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Tax Issues Related to Pot Legalization in California

Legalizing marijuana in California would have multiple, wide-ranging effects, both inside and outside the state, with tax implications across a wide spectrum. Ongoing debate concerning the subject routinely features discussion of tax litigation, tax evasion and tax fraud.

The RAND Corporation ("RAND"), a Washington, D.C., public-policy think tank, states that legalizing pot in the state could result in a drastic reduction in prices and a corresponding - though hard to estimate - rise in consumption.

The issue is fraught with matters related to tax and public budgets. Last year, the California Board of Equalization estimated that taxing legal marijuana could bring the state treasury more than $1 billion a year. RAND states that the actual amount could vary widely from that figure, owing to factors that include the level of tax levied upon a legal sale and to tax evasion.

Looking forward, various propositions and bills are sure to capture the public's attention. Proposition 19 on the November 2 ballot this year would make legal to persons over 21 the possession, growing and transport of marijuana for personal use and leave to municipalities the decision whether to regulate and tax commercial production and sales. Pending Assembly Bill 2254 would establish a $50-per-ounce surcharge to fund education and rehabilitation programs. (RAND estimates that legalization before factoring in a state tax levy could reduce the cost of pot nearly tenfold, from about $375 an ounce currently to approximately $38 an ounce. Adding a $50 tax per ounce would still make legalized marijuana markedly cheap when compared to present costs).

The RAND study also notes that "taxes on exports could dramatically increase California's tax revenues."

As to the increased consumption, RAND states that, allowing for a tax of $50 per ounce and "a moderate rate of tax evasion around 25 percent," marijuana use could increase up to 100 percent, which would be close to what it was in the late 1970s.

Related Resource: MercuryNews.com "Legalizing pot would lower prices, raise use, study says" July 7, 2010

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