With more States legalizing recreational and medicinal marijuana I find it interesting to see the unforeseen consequences and results occurring therefrom.  As a libertarian I believe that most people should be able to make up their mind on most decisions.  Like most things, I am not an extremist in my view and think all laws should be abolished, but there are certain instances where I just don’t get why people care.

For example, I can’t for the life of me figure out why people are against prostitution.  Two consenting adults entering into a contract for services.  If they aren’t adult or its not consulting then you would have laws and penalties just like we do today (hell they may be even more effective if the policies didn’t have to stop the former situation).  Similarly, I never understood why marijuana was illegal.  It seems relatively harmless when compared to what someone can do with a legally purchased bottle of booze.  I always thought, legalize it and tax the hell out of it!  Well, as of this blog post two States have gone that way (Washington and Colorado although the laws regarding marijuana legality are changing at a rapid pace).

Well it turns out, the “legalize it and tax the hell out of it” mantra that I often spouted may have some problems!

What is Tax Neutrality and How does it Apply to Marijuana?

There is an economics doctrine known as Tax Neutrality which is explained by Jason Furman much better than I could ever imagine in his testimony to congress about general tax reform a few years ago,

The primary purpose of the tax system is to raise the revenue needed to pay for government spending. As such, the goal is to raise this revenue without distorting the decisions that individuals and firms would otherwise make for purely economic reasons. For example, an efficient economic system people would choose between chocolate chip cookies and oatmeal cookies based on their own personal tastes and the costs of these products. If policymakers imposed a tax on chocolate chip cookies but not on oatmeal cookies the result would be that and possibly end up consuming the less desirable cookie because it was cheaper.

neutralities in the tax system also lead people and firms to devote more socially wasteful effort to transforming the form or substance of their activities to reduce their tax payments, for example by hiring lawyers and accountants to structure financial transactions in a manner that minimizes tax liability.

In some cases deviations from a neutral tax system are unavoidable. It is widely agreed that tax payments should increase with some measure of well-being, like income, consumption or wages. One inevitable consequence of this agreement is that the market consumption of goods and services will be taxed, either directly (as in a consumption tax) or indirectly (as in an income or wage tax, both of which tax the money used to purchase consumption goods). Time spent is not taxed. As a result, people will which is equivalent to a reduction in labor supply. Whether this is a quantitatively large or important effect is another question, but at a conceptual level this is a way that the tax system departs from the neutral ideal.

In other cases, deviations from a neutral tax system reflect the goals of policymakers. The tax system is designed to encourage home ownership, contributions to charity, health insurance, and higher education and to discourage smoking and drinking alcohol.

Well, Colorado’s recent experiment has brought the idea of tax neutrality truly front and center.

Imagine if you will, you are a regular user of Cannabis in Colorado, and you already had a prescription to obtain your drug of choice.  Every time you went and bought said legally prescribed drugs you paid a tax of 2.9%…would you really rush out to change your purchasing habits to pure recreational which carries a 25% tax?  Probably not and that is what Colorado is finding out.

According to CNN Colorado,

expected to raise $22.7 million before July from special sales taxes on recreational marijuana, but state economist Larson Silbaugh is skeptical. About $3.4 million was raised in January and February, the only months for which sales have been reported so far.

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The forecast was cut because fewer people switched from buying medical marijuana to buying recreational marijuana than was first expected, Silbaugh said.

Medical marijuana users need to get approval from a doctor to buy the drug, but the state taxes those sales at just 2.9%. Recreational marijuana is taxed another 25%.

The article was written in March 2014, and it looks like March was a good month for pot sales, but the problem of unintended consequences is still readily apparent when you try to control a population through taxes.