rate due to economy of scale. While a state’s cost of regulation and industry-related services is relatively fixed, the expected greater gross revenue allows bigger states to charge a lower tax rate.

The subcommittee admits legal pot won’t eradicate the black market. In what sounds like “whistling in the dark,” the subcommittee opines hopefully that “the price of regulated marijuana products should be competitive with black market prices to incentivize buyers to pay taxes and support licensed establishments and controlled products.”

But just how, exactly, would a state-regulated industry facing a 27% tax rate, plus fees, and the normal overhead of legal business overcome an entrenched black market industry burdened with none of these?

In response, the commission suggests consumers will prefer legal pot’s supposed product quality control and labeling reliability. It also recommends “educating consumers that purchasing from the State supports local businesses and state government and not drug cartels and drug dealers.”

But the Commission stops short of awarding the legal industry the Good Housekeeping Seal of Approval. It worries that licensees will (unintentionally, or not) divert product cultivated legally to be sold illegally to youth or in non-legal jurisdictions.

The draft report will be finalized and presented to the full Marijuana Commission sometime later this month or next month. There will be opportunity for public comment - and there is reason to hope that Vermonters’ concerns will be listened to.

Gloomy forecasts to the contrary, ‘tax and regulate’ is not necessarily a done deal.

It is true that House Majority Leader Jill Krowinski has said ‘tax and regulate’ is a legislative priority for many in the new House Democratic supermajority, which can - if unified - override any gubernatorial veto. But as other Democratic leaders have said recently, just having a supermajority does not guarantee a successful override. Many Democrat and Progressive lawmakers have, in the past, voted and spoken against ‘tax and regulate.’

As Vermonters go public with their concerns about the real-world consequences of ‘tax and regulate’, they may find legislative allies in unexpected places.