There are different ways to design and apply a tax. Depending upon the exact tax structure, this can result in similar or different effective tax rates across a range of products or activities. At the request of Senator Boquist, our office recently looked into the effective tax rates here in Oregon on recreational marijuana and tobacco products. We presented the following information to the Senate Finance and Revenue Committee and the House Committee on Revenue, however it did not make it into our quarterly publication.
Right now Oregon taxes marijuana at a fixed percentage of the sales price (17% for the state, with a local option of up to an additional 3%). This type of tax is usually referred to as ad valorem, meaning the tax increases in proportion to the price. Given the way ad valorem taxes are applied, it means the effective tax rate is equal to the statutory tax rate. Additionally, as I said at the forecast release, and a quote that made it to Twitter, a benefit to this type of tax is that it applies equally to both higher-end and lower-end products.
Even as Oregon does not have a general sales tax, we’re all familiar with this type of tax. What it means is that recreational marijuana customers will pay about $1.50 in state taxes per gram based on average sale prices as reported by the Department of Revenue.
On the other hand, tobacco products are usually taxed based on a fixed amount per product, or what can be called a specific excise tax.
In the case of cigarettes, the federal government levies a $1.01 tax per pack, while Oregon adds an additional $1.32 per pack. Since these taxes are fixed, it means the effective tax rate per pack depends upon which product a consumer buys. In doing some admittedly unscientific research on what cigarettes cost today, I went into three convenience stores/gas stations in the Portland and Salem area. What follows is a stylized example based on this window shopping. Average prices across the state based on what customers actually purchase will differ, but will generally fall within the ranges discussed below.
Name brand cigarettes like Camel and Marlboro seemed to cost about $6.50-$7.00 per pack. This means the effective tax rate on name brand cigarettes is around 50% (taxes paid as a share of the pre-tax price, or taxes paid as a share of the price excluding taxes). For generic brands, the purchase price per pack is considerably lower, less than $4.50 per pack. However given that the taxes per pack remain the same regardless of brand or price, that means the effective tax per pack skyrockets up to more than 100% in many cases.
A similar pattern can be seen when it comes to moist snuff, although effective tax rates appear to be somewhat lower than for cigarettes.
Even as taxes can be applied in different ways, they can also be calibrated to result in similar effective tax rates if desired. That said, one of the goals of M91 that legalized recreational marijuana was to keep taxes low to encourage conversion from the black market into the legal market. There are lots of policy goals and ideals when it comes to taxation beyond strictly talking about effective tax rates.
Finally, for comparison purposes we showed how large each revenue source is for the state. At roughly $60 million in tax revenue, marijuana and other tobacco products (mostly moist snuff but also cigars and loose tobacco) are considerably smaller than cigarette tax revenue at more than $200 million per year.
In terms of where these revenues go, and which programs they are spent on, it really varies by product. For example, none of the marijuana revenue goes to the General Fund, which is a common misconception. For a full breakdown of where these monies are dedicated, see Table B.6 in Appendix B (PDF) of our forecast document.