Kamala Harris' MJ Tax Proposal

Sen. Kamala Harris (D-Calif.) and House Judiciary Chair Jerry Nadler (D-N.Y.) have introduced a measure to remove marijuana from the controlled substance list and impose a 5 percent federal sales tax on pot sales.

Removing marijuana from the controlled substance list would allow marijuana businesses to deduct routine business overhead expenses — something the industry has been seeking for years that was barred by IRC 280E. How would this affect Federal tax collections?

Some basics about the marijuana industry:

The "Marijuana Business Factbook" predicts combined medical and recreational marijuana sales will grow between now and 2023:

2018: $8.6 billion to $10 billion 2019: $11.2 billion to $13.7 billion 2020: $15.7 billion to $19 billion 2021: $19.4 billion to $23.5 billion 2022: $22.4 billion to $27.4 billion 2023: $25 billion to $30.4 billion

Our own analysis of available (reasonably reliable) industry data indicates that, notwithstanding their arcane product, mature Marijuana Dispensaries operate a lot like other retail establishments.

Gross Margin: 52.4% to 58.4% of sales (Midpoint = 55.4%) Administrative Overhead: 40.3% to 45.3% of sales (Midpoint = 42.8%) Pre-Tax Net Income: 12.2% to 13.1% of sales (Midpoint = 12.6%)

Assuming most, if not all, of the established Dispensaries are incorporated: tax collections under the proposed rule would be:

2018: LOWER by $350.1 million to $408.1 million 2019: LOWER by $457.1 million to $559.2 million 2020: LOWER by $640.8 million to $775.5 million 2021: LOWER by $791.8 million to $959.1 million 2022: LOWER by $914.2 million to $1.118 billion 2023: LOWER by $1.020 billion to $1.241 billion

While $4.2-$5.1 billion tax cut is not a "big number" by DC standards,* it is probably big enough to raise eyebrows among the budget conscious.

*) As Everett Dirksen is said to have said about DC budgets: "A billion here, a billion there, pretty soon, you're talking real money."

#TaxingMJ #TaxPolicy

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