Month: February 2016

Yesterday Congress passed a bill, which President Obama is expected to sign, that will ban states from imposing taxes on Internet access.  The so-called “Internet Tax Freedom Act” (ITFA) was originally enacted in 1998 as a temporary measure meant to assist an “infant industry.”  Now, however, it is being made permanent for exactly the opposite reason: because the Internet is “a resource used daily by Americans of all ages, across our country,” according to Sen. Majority Leader Mitch McConnell.  The bill effectively forces a tax cut onto the states, without any direct cost to the federal government.  It’s Congress’ favorite kind of tax cut: one that it does not need to pay for.

The most tangible effect of ITFA will come in 2020 when the seven states that began applying taxes to Internet access prior to 1998—Hawaii, New Mexico, North Dakota, Ohio, South Dakota, Texas, and Wisconsin—will lose their “grandfathered” status and be forced to enact special Internet tax exemptions costing a total of $563 million per year.  But Michael Mazerov at the Center on Budget and Policy Priorities (CBPP) explains that the impact on existing state taxes may not stop there.  According to Mazerov, this sweeping new ban could provide Internet access providers with a legal basis for arguing that all of their purchases, from computer servers to fiber-optic cable and even gasoline, must be exempted from tax in order to avoid any “indirect tax” on Internet access.

For years, permanent enactment of the ITFA had been stopped short by members of Congress who insisted that it be packaged with a measure that could actually improve state sales tax systems: the Marketplace Fairness Act (or similar legislation) that would allow states to require online retailers to collect the sales taxes owed by their customers.  Today, enforcement of sales taxes on purchases made over the Internet remains a messy patchwork, with many e-retailers enjoying an inequitable and distortionary price advantage over brick and mortar stores.  In order to secure passage of ITFA, Sen. McConnell pledged to hold a vote on the Marketplace Fairness Act later this year—though if history is any guide, that may not mean much.  The Senate already passed the Act once, in 2013, before watching it languish in the House.

Regardless of what happens to the Marketplace Fairness Act, the permanent extension of ITFA marks a step backward for state tax policy.  ITFA narrows state sales tax bases, makes them less economically neutral, and damages the long-run adequacy and sustainability of state revenues.  Limiting states’ ability to apply their consumption taxes in a broad-based way is antithetical to sound tax policy.

This is the fifth installment of our six-part series on 2016 state tax trends. An overview of the various tax policy trends included in this series is here.   

As we explain in our annual report on low-income tax credits, the strategic use of Earned Income Tax Credits (EITCs), property tax circuit breakers, targeted low-income tax credits and child-related tax credits can have a meaningful impact on addressing poverty, tax fairness and income inequality in the states.  

The use of these tools is so important especially because states have created an uneven playing field for their poorest residents through their existing tax policies. Every state and local tax system requires low- to middle-income families to pay a greater share of their incomes in taxes than the richest taxpayers and, as a result, tax policies in virtually every state make it even more difficult for those families in poverty to make ends meet. Unfortunately, it does not stop there–many recent tax policy proposals include tax increases on the poor under the guise of “tax reform”.   

That reality may seem bleak, but it provides state lawmakers plenty of opportunities to improve their tax codes in order to assist their state’s lowest-income residents. Targeted low-income tax cuts can serve as a vital tool in offsetting upside down tax systems and proposed regressive tax hikes. On top of that, targeted tax breaks and refundable credits do not only benefit a state’s low-income residents–they can also pump money back into the economy, providing both immediate and long-term economic stimulus. With this in mind, a number of lawmakers are heading into the 2016 legislative session with anti-poverty tax reform on the agenda.  

This year we expect states to build on reforms enacted in 2015 with a range of policies to address poverty and income inequality–including, most notably, efforts to enact or improve state EITCs in as many as a dozen states. Unfortunately, lawmakers in a few states are looking to reduce or eliminate their EITCs.  Here’s a look at the opportunities and threats we see for states in 2016:   

Enacting state EITCs:   

Twenty-six states plus the District of Columbia currently have a state EITC, a credit with bipartisan support designed to promote work, bolster earnings, and lift Americans low-wage workers out of poverty. 

In 2016, a number of states are looking to join this group by enacting their own state EITCs. For instance, Mississippi Gov. Phil Bryant recently called for “blue collar tax dividends” to give people back a portion of their hard-earned tax dollars (he has proposed a nonrefundable state EITC). In South Carolina, a refundable EITC is on the table to help offset a largely regressive transportation revenue raising package. And lawmakers in Idaho have proposed the enactment of an EITC at 8 percent of the federal credit (PDF).  Advocates in Georgia, Hawaii, Kentucky, Missouri and West Virginia are calling on their state lawmakers to enact state EITCs as a sensible pro-work tool that would boost incomes, improve tax fairness, and help move families out of poverty. 

Even states without an income tax could offer a state EITC and lift up the state’s most vulnerable. Washington State enacted a Working Families Tax Rebate at 10 percent of the federal EITC in 2008, though it still lacks sufficient funding to take effect.  

Enhancing state EITCs:   

While state EITCs are undoubtedly good policy, there is still room for improving existing credits. Three states (Delaware, Ohio and Virginia) have EITCs but only allow them as nonrefundable credits–a limitation which restricts their reach to those state’s lowest-income families and fails to offset the high share of sales and excise taxes they pay. Lawmakers in Delaware seem to have recognized this shortcoming by recently introducing a bill that would make the state’s EITC refundable, but only after reducing the percentage from 20 to 6 percent of the federal credit and then gradually phasing it back up to 15 percent over the course of a decade.  Advocates in Virginia are calling for a strengthening of the state’s EITC as an alternative to untargeted tax cuts proposed by Gov. Terry McAuliffe. 

In addition to refundability, many states are discussing an increase in the size of their credit. Governors, in particular, are stepping up to the plate: Rhode Island Gov. Gina Raimondo recently announced her plan to raise the state’s EITC to 15 percent, up from 12.5 percent of the federal credit; Louisiana Gov. John Bel Edwards, meanwhile, has called for doubling the state EITC as part of his commitment to reduce poverty; and Maryland’s governor, Larry Hogan, called to accelerate the state’s planned EITC increase. In California, Gov. Jerry Brown reiterated his support for the state’s new EITC in his 2016-17 budget. In New York, Assembly Speaker Carl Heastie proposed increasing the EITC by 5 percentage points over two years. And Oregon lawmakers are calling to bring the EITC up to 18 percent of the federal credit.   

Another “enhancement” trend that is building momentum is expanding the EITC to workers without children. At the federal level, President Obama proposed just that (PDF) in 2014 and again reiterated his support for such a change in his most recent State of the Union address and budget proposal. Just last year, the District of Columbia expanded its EITC for childless workers to 100 percent of the federal credit, up from 40 percent, and increased income eligibility.   

Protecting state EITCs:  

Rather than focusing on proactive anti-poverty strategies, a handful of states will be spending the better part of 2016 protecting their state EITCs from the chopping block. Tax reform debates in Oklahoma have led to calls that the state’s EITC should be re-examined and possibly eliminated, possibly in combination with the elimination of the state’s low-income sales tax relief and child care tax credit.  

For more information on the EITC, read our recently released brief that explains how the EITC works at both the federal and state levels and highlights what state policymakers can do to continue to build upon the effectiveness of this anti-poverty tax credit. 

How do tax reform plans affect economic growth? And can an economic model that always assumes tax cuts stimulate economic growth and tax increases stifle growth credibly answer this important question? In a word, no.

A new paper by Carl Davis, research director at Institute on Taxation and Economic Policy (Citizens for Tax Justice’s research partner), takes an analytic look at the Tax Foundation TAG (Taxes and Growth) Model and outlines why observers of the organization’s data should be skeptical.

“The TAG model currently views government investments in infrastructure, education and other services as worthless,” Davis wrote. “The model ventures even further into the territory of economic voodoo by depicting tax cuts as a means of raising federal revenues, and tax increases as ineffective at achieving that same goal.” 

Read the full paper here. 

As expected, the budget unveiled by President Obama this week includes a proposed new tax of $10.25 per barrel of crude oil.  The revenues raised by this tax would go toward not just shoring up our nation’s anemic Highway Trust Fund, but also expanding it into a more ambitious (and renamed) Transportation Trust Fund that would bring with it a heavier emphasis on public transit projects.

Since most crude oil is ultimately converted to gasoline or diesel fuel, much of the impact of this oil tax would be identical to a 20 or 25 cent increase in the nation’s existing fuel taxes.  The primary difference is that a tax on crude oil would also fall on a wider range of products, including heating oil and jet fuel.

In a sense, a tax on crude oil can be thought of as straddling a middle ground between the nation’s current taxes on transportation-related fuel use, and a more comprehensive tax on all carbon emissions.  In its budget proposal (PDF), the Obama Administration’s case in support of an oil tax sounds very similar to one that could be made for a carbon tax: “a fee on oil … creates a clear incentive for private-sector innovation to reduce America’s reliance on oil and invest in clean energy technologies.”

In addition to its likely environmental benefits, a crude oil tax of this size could also ensure solvency in the nation’s transportation account throughout the entire 10 year budget window (in contrast to the 2021 insolvency being forecast today), and is described (PDF) by the Administration as generating “a sustainable revenue level … going forward.”  Part of this sustainability hinges on the fact that the President’s proposed $10.25 per barrel tax would be allowed to grow alongside inflation in the years ahead.  This is in sharp contrast to the nation’s current gas tax which has stagnated at a fixed rate of 18.4 cents per gallon for over 22 years and lost roughly 40 percent of its purchasing power in the process.

Even if a new tax on crude oil is “dead on arrival,” as House Speaker Paul Ryan recently claimed, members of Congress should take note of the inflation indexing component of this proposal and consider its relevance to the gas and diesel taxes already on the books today.  As we’ve explained in the past, tying fuel taxes to inflation is smart policy and, at least at the state level, is becoming increasingly routine.

Today we are taking a look at several states that are dealing with budget shortfalls. Despite shortfalls, governors in Arizona and Kentucky are calling for tax cuts. Newly elected Louisiana Gov. Edwards is taking a different approach and calling a special session next week to talk about tax increases. Meanwhile the sad saga of Kansas continues as lawmakers grapple with revenues that again fell short of monthly projections.
Thanks for reading. 
— Meg Wiehe, ITEP’s State Tax Policy Director

Years of tax cuts have left Arizona low on cash, despite state officials’ protestations to the contrary. While lawmakers point to lingering effects of the Great Recession to explain sluggish revenue collections, economists at Arizona State University blame over 20 years of tax cuts, which have reduced the 2016 general fund by $4 billion. Revenues will continue to decline as corporate tax cuts are phased in through 2019, but no matter — Gov. Doug Ducey affirmed his commitment to cutting taxes further in his State of the State address (while somehow also promising increases in education spending).

Advocates in Kentucky say years of budget cuts show that the state needs more revenue. Under former Gov. Steve Beshear, the state cut spending by $1.5 billion. Gov. Matt Bevin has proposed $650 million in additional cuts under his latest budget. Recently, a coalition of 20 groups called on lawmakers to consider raising revenue instead of enacting more cuts. Using data from our state partners at the Kentucky Center for Economic Policy (KCEP), the Kentucky Together coalition advocates for eliminating tax breaks for corporations and wealthy property owners as well as broadening the sales tax base to include services. The KCEP report (PDF) cites ITEP data showing that state and local taxes hit middle-income families hardest (10.8 percent of family income) and are relatively light on the top one percent of Kentucky earners (6 percent of family income).

The sad saga of Gov. Sam Brownback continues for Kansas. The governor and his revenue officials continue to make the case that relying heavily on consumption taxes will provide “more stability” for state revenues despite mounting evidence to the contrary. In January, sales tax receipts were $3.9 million under expectations, and since July have come in as much as $10 million under monthly projections. Brownback and lawmakers increased the sales tax rate last June in an effort to pay for the governor’s costly income tax cuts. Revenue Secretary Nick Jordan insists that the short-term data are an aberration, and that the sales tax is more reliable than the income tax “over a 5-10 year trend.” Conveniently, Jordan won’t be around then to see if his prediction was correct. And despite the assertions of Art Laffer and Stephen Moore, the Kansas economy doesn’t prove the wisdom of Brownback’s “experiment.” As Yael Abouhalkah of The Kansas City Star notes, those economists have failed to acknowledge the consumption tax hikes, budget cuts and highway trust fund raids made necessary by the state’s recent tax cuts.

At the request of new Gov. John Bel Edwards, Louisiana will hold a special session beginning next Monday to deal with its budget crisis. The session is limited to considering bills that would increase taxes, rollback tax cuts and incentives, or cut spending in an effort to balance the budget. However, it will be up to the legislature to decide if a bill meets the parameters established by the governor. One piece of legislation expected to be considered is a repeal of the SAVE higher education act, a bill passed by Louisiana lawmakers at the behest of former Gov. Bobby Jindal. The convoluted law created a fake tax credit to cover for a tax increase so that Jindal could pretend to keep his no-taxes pledge.

State of the State Addresses This Week:
Louisiana Gov. John Bel Edwards — Friday, Feb. 12
Pennsylvania Gov. Tom Wolf — Tuesday, Feb. 9 (watch here)
Wyoming Gov. Matt Mead — Monday, Feb. 8 (watch here)

If you like what you are seeing in the Rundown (or even if you don’t) please send any feedback or tips for future posts to Sebastian Johnson at sdpjohnson@itep.org. Click here to sign up to receive the Rundown in via email. 

The recently released annual report from the Celanese Corporation, a Fortune 500 manufacturer of engineering polymers, is a helpful reminder of why multinational companies should be required to report their earnings to tax authorities in countries where they claim to earn profits. In its 2015 annual report, Celanese discloses that its foreign income over the past three years totaled $1.46 billion, the bulk of which ($900 million) it reported earning in four tax havens: Bermuda, Luxembourg, the Netherlands and Hong Kong. This means the company is claiming that more than 60 percent of its foreign income, and an incredible 30 percent of its worldwide income, is earned in these tax-haven countries.

As we’ve argued in the past, country-by-country reporting is a vital tool for tax administrators in the United States and abroad to help them detect corporate tax avoidance schemes. The Internal Revenue Service has released rules implementing OECD recommendations for country reporting, but Rep. Charles Boustany, chair of the House Ways and Means Tax Policy Subcommittee, is doing whatever he can to postpone this effort in the United States.

Whether you’ve heard of Celanese or not, you’ve used a product created with raw materials manufactured by the company. Its customers are industries as varied as agriculture, pharmaceutical, electronics, aerospace and automotive. And while it profited handsomely over the last three years, the company’s claims about where it is earning its profits are, at best, questionable. Country-by-country reporting would provide much-needed transparency and, possibly, prevent the company’s elaborate tax-dodging scheme.

What makes the company’s income reporting seem implausible is that Celanese also discloses the location of its sales, property, plant and equipment—and remarkably little of it appears to be in any of these tax havens. [See CTJ’s report on tax haven abuse for a brief explanation of why corporations’ claims of massive profits in tax haven countries is unbelievable.]

In 2015, Celanese reports that $146 million of its $5.67 billion in worldwide sales are generated in a residual “other” category of countries, which includes but is presumably not limited to these four tax havens. These “other” countries also represent just $70 million of the company’s worldwide $3.6 billion in property, plant and equipment.

So how can it be that a small group of tax havens in which Celanese has at most 2.6 percent of its sales and 1.9 percent of its property is nonetheless generating 30 percent of its worldwide income?

The only information about the company’s Bermuda operations in its financial statement is the existence of a subsidiary, Elwood Limited. If the well-documented income shifting hijinks of other big multinationals are any indicator, Celanese’s Bermuda subsidiary exists solely to act as a home away from home for the company’s intellectual property, patents and trademarks, most of which were really generated in a country in which the company actually has sales, property and employees.

Rep. Boustany has argued that country-by-country reporting would result in foreign governments engaging in “fishing expeditions” to ferret out sensitive information about corporate practices. But even the limited disclosures made by Celanese show that in fact, the main effect of country-by-country reporting would be to put an end to the tall tales many corporations are creating about where they earn their profits. Like the proverbial “fish that got away,” the invisible manufacturing plants allegedly creating nearly a third of Celanese’s income in four tax havens are a whopper, but a far more harmful one than your average fish tale. 

This is the fourth installment of our six-part series on 2016 state tax trends. An overview of the various tax policy trends included in this series is here.  

Tax shifts lower or eliminate one tax in exchange for increasing a different tax. While tax shifts can come in different forms, recent tax shift proposals have typically called for the reduction or elimination of personal and corporate income taxes and expanded consumption taxes to make up some or all of the lost revenue. Despite the detrimental effect these tax shifts have on working families and state budgets down the road, they’ve been quite popular among states. Unfortunately, this trend continues in 2016, with several states considering tax shift proposals right out of the gate.

This year we are keeping our eye on an emerging sub-trend in tax shifts—leveraging the need for states to make long-overdue improvements to transportation infrastructure in order to get tax cuts that disproportionately benefit the highest-income households. We saw this in Michigan this past November, where lawmakers approved increases to gas taxes and vehicle registration fees but also offset new revenue with future cuts to the state’s top income tax rate. While an increase in transportation funding has been long-overdue in many states, these tax shift proposals have the effect of doing so at the expense of other critical state investments including higher education, public health, and safe communities. 

Here’s a list of states we are watching in 2016:

Arizona. Eliminating the income tax and replacing lost revenues with a higher sales tax is still a priority for Gov. Doug Ducey and lawmakers like chairman of the Ways and Means Committee Representative Darin Mitchell. Details are still forthcoming, but the governor has stood by his campaign pledge to drive the income tax rate as close to zero as possible. In Arizona, the bottom 20 percent of taxpayers already pay three times as much in taxes as a share of their income as do the top one percent. Further tax shifts from the income tax to the sales tax would be a disastrous move for tax fairness, increasing taxes on low- and middle-income families while providing substantial tax cuts to those with high-incomes.   

Mississippi. There was no shortage of significant tax proposals last year, including the Senate’s proposal to reduce income tax rates and franchise taxes, the governor’s tax cut for working families, and the House’s proposal to eliminate the income tax. However, the session ended last year without a compromise plan that could garner enough votes to win approval.  Given a new supermajority among republican lawmakers thanks to November elections, the state is almost certain to see some sort of major tax shift this year. 

Mississippi’s transportation infrastructure needs may very well provide the ticket lawmakers need to enact their desired cuts. It’s been 27 years since Mississippi last raised its gas taxes, making proposals to reform fuel taxes this year most welcome and long-overdue. Plans to raise at least $300 million for road and bridge maintenance however, are unlikely to move forward without offsetting tax cuts. Even Governor Bryant is calling for “an equal and sufficient tax reduction” to offset any proposed tax increases.  His preferred plan is a “blue collar” tax cut in the form of a nonrefundable EITC (the same plan he advocated for last year), but he is also amenable to a reduction or elimination of the state’s corporate franchise tax. While a tax cut for working families would be an appropriate and targeted policy to pair with a regressive tax increase, House and Senate lawmakers are likely to propose less targeted and more broad-based tax cuts that could result in tilting the state’s already upside down tax system more in favor of the wealthy.

Tax Shifts for Transportation a Bridge to Nowhere

Indiana. To make it more palatable for lawmakers to fund repairs for roads and bridges, House Republicans slipped a phased-in 5 percent income tax cut into a transportation package that passed the House this past Tuesday. Intending to increase funds available for infrastructure improvements, HB 1001 raises the state’s gasoline excise tax by 4 cents per gallon and the tax on diesel fuel by 7 cents. It also increases the cigarette tax by $1 per pack. The revenue potential of this bill, however, is undermined by the reduction of the personal income tax rate down to 3.06 percent over eight years. The proposal also exacerbates the unfairness of Indiana taxes: an ITEP analysis of the proposal found that the average taxpayer among the bottom 80 percent of earners would see a tax hike while the wealthiest 20 percent would benefit from a tax cut.

Georgia. What we’re seeing in Georgia is an attempt to enact a tax shift over two legislative sessions. Last year, the state enacted significant gas tax reform amongst other measures, raising $1 billion in transportation revenue. Part of the transportation package created a Special Joint Committee on Revenue Structure, which was tasked with identifying tax cuts. Due to a failure of the House to appoint their members, the committee did not convene and no tax reform plan was created. As a result of this inaction and in direct response to the prior year’s tax increase, Senator Judson Hill has introduced his own tax-cutting measures. Senate Bill 280’s primary effect is to flatten Georgia’s personal income tax to a single rate of 5.4 percent. Senate Resolution 756 requires a constitutional amendment that would bring down this rate even further. Both measures would deprive the state of needed revenue and require it to inevitably to make up these losses through more regressive sources. 

New Jersey. Facing a drying up Transportation Trust Fund, lawmakers continue to talk this year about increasing the gas tax. However, Governor Christie has said that he won’t consider raising the gas tax unless lawmakers agree to other tax cuts, specifically raising the exemption level of the estate tax or eliminating the tax altogether. In contrast to the governor’s claim that the estate tax is a burden on the middle class, a new report from the New Jersey Policy Perspectives shows that just four percent of estates are subject to the tax and that cutting the tax could seriously threaten resources needed to fund important building blocks of a strong economy such as higher education, health care, and safe communities.

South Carolina. South Carolina is preparing to debate and vote on a road repair plan in the coming weeks. The proposed law would raise an estimated $700 million each year in new revenue once fully phased in through an increase to the gas tax and other transportation related-fees, but this amount would be offset by $400 million from a combination of income tax and business property tax cuts. While there are some targeted income tax breaks that would benefit working families, including the creation of a 3.5% refundable Earned Income Tax Credit, the overall effect of the plan is somewhat regressive. There may be talk of offsetting the gas tax increase with cuts to the sales tax instead of the income tax, which, all things being equal, would be a preferable shift since it would favor cuts for middle-income earners over the wealthiest. But, most importantly, like in every other state considering this brand of tax shift, increasing one set of fees and taxes to support new funding for transportation while cutting taxes that support public education and health care is not a sensible or sustainable policy idea.

Up Next

Not all tax cuts and shifts are bad policy. Building on the momentum from 2015 reforms, many states are headed into their legislative sessions looking to address poverty and inequality through targeted tax measures. Stay tuned for the next blog post in our series for a more in-depth look at what states are addressing poverty and inequality through enacting or strengthening tax credits for working families.

In four states (Alaska, Colorado, Oregon, and Washington State), retail sales of marijuana are both legal and taxable.  Of these states, Colorado was the first to implement sales and excise taxes on legal marijuana and now has over two years’ experience collecting those taxes.  The state is collecting roughly $90 million in marijuana excise taxes alone each year—an amount short of the $162 million it collects from cigarette taxes, but that far exceeds the $42 million it receives from taxes on alcohol.  When state-level sales taxes, license fees, and application fees are added to the picture, Colorado’s haul from marijuana taxes rises to roughly $130 million per year, with millions more flowing directly to local governments via their own sales taxes on marijuana.

As the chart below shows, marijuana tax revenues have risen rapidly in Colorado throughout most of the last two years.  The same is true in Washington State—the only other jurisdiction where legal, taxable sales of retail marijuana have been taking place for a sustained period of time (Oregon implemented its retail marijuana taxes in January 2016, and Alaska will do the same later this year).  As I recently noted in testimony before Vermont’s Senate Finance Committee, monthly marijuana tax revenues are up 64 percent in Colorado compared to a year earlier, and are up by a staggering 246 percent in Washington State.

Nobody knows for certain how marijuana tax revenues in these two states, and elsewhere, will perform in the years ahead.  But it is clear that this kind of rapid growth cannot continue forever.

Much of the growth seen so far is related to the fact that new retail marijuana outlets were opened gradually in each of these states, and that many marijuana consumers did not immediately shift their purchases from the black market to the legal market following the start of legal sales.  Once the legal marijuana market becomes more established, the rapid growth in tax collections observed thus far should begin to slow.

More interesting, however, is speculation surrounding what may happen to the legal marijuana market in the long-term.  As I discussed in Vermont, one place to look for clues about the long-run trajectory of legal marijuana is the gambling industry.  Today, legal marijuana is relatively rare—much like legal casino gambling was decades ago.  With gambling, early adopters such as Atlantic City reaped an enormous economic and tax revenue windfall as gamblers flocked to the city’s casinos.  But eventually that windfall faded when casino gambling became more commonplace.  While it is unlikely that any state would ever become as economically reliant on marijuana as Atlantic City has been on gambling, early adopters of legal marijuana are likely to be more effective at luring out-of-state customers, and tax dollars, in the short-term than they will be in a future where other states are likely to have legalized marijuana as well.

Changes in the price of marijuana will also have enormous effects on the long-run yield of marijuana taxes.  Three of the four states that collect taxes on retail marijuana sales (Colorado, Oregon, and Washington State) tax the product based on its price with just one state (Alaska) taxing marijuana at a flat rate per ounce.

The RAND Corporation, among others, expect that the price of marijuana will fall significantly in the years ahead as growers become more experienced at cutting costs and as federal and state laws related to marijuana are loosened.  If prices fall, those states with price-based taxes could see a dramatic decline in marijuana tax revenues—much like the decline in many states’ gasoline taxes that has resulted from the falling price of fuel.

To help avoid this outcome, states with legal marijuana could establish a “tax floor” that would prevent the tax charged per ounce from dropping below some predetermined level even if marijuana prices plummet.  In the context of gasoline taxes, “floors” are an increasingly popular policy option used in states such as Kentucky, North Carolina, Pennsylvania, Utah, Vermont, Virginia, and West Virginia.

Ultimately, however, tax floors are no panacea for potential long-run challenges to the yield of marijuana taxes.  Lawmakers in states where marijuana is legal—or where legalization is being considered—should be aware that marijuana taxes may not be a particularly sustainable source of revenue in the long-run.  More generally, lawmakers should accept that the future of marijuana taxes is highly uncertain.  While they should strive to tax marijuana in the most sensible fashion possible, any marijuana tax established today will almost certainly need to be revisited in the future as changes occur in the price of marijuana, the structure of the industry, and the product’s legal status at the federal level and in other states.

For more information, see:

Testimony Regarding Tax Policy Issues Associated with Legalized Retail Marijuana

Issues with Taxing Marijuana at the State Level