Taxing marijuana: starting point

The Opinionator feature in the New York Times today, http://opinionator.blogs.nytimes.com/2009/07/20/drill-baby-drill-and-legalize-baby-leglalize/, points to a piece, http://gregor.us/uncategorized/marijuana-first-then-the-oil/, advocating the taxation of marijuana. It may be time to think that idea through.

(Bills in at least two States would tax marijuana. In California, Assembly bill 390, http://www.leginfo.ca.gov/pub/09-10/bill/asm/ab_0351-0400/ab_390_bill_20090223_introduced.pdf, would impose a tax of $50 an ounce. In Massachusetts, companion bills, http://www.mass.gov/legis/bills/house/186/ht02/ht02929.htm

and http://www.mass.gov/legis/bills/senate/186/st01/st01801.htm, would tax on the basis of potency, with rates ranging from $150 to $250 per ounce. Both bills would allow non-legislative authorities to adjust the rate (that power to adjust looks to me like a new and fresh idea): Massachusetts in either direction, California only down. More about these bills later, maybe.)

Figuring out a rate for marijuana starts but does not end with the competing interests of (1) keeping the rate low enough to deter bootlegging thugs like that no good Marlo Stanfield on “The Wire” on the one hand and (2) maximizing revenue on the other.

First, deterring bootleggers doesn’t necessarily mean totally eliminating them. Bootlegging to avoid Federal alcohol or tobacco taxes is not one of our major problems today, so an acceptable target might be to reduce marijuana bootlegging to that order of magnitude. I wonder if the public would tolerate the level of bootlegging involved with those trucks full of cigarettes headed from low tax States to high tax States. See http://politicalcalculations.blogspot.com/2007/10/business-of-bootlegging.html

Second, maximizing revenue would follow from knowing the elasticity of demand, I guess, but only if you plug bootlegging into that analysis: elasticity analysis will tell how much consumers would buy at what prices, but not whether they would buy from a taxed source or from a bootlegger. Buying from a bootlegger would involve nonfinancial risks or costs: the danger of illegality and the risk of buying something that lacks any imprimatur of genuineness or purity. In any event, “knowing” is a euphemism for what one can understand about the elasticity here – estimating is more accurate.

Beyond those two competing interests, there’s a third consideration, that of the street price. Meanwhile, consumers of marijuana (bless their hearts) would generally be happy enough to get legalization and would not be seeking a price cut. The opponents of legalization (bless their hearts, too) think marijuana is bad for society and would resist a price cut. It’s hard to see the opponents retreating on to taxation and legalization if they foresee cheaper marijuana – and they are in the majority now, at least in Legislatures. So if the revenue-maximizing rate resulted in a lower cost to the consumer than in today’s black market (because the criminal element got no take), it’s hard to imagine that outcome working politically. Any middle ground might well keep the street price at least at current levels.

Financial collapse, VAT issues, and golf

A friend and I agreed yesterday that The Greatest Nation on God’s Green Earth faces a choice between significant new taxes and financial collapse. Neither of us can imagine the public sitting still for new taxes (I blame the education system, which doesn’t teach financial literacy), but we don’t know how to prepare for collapse: will it take the form of hyperinflation (one should buy land, commodities, and stocks) or depression (sell everything and hold cash)?

Rather than dwelling on doom, though, I’m reading Turnier, Designing an Efficient Value Added Tax, 39 Tax L. Rev. 435 (1984) (not available online – sorry – but plenty of VAT material is googleable), because if we are to avoid collapse, a Value Added Tax ought to be on its way. In that happy eventuality, Congress would help out “politically favored businesses,” id. at 443. It’s instructive just now to watch the North Carolina Legislature sort through the claims of providers of services that it might tax.

For one thing, providers jump at the chance to say taxing them would be regressive, and here’s an example:

“’The bulk of our business is the blue collar worker,’ said Del Ratcliffe, president of the North Carolina Golf Course Owners Association.” http://politics.mync.com/2009/07/nc-tax-overhaul-still-alive-in-budget-talks/. Here’s the Association’s flyer, making the same point and referring to “’average’ people”: http://site.golfkeepsusgoing.com/uploads/Recreation_Tax_Bullet_Points.pdf.

Reasonable people may disagree about what to tax: as Professor Turnier says, "a pluralistic democratic society such as ours (with a governing process which places a premium on compromise) can be expected to produce a tax system replete with special treatments and exemptions." Id. at 470. I think taxing golf would hit the wealthy less than taxing legal services and more than taxing tatooing. But regressivity isn't the only issue. I would tax legal services because we could, like Japan, do well with fewer lawyers, and I would tax tatooing because I'm a square. Golf, I don't know, but there are those pesky pesticides. http://www.pesticide.org/golfcourses.pdf.

NC: Repair, maintenance, and installation services

If I were a contractor in North Carolina, I might be tempted undercharge for parts and to overcharge for services to try to beat the sales tax system, for the State pretty much tries to tax sales, but not services. (I leave aside how FICA might apply.)

But a proposal, http://www.ncleg.net/Sessions/2009/Bills/Senate/PDF/S202v6.pdf, would tax:
“(33e) Repair, maintenance, and installation services. – The term includes the activities listed in this subdivision:
a. Repairing tangible personal property to restore it to proper working order.
b. Maintaining tangible personal property to keep the property in working order, to avoid breakdown, or to prevent unnecessary repairs.
c. Installing tangible personal property.”

This proposal could take away an incentive at the State level to turn A into B, so it works toward simplicity, I think.

Simplicity, in my view, with respect for those who condemn the Revenue Code for its number of pages, can sometimes also result from having many words make light work. People make fun of lawyers for listing terms that overlap or worse like “I sell, assign, transfer, and convey,” but we are trained for overbreadth as opposed to letting something slip through the cracks. Recently, to ease the pain of idleness, I took a look at what some other jurisdictions do. Here are my favorites:

Florida lists:
“adjusting, applying, installing, maintaining, remodeling, or repairing tangible personal property,”
http://dor.myflorida.com/dor/taxes/repair_services_sut.html

Ontario lists:
“install, assemble, dismantle, adjust, repair, or maintain items, or install, configure, modify or upgrade a taxable computer program,”
http://www.rev.gov.on.ca/english/guides/rst/601.html. Among examples listed are battery charging, garment alterations, and for the ice hockey fans, skate sharpening.

And getting down to the capillaries, Ontario taxes “potted plant maintenance, if the planters are moveable.” But not if they are built in, I guess, on the theory that built-in planters are real property rather than personal property. Meanwhile, our Governor’s proposal, reachable via http://www.news-record.com/blog/53964/entry/63759, would raise a whopping $232 million in 2010 from a line item called “Property and Some Personal Services.” I don’t know what that means, but I wonder if it extends to services involving real property – in which case it might cover even solidly anchored potted plants.

“Altering” personal property might be a useful catch-all (I saw this in some jurisdiction’s list, but failed to note where). A seamstress or tailor shouldn’t have to create separate categories for (1) expanding my pants’ waist from 34 to 36, which is not a repair, and (2) repairing a seam that split because I ate so much that the pants burst open.

But maybe that expansion ((1)) is covered by the NC proposal as a service “to prevent unnecessary repairs.” But I don’t know what to make of the word “unnecessary.” If I keep exercising, that repair won’t be necessary. Maybe that’s a thicket we could avoid by saying just “to prevent repairs.”

Sunsets in Governor Perdue's July 7, 2009, Proposal

A friend told me Governor Perdue just let out her tax plan, findable by clicking via http://www.news-record.com/blog/53964/entry/63759.

There are many line items I can’t decipher, but I’ll start with sunsets: automatic termination of rules. The Governor would sunset a number of tax increases. Now I imagine we can find plenty of waste, fraud, abuse, corruption, and irritating bureaucracy here in North Carolina or wherever (and let’s attack all that), but I also understand that just having a road from my house to the grocery store and to the doctor’s office (not to mention having the police) is worth everything I pay in taxes many-fold, so I like sunsets on tax cuts, not on tax increases.

Sales tax sunset

Sunsetting the sales tax increase on October 1, 2010 saddens me. I doubt that our budget will magically come into balance by then, so I suppose the responsible Legislators willing to vote for unpopular taxes today will have to do it again next year. Sorry for the cliché, but this is like cutting the cat’s tail off an inch at a time.

Income tax sunset

Sunsetting the increase in the income tax for folks with huge incomes has the minor benefit of maybe keeping someone from moving away forever in rage or frustration. I can imagine that if the increase were permanent, someone might say, “That’s it. I’ve had it. I’m out of here,” sell out, and leave the Land of the Long Leaf Pine, for a three-quarters of a percent increase, the proverbial straw. But between now and December 31 of next year (2009 is included, I think, if the proposal follows a Senate [make that House] bill, http://www.ncga.state.nc.us/Sessions/2009/Bills/Senate/PDF/S202v6.pdf), will people sell out in this depressed real estate market? Maybe not, but we can probably figure on more folks following the path of a friend of mine who spends at least 183 days in income-tax-free Florida every year and carefully charges something on his credit card there every day to prove he’s not a North Carolina resident.

Automatic sunset

I guess you could solve this problem by saying, “If sales tax receipts in August 2010 equal or exceed $X, this temporary emergency sales tax increase expires on September 30, 2010.” Or something. The idea would be that sales tax receipts are a good measure of economic activity, and to set the $X to sunset the tax if the economy is recovering, but to continue the tax if not. A month’s sales tax receipts might not be enough (are we keeping that strange back-to-school sales tax holiday in August?). And August’s receipts might not be knowable in time for early October action. And that $X threshold creates an undesirable cliff, where one dollar (with rounding, a penny) creates an enormous difference. And there may be a better formula than sales tax receipts, though using sales tax receipts would give more certainty than “a [Federal] rule that would sunset some portion of a legislated tax cut if revenues fell below some x percent of GDP,” http://ntj.tax.org/wwtax%5Cntjrec.nsf/E01BF9150131151385256F3A006591D4/$FILE/Article%2003-Penner.pdf, since GDP (or the State’s actual budget position) takes more interpretation to measure than sales tax receipts take. And sales tax receipts or any formula might not give Legislators much cover. But it’s worth thinking about.

Evaluating and locating intangibles

Figuring out the source of income of a cross-border corporation (maybe multinational enterprise is the current lingo) is a task I have left to folks, including some of my best friends, with more patience than I have. The arm’s-length method was a joke, the last time I looked, so worldwide unitary apportionment is my only hope.

The traditional unitary formula weighs property, payroll, and sales equally. That equal weighting may have made sense before we had an information economy, but now, as Charles Kingson pointed out in the inaugural David A. Tillinghast Lecture on International Taxation, 51 Tax. L. Rev. 639, 658 (1996), the property element would force people to “evaluate and locate increasingly elusive intangibles.”

Not only do we have trouble both locating and evaluating intangibles, we may not want to. North Carolina, my State, is racing other States, Commonwealths, and probably the oddly named “State of Rhode Island and Providence Plantations,” http://www.nytimes.com/2009/07/05/opinion/05vowell.html?scp=1&sq=Plantation&st=cse, to the bottom by begging companies to bring in property and payroll. Like a developing country, we are looking for ways to give away our tax base to corporations -- this from the Democrats.

I don’t argue that single-factor apportionment using only sales measures income accurately, but neither does the current system. At some point, even if you know where income arises, measuring it gets so difficult that a VAT looks good.

Regressivity of taxing internet sales

North Carolina was trying to tax Amazon and other internet vendors on the nexus of commissions they paid local people who linked to the out-of-State company that made sales from those links. Amazon and Overstock are cancelling those commission deals and proclaiming we can’t touch them. That preposterous “no nexus” dodge, based on the legislative power of the Supreme Court, is a topic for another day, maybe, but the claim that taxing internet sales is regressive is worth a moment. That claim is often made without analysis, as in http://forums.slickdeals.net/showthread.php?t=794298 and http://www.bluenc.com/amazon-sucks (“new or added sales taxes are regressive”).

Well, sales taxes in general are regressive. Taxing salt, for example (see http://en.wikipedia.org/wiki/Salt_Satyagraha), is way on up there. But not all sales taxes are regressive: what is a luxury tax other than a sales tax?

About internet sales, I'm not buying the regressivity argument. The kinds of things I buy via the internet are not necessities. Those things have a high value to weight ratio, not the characteristic of most necessities. Food, for example, is a necessity, but food ordered over the internet will tend toward expensive, luxury items. (Prescription drugs are a necessity and cut the other way, but they must make up a small fraction of internet sales.)

There’s some interesting data from 2008 at http://blogs.zdnet.com/ITFacts/?p=14001, which says that of folks who had bought online then, 19 percent had incomes over $100k, while 13 percent had incomes below $25k; of folks who had not bought online then, 7 percent had incomes over $100k, while 19 percent had incomes below $25k.

I don’t know enough about regressivity to make much of a conclusion. Amazon probably has a lot of data – ZIP codes would tell a lot – about the demographics of its customers, but I’m not holding my breath for disclosure.

Anyway, if you don't have a fixed address, computer access (OK, the library can supply that), internet literacy, and a credit card, I don't see how you can buy stuff over the internet.

Taxing services

Every country seems to making its own decisions on what items or services bear a Value Added Tax.

Europe “allowed the application of a reduced VAT rate to certain specified labour-intensive services, but only for an experimental period of three years so as to test its impact [extended time and time again, now until 2010 at least], in terms of job creation and in combating the 'black' economy.

“The list of categories to which Member States were authorised to apply the reduced rates were:

• The repairing of:
• bicycles
• shoes and leather goods
• clothing and household linen (including mending and alteration)
• Renovation and repairing of private dwellings, excluding materials which form a significant part of the value of the supply
• Window cleaning and cleaning in private households
• Domestic care services (e.g. home help and care of the young, elderly, sick or disabled)
• Hairdressing.”

http://ec.europa.eu/taxation_customs/taxation/vat/how_vat_works/labour_intensive_services/index_en.htm

That’s just an example.

Now North Carolina faces an analogous issue as the Legislature considers imposing tax on more services. The issue of which services to tax seems like just what legislative branches are called to do: log rolling and politics about issues that people can understand. I think it’s fine to consider every service on its own merits (or connections or whatever), and for States to come up with unique sets of services to tax. See http://www.taxadmin.org/FTA/pub/services/services.html (the spreadsheet shows the variety).

Since everyone can have an opinion:

Start with tattooing, I’d say, on the hunch that tattooed folks don’t vote and other folks wouldn’t mind. After tattooing, I nominate legal services. It’s OK to discourage writing fine print and designing golden parachutes. But legal services seem to off the table here:

“While about 50 new services would be taxed, professional services by attorneys and accountants would not be.

“Sen. Dan Clodfelter, co-chairman of the Senate finance committee, said these professional services were excluded because most of their costs are tied up in health care and real estate, and the higher taxes would raise these industries' costs substantially.”

http://www.charlotteobserver.com/local/story/790665.html

I don’t follow that argument. The professionals don’t pay the tax, the user does. Now maybe there is an economic argument that the professionals bear the burden, but I haven’t seen it. By analogy, it would seem a new and fresh idea to determine sales taxes on the basis of whether the seller’s gross margins are close to its net margins (grocery stores have lots of assets tied up in real estate and inventory, but we tax food more lightly to fight regressivity and to enable survival), and I don’t see why services should be different. Maybe I’m missing something.

Which services to tax is an inexhaustible topic. I tend to oppose taxing tuxedo rentals, which do not seem like a luxury. That tax would hit every high school kid for whom the prom is the biggest event so far. I'd tax 'em if they rent a limo, because that seems like a luxury, but a tuxedo is a necessity for that rite of passage. Wealthy folks own tuxedos, poor folks rent. Still, the purchaser of a tuxedo pays a sales tax.

And you soon get into the capillaries of policy: are massages a luxury that should be taxed, or therapy that should be exempt? Our should we try to distinguish? And so on.