Sin taxes on marijuana empirically fail – section 280e proves

There should be some correlation between the severity of a penalty and the seriousness of the crime, the penalty on a marijuana business depends upon an item (costs incurred) that is neither the harm to be taxed nor is correlated with that harm. The degree of caused by a denial of a deduction for an expense that produces income has no relationship to the nature of the offense and so is an arbitrary policy. But the treatment of a marijuana business by [section] 280E goes even further by denying a deduction for ordinary lawful expenses of a lawful business. Let us consider what justifications there might be for this provision and whether they can stand scrutiny. A. Sin Tax One possible justification for the denial of a deduction is that raising the tax costs of the dealer or producer will raise the cost of acquiring marijuana and, thereby, decrease the demand for it and reduce the amount of its use. In other words, the provision can be viewed as a kind of sin tax. The quotation above from the Senate Finance Report gives reason to doubt that was the Congressional purpose for the adoption of the provision, but nevertheless can it be defended on that ground? First, there is no reason to impose a sin tax on the medical use of marijuana. The use of medicine to relieve pain is not against public policy, and there is no reason to increase the cost of obtaining that relief. Indeed, increasing the cost would be contrary to the public policy of having medicine affordable to those who need it. At the very least, if the denial of a deduction were a sin tax, a distinction should be made between a purchase for medicinal use and a purchase for recreational use. (28) The question would be whether that distinction can be made in practice. The taxpayer could be required to show that the marijuana produced was held only for sale for medicinal purposes. If that requirement were made, marijuana dealers and producers would segregate the inventory dedicated to medicinal use from the rest of their inventory so that only the latter would be taxed. With the vast majority of states legalizing some form of marijuana for medical purposes, and even the DEA and FDA certifying that it has at least some medical benefits, it is worth noting that no other product or activity that has proven health benefits is subject to a sin tax. Even if that distinction were adopted, the imposition of a sin tax on recreational marijuana is questionable. In states where marijuana is legal, it is expensive to purchase it legally. It is probable that the tax law's denial of a deduction is a factor in the high costs. (29) Consequently, a black market has arisen that sells marijuana for much less than the lawful market. The deduction denial (which for this discussion we are treating as a sin tax) has the side effect of creating an incentive for a black market in which the dealers do not report and pay taxes. One negative of having a black market is that the government cannot regulate the production of the product to ensure that there are no harmful impurities in it.