Marijuana industry eager to pay taxes — and cash in on deductions

Legalization of pot at federal level not likely anytime soon

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WASHINGTON — As Congress wrestles with big budget cuts, one budding industry wants to help out the federal government with a novel message: Tax us, please.

Marijuana businesses and their backers say legalizing the drug and taxing it like alcohol would add billions to the federal treasury.

Some analysts dismiss a pot tax bonanza as far-fetched, neither likely nor lucrative. But the idea is stirring newly serious debate on Capitol Hill.

The Senate Finance Committee, for instance, included marijuana taxes in an "options paper" listing fresh possible sources of revenue.

In the House of Representatives, legislation is pending on two tracks. The first would legalize marijuana, tax it and regulate it on a national scale. Even advocates don't expect that to pass anytime soon. A less ambitious bill called the Small Business Tax Equity Act would allow the Internal Revenue Service to provide immediate breaks on federal income taxes for marijuana businesses.

As Congress sorts through the proposals, members must confront a central irony: As pot is growing in popularity -- and is given a legal OK in some states -- that puts marijuana businesses in a stronger position to argue for tax breaks for selling a drug that's still outlawed nationally.

Some warn that if Congress doesn't treat pot sellers like other businesses, state plans to tax and regulate marijuana for recreational use in Washington state and Colorado are doomed to fail when they start next year.

"How can you run a business if you're not receiving the same tax breaks?" asked Rep. Adam Smith, D-Wash., one of 13 House members who are promoting the bill that would authorize the deductions for marijuana businesses.

There are plenty of skeptics.

"There's just so much utter nonsense about this issue," said Jeffrey Miron, the director of undergraduate studies in the department of economics at Harvard University and a senior fellow at the libertarian Cato Institute in Washington, D.C. He specializes in the economics of illegal drugs.

"If they don't like the fact that they can't take certain tax deductions because they're in an illegal business," he said, "then they should go in some other business where they can take tax deductions."

Under the legalization bill, introduced by Democratic Reps. Earl Blumenauer of Oregon and Jared Polis of Colorado, marijuana would be taxed to help pay for substance abuse treatment and law enforcement and to reduce the federal debt.

They estimate that a $50-per-ounce tax could raise up to $20 billion a year. By comparison, the alcoholic beverage industry pays $7.9 billion in federal excise taxes each year, while excise taxes on tobacco totaled $15 billion last year, according to the federal Alcohol and Tobacco Tax and Trade Bureau. Those totals don't include state and local taxes.

Rob Mikos is a professor at Vanderbilt University Law School in Nashville, Tenn., who teaches courses in federalism, criminal law, and drug law and policy. He said the state legalization plans might backfire on pot sellers because marijuana remained illegal at the federal level.

Attorney General Eric Holder has yet to announce how the federal government will respond to the state legalization plans. So, Mikos said, marijuana sellers still could face prison terms or have their assets seized. And he said sellers could provide federal authorities with "the smoking gun" just by reporting their sales.

"If you're somebody who's reporting monthly to the Colorado Department of Revenue or the Washington Department of Revenue exactly how much marijuana you're selling," Mikos said, "that's very incriminating evidence."