What's The Best Way To Tax Marijuana? It Depends On What You Want

Nov 22, 2013
Originally published on November 22, 2013 6:21 pm

A basic tenet of economics: Tax things you want less of. If you want people to, say, eat less candy, tax candy.

Economists, given that they are economists, have traditionally assumed that it doesn't matter when the tax is added to the price. Whether people see the tax reflected in the price of the candy when they grab it off the shelf, or whether the tax is added at the cash register, like sales tax, shouldn't make a difference.

As it turns out, though, where the tax shows up matters quite a bit. "Consumers tend to pay more attention to taxes that are included in the posted price than taxes added on at the register," says Jacob Goldin, an economics researcher at Princeton.

Sales taxes aren't obvious to consumers. Most of us are not walking around the grocery store calculating in our heads how much the sales tax will add to what we buy.

"At least for me, I just swipe the credit card, just pay the cash," Goldin says. "It's not even until the end when I get my receipt that I know how much was taxed and how much wasn't.

Economists have actually quantified this. One study found that when taxes were included in groceries' sticker prices, demand went down 8 percent. You see the same effect with automatic tolls like E-ZPass. What you're paying is less obvious, so governments can get away with charging more.

The bottom line for policymakers is clear: If you want people to consume less of something, make the tax more obvious. If you want to just collect more money, make it less obvious.

But, Goldin says, policies often don't follow these rules. "Soda taxes, candy taxes — this is an area where policymakers have really screwed up if they're trying to get people to drink less soda," he says.

Connecticut, New York and New Jersey are just some of the states that charge higher sales taxes on candy to try to get people to eat less of it. But each uses a not-so-obvious sales tax, so potential candy eaters are less likely to be swayed.

Last year, Colorado voters legalized recreational marijuana, partly because backers promised that a tax on marijuana would help fund schools.

Colorado decided to use both kinds of taxes for marijuana: A 15 percent tax collected during production (that adds to the posted price the consumer sees), and a 10 percent sales tax (that doesn't show up until the moment of purchase).

Dan Pabon, a state representative who helped create Colorado's marijuana taxes, says lawmakers there talked about a lot of ways they could tax pot. In the end, they split the difference.

"We wanted to make sure marijuana paid for itself," he says.

Pabon says the point of the taxes is not to discourage people from smoking — it's to raise money to regulate the marijuana trade and help fund schools. If that's the case, Goldin says, they might have been better off with a straight sales tax that doesn't show up until the customer gets to the register.

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So-called sin taxes are designed in part to change our behavior: smoke less, drink less. But NPR's Dan Bobkoff of our Planet Money team explains, it doesn't always work that way.

DAN BOBKOFF, BYLINE: Let's start with an example, a Kit Kat bar. Let's say it cost $1.07. $1 for the bar, seven cents in tax. Now, there are two main ways the government could collect that seven cents. They could collect it from us, the consumer, at the register, or they could collect it from Hershey's, the company that makes that Kit Kat.

JACOB GOLDIN: Traditionally, public finance economists haven't thought that it matters.

BOBKOFF: But Jacob Goldin, economics researcher at Princeton, says it turns out it matters quite a bit. And it has to do with what you see when you pick up that Kit Kat bar. If the government had taxed Hershey's, they'd passed that tax on to you. So when you see that Kit Kat at the store, the sticker price, the price posted next to the bar, would be $1.07. But if the tax is designed the other way, the sticker price you see is a dollar. The 7 cents gets added later at the register.

GOLDIN: Consumers tend to pay more attention to taxes that are included in the posted price than to taxes that get added on at the register.

BOBKOFF: What this means is if we see that Kit Kat bar for a dollar, even if we know there's a sales tax, we don't actually do the math in our heads.

GOLDIN: At least, for me, I just, you know, swipe the credit card, just pay the cash. I don't - it's not even until the end when I get my receipt that I even know how much was tax and how much wasn't.

BOBKOFF: So that extra 7 cents didn't factor into whether Goldin bought that Kit Kat bar. But if the tax had been applied directly to Hershey's and the price you see on the shelf is $1.07...

GOLDIN: Then I would be less likely to buy that Kit Kat bar. Even though I knew that if you had asked me, I knew that the amount of the tax was the same in both cases, how the tax is presented to me has an effect on whether or not I'd buy the taxed item.

BOBKOFF: Economists have actually quantified this. One study found that when taxes were included in the sticker price, demand went down 8 percent. So the implications of all this are pretty big, especially when it comes to so-called sin taxes. Government often puts a big tax on something in order to discourage people from using it - cigarettes, liquor, big sodas, candy. But the weird thing is that, often, governments use the wrong tax.

GOLDIN: Soda taxes, candy taxes, these are areas where policymakers have really screwed up if they're trying to get people to drink less soda.

BOBKOFF: Connecticut, New York and New Jersey are just some of the states that have done it wrong. Goldin says policymakers should be designing taxes that inflate the actual sticker price of soda and candy. Instead, the tax they designed gets added at the checkout where it's less likely to influence our behavior. But there are some cases where it's less clear what kind of tax you should use.

For example, Colorado. Voters there legalized recreational marijuana last year. But if you're taxing marijuana, what kind of tax do you want? You could argue that marijuana is in the same class as cigarettes and alcohol, where you want the tax to discourage use. But on the other hand, voters there legalized marijuana because ads promised the taxes would help build schools.


UNIDENTIFIED MAN: (Singing) Money for schools. Who could ask for more?

STATE REPRESENTATIVE DAN PABON: We wanted to make sure that marijuana paid for itself.

BOBKOFF: Dan Pabon is a state representative who helped write the marijuana taxes. He says discouraging use was not a big part of the discussion. They were always trying to raise as much revenue as possible with the tax. And yet, by Goldin's thinking, they didn't do a very good job. They went with a 10 percent sales tax, which is the right tax if you want to raise money, but they added a 15 percent tax on producers. That raises the pot sticker price. Goldin at Princeton says they might've been better off with a straight sales tax. Statistically, that would mean people would buy more pot, so the government could charge a lower overall tax and still bring in the same money.

GOLDIN: If we're smart taxpayers and voters, we want to elect people who are going to design systems that cost us more in making purchasing decisions to make mistakes.

BOBKOFF: In other words, not realize what the total price actually is. So there you have it. Government help us make mistakes at the cash register. We might all benefit. Dan Bobkoff, NPR News. Transcript provided by NPR, Copyright NPR.