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Monday, June 14, 2010

Alcohol, Marijuana, and Taxes

In the fall, California voters will decide on a measure to legalize marijuana in the state. According to its website, the ballot initiative would:
Control cannabis like alcohol: Allow adults 21 and older in California to possess up to one ounce of cannabis

Give local governments the ability to tax the sale of cannabis to adults 21 and older

Generate billions of dollars in revenue to fund what matters most in California: jobs, healthcare, public safety, state parks, roads, transportation, and more

The revenue claim is highly debatable. Even if the measures passes, marijuana will still be illegal under federal law. Filing tax paperwork on marijuana sales would amount to confessing to a federal offense -- in writing. It is questionable whether many businesses would be willing to do so.

In the New York Times, Daniel Okrent uses the example of Prohibition to warn that marijuana revenues would not bring income tax relief. Advocates of repeal, such as Pierre duPont, argued that revenue from alcohol taxes would allow Congress to scrap income taxes on corporations and individuals. Things did not work out as they had hoped.
Roosevelt and Congress did respond to the repeal windfall by cutting income tax rates for workers earning less than $3,000 a year. But the New Deal had little sympathy for the wealthy, whose taxes actually increased over the next few years. Rather than the trade-off duPont expected, the government used the excise income to expand.