Smuggling and Excise Tax Evasion for Legalized Marijuana

This paper explores three lines of evidence that may shed light on whether marijuana excise tax revenue could be threatened by black market sales and smuggling: (1) Comparing the Ammiano Bill’s proposed $50 per ounce tax to various other current and proposed excise taxes on a variety of metrics, (2) Placing a $50 per ounce tax in the context of cross-sectional state-level data relating tobacco smuggling to tobacco excise taxes, and (3) Comparing the tax to current marijuana prices on a per pound basis. This exercise suggests that: (a) As compared with other familiar excise taxes, a $50 per ounce excise tax on marijuana is either very high or truly unprecedented depending on the metric employed, (b) California should expect at least some degree of tax evasion; it is hard to see why evasion would be less of an issue than it is with cigarettes, (c) California should not rule out the possibility that tax evasion would wipe out essentially all of the potential revenues from a $50 per ounce excise tax.