Nov. 5 (Bloomberg) -- Just two months before Colorado retailers begin selling marijuana for the first time in the U.S., voters will weigh in today on a 25 percent tax to help fund enforcement efforts intended to forestall federal intervention.
As the drug emerges from prohibition in Colorado, state officials and even existing medical marijuana dispensary owners say taxes are necessary to ensure there’s money to cope with uncertainties likely to crop up in a new industry being watched worldwide.
“We don’t want to be at odds with the federal government and have them swooping down into our state,” said state Senator Cheri Jahn, a Democrat from Wheat Ridge who worked on a task force that devised regulations for the new industry.
“We worked really hard to make sure we had tight statutes so there could be tight enforcement,” Jahn said. “Without funding, that cannot happen.”
The proposed pot taxes are among several ballot measures in Colorado today. Other issues include a $950 million state income-tax increase to finance education, local initiatives to restrict oil and gas drilling, and whether voters in 11 counties want to secede from the state after lawmakers passed the toughest gun-control laws in a decade.
Polls show a majority of voters approve of a proposed 15 percent excise tax on the wholesale price of retail marijuana that will go partly to fund school construction and a 10 percent sales tax to finance regulatory efforts. Even so, the passage of Proposition AA in a state with a long anti-tax history is not a sure thing.
If new taxes aren’t approved, money to police a product that is still illegal under federal law would come from the general fund, state officials warn. The department charged with regulating the state’s medical marijuana industry has said it doesn’t have sufficient resources to meet the demands of the existing 1,400 or so pot-related businesses.
The 25 percent tax burden will come on top of local levies and a 2.9 percent state sales tax. A dozen municipalities are asking residents to vote on additional taxes on retail marijuana sales. If voters approve them, levies on cannabis could climb to as high as 35 percent in some areas.
The city of Denver, home to the state’s largest number of medical marijuana dispensaries, is asking residents to approve a 3.5 percent local sales tax to pay for retail marijuana regulation.
“Ultimately the whole enforcement apparatus will fall on the municipal government,” said Denver Mayor Michael Hancock, a first-term Democrat.
“We’re going to need to make sure we have proper staffing to handle licensing and proper monitoring with enough inspectors,” he added. “We also have festivals and we have to keep the paperwork in line for those and special police officers who require special training, along with firefighters and medical health personnel.”
Taxation ballot initiatives are among the last steps in a series of actions to implement constitutional Amendment 64, approved by a majority of voters in 2012, allowing those 21 and older to possess up to an ounce of marijuana. Washington state also legalized pot last year. Recreational marijuana sales there will include a 25 percent tax each on producers, processors and retailers.
After weeks of debate, the Colorado legislature approved a bill to regulate the industry -- amending it 130 times -- in the session that ended May 8. The legislation reflected many of the 58 recommendations made by a task force convened by Governor John Hickenlooper last December.
The ballot initiative puts the state’s existing medical-marijuana firms, who initially are the only ones who will be allowed to apply for licenses to sell recreational pot, in a rare position of asking for a tax on their business.
“It’s unusual, but we’re in a lot of unusual positions in this industry,” said Andy Williams, president of Denver-based dispensary Medicine Man. “Marijuana is under the spotlight. It’s changing peoples’ attitudes and perception of the industry and showing the federal government we can handle this change.”
The federal government said in August it won’t interfere in the new recreational marijuana industry in Colorado and Washington if the states do a good job at regulating it.
The campaign for the marijuana tax was backed by Hickenlooper, a first-term Democrat, and Attorney General John Suthers, a Republican, and the state’s largest medical-marijuana dispensaries. Opponents included small business owners, activists and students.
Proponents raised about $67,000, compared with about $3,800 by opponents who took their case to the public by holding two free pot giveaways where they handed out 1,600 joints. Those in favor of Proposition AA, meanwhile, traveled the state speaking to local Lions and Rotary clubs in an effort to persuade older voters to approve new taxes.
“My biggest concern with this, since there are a number of other tax measures that Coloradans are voting on, is that when voters get to the voting booth they will be inclined to vote no on everything,” said Joe Megyesy, communications director for the Yes on Proposition AA campaign.
Some owners of smaller medical-marijuana businesses say additional taxes would harm them just as they’re trying to comply with new retail regulations. These rules require them to pay licensing fees twice if they want to sell products at retail and to separate production of their goods.
This is a costly endeavor for entrepreneurs like Jessica LeRoux who sells dispensaries handmade cheesecakes, chocolates and salty snacks infused with marijuana.
“When you’re making a baked product and your overhead is eight times more than a strip club and you have more cameras than a casino, the market is already over-regulated,” said LeRoux, whose Denver-based company, Twirling Hippy Confections, is five years old.
LeRoux and other tax opponents say high taxes on a new industry will deter tourists. It may also prompt Coloradans to grow their own pot -- Amendment 64 allows the cultivation of as many as six plants a person -- or force them to go to the black market, they say.
“We want to give the marijuana industry a fair chance,” said Larisa Bolivar, executive director of the No on Proposition AA campaign, “and not overtax it so people go back to the black market, which in Colorado is thriving. Consumers are already telling me, ‘I will just go to my neighbor.’”
Even with additional taxes added on, said Megyesy, the price of marijuana would still be below the black market. The levies would add about $7 to the $25 to $30 price for an eighth of an ounce of medical marijuana, which sells underground for $50, he added.
A nonpartisan voter guide compiled by the state’s legislative council estimates the taxes will bring in $67 million per year. About $27.5 million of this would go to school construction and $6 million to local governments, leaving $33.5 million for state regulators.
The $950 million statewide income-tax increase to fund education being considered today is backed by some prominent local businesses and New York Mayor Michael Bloomberg, who is majority owner of Bloomberg LP. Bloomberg has given $1 million to the school campaign.
Energy companies are opposing the local drives to limit energy drilling. About 99 percent of the funding for committees opposed to the measures in four Colorado towns came from energy companies such as The Woodlands, Texas-based Anadarko Petroleum. Questions on the ballot in 11 Colorado counties asking residents if they wish to secede were promoted by local county commissioners.
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