Pot Taxes Can Help Municipal Kettles Get into the Black
A version of this commentary appeared in the St. Louis Post-Dispatch.
When Missouri voters approved the ballot initiative legalizing marijuana last year, one part of the plan authorized cities and counties to enact a three-percent tax on marijuana sales in their communities (once again upon voter approval). Not surprisingly, many local governments in the St. Louis-region are attempting to do just that this coming April. The argument in favor of voters approving the tax is straightforward enough, but the debate over what to do with the new tax revenue is more complex.
“Pigouvian” taxes are taxes levied on certain goods to address their negative effects. They are common and include special taxes in Missouri on items like cigarettes, alcohol, and pool tables (yes, really, pool tables). Tobacco and alcohol consumption impose certain costs on society, and the extra tax revenue is used to fund services to address those negative effects, like lung cancer research and drunk driving enforcement. In addition, the taxes simply make the item more expensive, thereby reducing consumption. Elsewhere, for example, gas taxes may be quite high not only to fund roads but also to encourage public transit. Marijuana legalization will indisputably have some negative societal effects, and the three-percent local sales tax on it can help fund services like county health departments and municipal police efforts to mitigate those negative impacts. Also, life is not a Cheech and Chong movie—dare to dream that it were! —and cheap pot really doesn’t do anyone much good. I generally support neither new nor high taxes, but the argument in favor of these new local marijuana sales taxes is very strong.
What to do with the money is more difficult. There are two questions: Should the revenue be dedicated to certain uses or sent to the general fund? And should it serve as new revenue or be used to cut taxes elsewhere? Economists have long debated the costs and benefits of earmarking taxes for specific uses. Directing taxes into the general fund gives local officials more flexibility to address local needs, but earmarking taxes improves both voter and elected-official decision-making and accountability. In some cases, as with cigarettes, the harms to society are easy to determine. Accordingly, the choice to earmark tobacco taxes to health-related fields, as we generally do in Missouri, is defensible. Legal marijuana, however, will be more like alcohol, with costs and harms (also called externalities) to society spreading across a variety of sectors. Should the tax revenues go to policing? Health care? Family services? Frankly, who knows? This is why alcohol taxes generally are not earmarked in our state, nor should local marijuana taxes be.
Politicians will try, as is their wont, to treat the new marijuana tax revenue as manna from heaven. Voters should demand more from them as we approach the elections. A new marijuana tax should not just be an opportunity to raise more revenue. It should also be an opportunity to replace other, more economically harmful taxes. St. Louis County, with its high commercial property surtax, should use the marijuana revenue as a justification for a surtax reduction. Cities such as University City with the woeful economic development sales tax—a misnomer if there ever was one—should use the marijuana revenue to replace that useless tax. It could be a small part of a larger package to help phase out the earnings and payroll taxes in St. Louis city. And, yes, at a minimum it should replace the anachronistic pool table taxes implemented long ago in the days of seedy pool halls, gangster molls, and bathtub hooch.
There is, unfortunately, one question mark hanging over the upcoming votes. The question of whether a county-level marijuana sales tax will apply countywide or only in the unincorporated areas is unclear and will likely be determined in court. The budgetary implications for counties are enormous, as the revenue difference between the two options is substantial. If county taxes are determined to be in addition to municipal taxes, that could make the total sales tax for marijuana purchases well above twenty percent. A sales tax that is too high is concerning because it might encourage the illegal market for marijuana to continue, as has happened in California. This would nullify one of the purported benefits of legalization.
Marijuana taxes are an opportunity to improve both the current budgets and the long-term tax environment for cities and counties. Voters should demand a plan that does both.
