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Colorado votes to tax legal marijuana

Marijuana activists hold signs criticizing Colorado's proposed 25 percent tax on recreational marijuana as too steep, during a rally at which marijuana joints were given away to attendees, outside a pro pot-tax fundraiser attended by Gov. John Hickenlooper, at Denver Brewery's Barrel Room, in Denver, Wednesday Oct. 2, 2013. AP Photo/Brennan Linsley

After becoming one of the first states to legalize recreational marijuana last year, Colorado set another new standard on Tuesday when voters approved a pot sales tax.

Recreational cannabis sales will have a 25 percent tax slapped on them starting Jan. 1, when retailers begin selling pot legally, with 15 percent of that being an excise tax to be used for public school construction projects and 10 percent being a special sales tax to fund enforcement of regulations on the retail marijuana industry.

The steep tax, which comes on top of Colorado's 2.9 percent retail sales tax, would generate $33.5 million its first year and $67 million its second year in state tax revenue if approved, according to the non-partisan Colorado Legislative Council — but some marijuana advocates argue such a high tariff could encourage a black market.

"There are two main things that could incentivize the black market and make it survive or thrive," said Rachel Gillette, executive director of the Colorado chapter of the National Organization for the Reform of Marijuana Laws, which supports taxation of marijuana, but not at such high levels. "That's going to be excessive taxation, which makes the price of marijuana at the store a lot higher than the price of marijuana on the street, and then also the ban in local communities of retail sales. ... It's akin to a dry county."

The average Colorado pot retail store is expected to sell an ounce of marijuana for $200, according to Brian Vicente, a marijuana reform lawyer in Denver and chairman of the Yes on Proposition AA campaign. With the excise tax, that gets raised to $230; with the special sales tax, it goes up to $250. Toss on state and local taxes, and it's even more.

Colorado, along with Washington state, legalized the possession of up to one ounce of recreational marijuana for people 21 and older in November 2012, despite pot still being illegal under federal law. Individual jurisdictions can still ban marijuana shops in their communities.

Washington passed a tax on marijuana as part of its legalization law, with each party in the buying and selling process paying a 25 percent excise tax: producer to a processor, processor to a retailer, and retailer to the customer. The state estimates it could raise up to $2 billion in tax revenue during the first five years.

Proposition AA's 15 percent excise tax is passed down from wholesalers to retailers; that part was written into Amendment 64, the bill that legalized recreational marijuana, but is not being voted on until Tuesday, along with the 10 percent sales tax. Voters in Denver are also being asked for their stamp of approval on a 3.5 percent city sales tax on marijuana shops there.

"We think that the 15 percent excise tax should have been separate from an additional special sales tax. We would have liked to vote on those issues separately. But unfortunately, they put both of them together into one ballot measure," Gillette said.

She pointed out that alcohol, while it has an excise tax of 60 cents per liter of spirits, has no special sales tax in Colorado.

"The question is, how is this money going to be used? Is it fair to to tax marijuana consumers at such a high level?" she said. "Yes, we want to end prohibition, yes, it's the right thing to do, yes, we want to regulate like alcohol, but alcohol isn't subject to the same types of special sales taxes."

Vicente, the marijuana reform lawyer, argued alcohol and marijuana taxes weren't comparable.

Marijuana activist and Amendment 64 co-author Brian Vicente speaks during a news conference at which he and others kicked off the Yes on Proposition AA campaign, at the state capitol in Denver, Wednesday, Sept. 4 2013. Brennan Linsley / AP file

"This is a new industry and it's just crucial that we have sufficient funding," he said. "Alcohol has been a regulated industry for 80 years in this country so there's systems in place and oversight methods that have been refined over time. With marijuana, this is an industry that was largely illegal. Now we need to make sure that we're building that infrastructure at the front end and we need a sensible and robust tax to do that."

The proposed tax, he added, is "very reasonable."

"It's a responsible and positive tax," he said. "The legislature looked at this issue and they examined what the costs were for the Department of Revenue to oversee medical marijuana, which we've had a robust system for in the last three or four years in Colorado, and they said, if we're looking at a larger market with new licenses and a market that's available to any 21 or older, we need sufficient funding to cover that."

The proposed marijuana taxes — which are expected to pass — are among several ballot measures Colorado voters are weighing in on on Tuesday. They will also vote on restrictions on oil and gas drilling, a $950 million state income-tax increase for education, and whether voters in 11 counties in northern Colorado want to secede from the state after lawmakers passed the toughest gun-control laws in 10 years. The last measure is not expected to pass.

If Proposition AA doesn't pass, the results could be painful for the entire state, said Diane Carlson, a founding leader of Smart Colorado, a non-profit that focuses on the putting the safety of kids first when it comes to marijuana policies.

"There will not be the money to fund the regulatory costs, and so unfortunately that will just come straight out of our general fund, which is money that goes to our schools, and our roads, and other higher priorities — which I do not think the Colorado voters voted for," she said. "They were not looking for Colorado taxpayers to fund increased marijuana use."

Marijuana sales are anticipated to grow to $2.34 billion in the U.S. in 2014, up from $1.43 billion in 2013, according to ArcView Market Research's State of the Legal Marijuana Markets report, which was released on Monday.