Marijuana Taxation: Theory and Practice

Marijuana legalization creates a host of complex legal problems, not the least of which is how to best tax the emerging legal market. This Essay attempts to bridge the gap between tax theory and marijuana policy to make some modest claims. First, it roots the discussion of state-level marijuana taxation in the theoretical distinction between ordinary revenue-raising taxes and Pigouvian or regulatory taxes. It makes the somewhat controversial claim that the best taxing strategy for states is to attempt to capture as much of the marijuana legalization premium as possible without driving consumers into the illegal market and that other Pigouvian policy concerns are likely to be less important. Second, it roots the discussion of federal taxes in the many factors that will change if federal prohibition ends, again recognizing the importance of possible additional legalization surplus if marijuana is legalized at the federal level. It concludes that the most pronounced difficulty at both levels of taxation is ensuring that excessive taxes do not stymie efforts to move consumers out of the existing illegal market and into the newly regulated legal market while keeping taxes high enough to capture the majority of the legalization surplus