As nationwide political momentum for marijuana legalization grows stronger, a recent estimate shows potential revenue from a marijuana taxes could result in an approximately $3 billion increase in available state funds. Although the general underpinning of the estimate , published by NerdWallet, has been subject to criticism for relying on data not available to other economists, it may continue to fuel states’ willingness to pursue marijuana legalization as a means to raising state and local government revenue. Estimating the size of states’ revenue gains as a result of marijuana legalization has proven difficult. Currently, Washington and Colorado are the only two states that tax marijuana. Tax revenues in Washington are within the projected range, while Colorado’s tax revenues have failed significantly to live up to initial estimations. Colorado’s projection error has largely been attributed to the slower than anticipated transition from medical marijuana use to recreational marijuana use (for further background and detail, see our previous research ). Recently, however, retail marijuana sales in Colorado have exceeded sales of medical marijuana. Meanwhile in Oregon and Alaska, where a ballot vote for legalization of marijuana will take place in November, the approach to assessing the impact of taxing marijuana differs. Oregon’s Legislative Revenue Office projected a $16 million potential boost of state funds in fiscal year 2017, rising to $20-$25 million in 2019. Alaska, on the other hand, has decided not to conduct a study until the Measure 2 initiative is approved. NerdWallet estimates claim potential revenue gains in Oregon and Alaska could be in the range of approximately $50-$100 million and $10-$20 million, respectively. The discrepancy betwen the NerdWallet and the Oregon Legislative Revenue Office estimate is stark. Although NerdWallet’s estimate is illustrative, it is significantly higher than the Oregon Legislative Revenue Office ’s estimate for both 2017 and 2019. The key reasons for this difference are that NerdWallet uses high-level national estimates, such as the total estimated size of the U.S. marijuana market, as well as a higher assumed tax rate, to infer revenue potential. The Oregon Legislative Revenue Office, conversely, uses more state-specific data, which likely makes it a more reliable indicator. Moreover, in light of the official pre-vote revenue studies administered by Colorado, Washington, and Oregon, the absence of a revenue assessment in Alaska is concerning. Alaska Governor Sean Parnell (R), who is opposed to legalizing marijuana , has refused allocation of funds toward a state sponsored estimate of potential revenue gains until Measure 2 is approved (the Alaska Department of Commerce, Community, and Economic Development has nonetheless conducted a ”cost study,” estimating first-year implementation costs to be in the range of $3-$7 million). As expected, the process of implementing marijuana taxes is complex. Recent developments in Oregon exemplify this as a number of cities in Oregon have pre-emptively decided to levy a city tax on marijuana, despite such a tax being prohibited in Oregon’s Measure 91 . Cities are pushing for such taxes in the hopes of being ”grandfathered into” the new tax regime. NerdWallet’s report accurately points out that states stand to enjoy a significant revenue windfall if marijuana sales are legalized and normalized, such that they can be easily taxed. However, the usefulness of their state-level assessments are limited, because they make broad assumptions about each state based on national approximations, while state revenue offices tend to use more granular data. Furthermore, gauging the revenue capacity of a potentially prohibitive taxing structure is difficult. A tax levied to discourage consumption of a specific good tends to underperform over time and poses a challenge with respect compliance and administration costs. Against that backdrop, the potential revenue boost from taxing marijuana may be much more limited than some policymakers, and the researchers at NerdWallet, expect. Read more on excise taxes here . Read more on Alaska here . Read more on Oregon here .
In July, the DC Council approved a major tax reform that cuts income and business taxes, expands the low-income tax credit, and applies sales tax to items exempt by historical accident, all based on the recommendations of a blue-ribbon commission. Effective today, consumers must pay the 5.75 percent sales tax on the following transactions: Bottled water delivery Storage rentals and leases, including self-storage Carpet and upholstery cleaning Health club and tanning services, including gym and fitness memberships Car washes Bowling alleys and billiard parlors Ending the health club loophole proved the most controversial, with local gym Vida Fitness and a number of yoga studios launching a campaign to preserve their tax break that talked a lot about obesity and fitness and didn’t mention the income and business tax cuts that were part of the package’s tradeoff. (Vida itself will see a tax cut.) Our map below, showing the 24 states that apply sales tax to fitness memberships and services, illustrates how there’s no discernible relationship between sales tax on gym memberships and obesity rates. On one hand, a lot of people have memberships and don’t go, and on the other, a lot of people exercise in ways that don’t involve high-priced membership payments. Fun fact: if you compare the map with the United Health Foundation’s 2014 America’s Health Rankings report, only two of the top 10 healthiest states, Massachusettes (#5) and Colorado (#6), exclude gyms and fitness club memberships from their sales tax bases. Despite winning mayoral candidate David Catania (I) to Vida’s cause, a broad coalition supported the tax reform package, and the DC Council approved it overwhelmingly . The rest of the package , which takes effect in 2015: Middle-income taxpayers (those between $40,000 and $350,000) will see their tax rate drop from 8.5 percent to 7 percent next year, then 6.5 percent the year after that. Those earning up to $1 million will see their tax rate drop from 8.95 percent to 8.75 percent. All taxpayers will see more generous standard deductions and personal exemptions, as they will be increased to match federal levels. Childless low-income workers will see a larger Earned Income Tax Credit (EITC), from 40 percent of the federal credit to 100 percent of the federal credit. The District’s hefty business tax will drop from the current 9.975 percent to 9.4 percent (2015), 9 percent (2016-17), 8.5 percent (2018), and then to 8.25 percent (2019), and the District will adopt single sales factor apportionment. The estate tax threshold will be recoupled to federal law.
We’ve been asked which states adjust their gasoline tax for inflation. Most states (and the federal government) define their gas tax in so many cents per gallon, which can make a difference as time passes and inflation erodes the purchasing power of that tax rate. For example, the federal motor fuels tax today generates one-third fewer dollars in real terms since 1993 , when it was last increased. Inflation-adjusting your gasoline tax can prevent this, although it also means you’re writing automatic tax increases into law. 3 states adjust their gasoline tax for inflation based on the Consumer Price Index: Florida, Maryland (effective 1/1/13), and New Hampshire (effective 7/1/14). Massachusetts will begin doing so on 1/1/15, assuming it is not repealed by voters in November . Maine formerly adjusted for CPI but repealed that effective 1/1/12. 4 additional states and DC adjust some portion of their gasoline tax for the wholesale price of gasoline: Kentucky, North Carolina, Virginia, West Virginia, and the District of Columbia. 1 additional state adjusts the gasoline tax for state transportation revenue needs: Nebraska. Additionally, some states collect their sales tax in whole or in part on gasoline purchases: Hawaii, Illinois, Indiana, and Michigan. California applies a partial “sales tax” on gasoline on the wholesale price. New York collects local sales taxes on gasoline. Check out current gasoline tax rates here .
In June 2014, the Internal Revenue Service released a “ Taxpayer Bill of Rights ” at the recommendation of the Taxpayer Advocate Service. The publication attempts to clearly outline the fundamental rights a taxpayer has when filing their returns and dealing with the IRS in general. In an attempt to further distribute this information, the IRS created a YouTube video on the topic, which was posted on September 3rd. The video itself features IRS Commissioner John Koskinen, who briefly runs through the ten rights featured in the Taxpayer Bill of Rights: The Right to Be Informed The Right to Quality Service The Right to Pay No More than the Correct Amount of Tax The Right to Challenge the IRS’s position and Be Heard The Right to Appeal an IRS Decision in an Independent Forum The Right to Finality The Right to Privacy The Right to Confidentiality The Right to Retain Representation The Right to a Fair and Just Tax System Informing taxpayers of their rights is a movement in the right direction in regards to making the tax system more transparent and just. In future analysis, I will look at the effectiveness of these policies and how the IRS enforces them. Follow Amber on twitter
Last week, Chile’s President Michelle Bachelet signed legislation that would reform much of Chile’s tax system in order to raise tax revenue for the country. This law would raise the top corporate income tax rate from 20 percent to 27 percent by 2017. The law also creates a separate corporate tax regime that would start taxing corporate dividends on an accrual basis. This is in contrast with their current system, which levies a tax on shareholders only when dividends are distributed. The new Chile law will deem profits distributed at the end of each year, subjecting it to a 35 percent tax rate (after a credit for corporate taxes already paid). This doesn’t only hit domestic shareholders, but it also hit foreign investors as well. Chile also introduced a carbon tax, which is estimated to raise approximately $160 million. There are other smaller changes to how capital gains are calculated, full expensing for certain businesses, doubling of stamp taxes, a minimum tax on foreign earnings, introduction of CFC rules, and an end to loss carrybacks. Overall, this is meant raise approximately 3 percentage more in tax revenue as a percent of GDP annually to pay for expanded social services. While it is typically not news that a non-U.S. country makes significant changes to its tax code, it is atypical for a country to actually raise its corporate income tax rate or taxes on investment. In the past few decades, countries in the OECD (Chile is a member), have continuously lowered corporate income tax rates to become more attractive to investment. Chile is now working against this trend and will actually have one of the highest corporate income tax rates in the developed world and will have a less attractive business tax environment. Unfortunately for Chile, this will likely have a negative effect on investment and growth , especially considering that the tax changes hit foreign investment significantly. More on Chile’s Tax Reform: Here
Chile has for many years had one of the lowest corporate tax rates in the developed world, and also one of the fastest rates of economic growth. Between 2000 and 2010, Chile’s corporate tax rate was 15 to 17 percent, lower than that found in any developed country except Ireland. Over the same period, Chile’s economy grew about 45 percent , more than any country in South America and more than all but 4 other developed countries. See the chart below. In 2011 , Chile hiked the corporate tax rate to 20 percent, one of only two developed countries to do so that year (Iceland was the other). Now, as of this week , Chile’s new government signed into law a further increase in the corporate tax rate to 27 percent by 2017 and to 35 percent thereafter. This would be an interesting experiment, except that we already know what’s going to happen with a pretty high degree of certainty. The economy will tank, it is only a matter of time. Indeed, it appears investors, businesses and other forward thinking economic actors are already reacting : An economic slowdown continues to grip world No. 1 copper producer Chile, government data showed on Tuesday, as manufacturing production posted its biggest monthly drop in two years and the jobless rate crept higher. Factory output fell 4.9 percent in August from a year earlier, well below market forecasts, while the jobless rate for the June to August period rose to 6.7 percent. “In August, there was reduced dynamism in the domestic economy, in particular in manufacturing production,” the government’s INE statistics agency said. There are two lessons, which even the slightest regard for history reveals: 1) Don’t increase the corporate tax rate. It doesn’t help the workers or lead to “better opportunities for inclusive development”, as Chile’s president claims. 2) Businesses and other planners are forward thinking, so they will immediately reduce activity in response to a scheduled or even publicly discussed future increase in taxes. Follow William McBride on Twitter