1. Recognize There is a Limit to the Tax Burden the Industry Can Bear
Although some policymakers support legalization as a possible fiscal boon to state and local budgets because of the potential to levy special excise taxes, high tax rates will raise the final price to consumers on the legal market and allow the black market to remain competitive. Policymakers must remain aware that licensed marijuana businesses already must pay all standard business and sales taxes within their jurisdiction and that they are penalized on federal income taxes because they are not permitted to deduct ordinary business expenses. Additional excise taxes may be appropriate in certain circumstances, but complex systems that levy taxes at both the wholesale and retail levels combine to make the legal market uncompetitive. Regardless of any policymaker’s desire for additional tax revenue, a legalization effort should not cede market share to black market sources due to high prices on the legal market, as this would negatively affect public revenues and safety.