The cultivation, distribution, and possession of marijuana are prohibited for any reason other than to engage in federally approved research under the federal Controlled Substances Act of 1970 (CSA; P.L. 91-513). Yet, 23 states, the District of Columbia, and Guam have passed legislation or initiatives legalizing qualified sale, possession, manufacture, and distribution of medical marijuana, and 17 states and the District of Columbia have decriminalized the possession of marijuana. In addition, in November 2012, Colorado and Washington became the first states to legalize, regulate, and tax small amounts of marijuana for non-medicinal use (so-called recreational) by individuals 21 and older. Commercial sales of recreational marijuana became legal in the state of Colorado beginning on January 1, 2014—the first jurisdiction in the world to do so. Washington's commercial marijuana market opened on July 7, 2014. On November 4, 2014, Alaska and Oregon became the third and fourth states to approve ballot initiatives to legalize, regulate, and tax marijuana for recreational purposes. That same day, the District Columbia approved further measures to legalize the cultivation, possession, and exchange (but not the commercial sales) of marijuana. In addition to state and local movements to decriminalize or legalize the production, sales, or use of marijuana, there has been a general shift in popular sentiment toward marijuana policy. According to polls conducted by Rassmussen, the Pew Research Center, and Gallup, a majority of Americans favor legalizing marijuana. The combination of state policies and general sentiment has led to heightened debate over the merits of marijuana legalization at the federal level. For example, in the 113 th Congress, bills have been introduced that would remove marijuana from the list of Schedule I drugs prohibited by the Controlled Substances Act and impose a federal excise tax on the production and importation of marijuana. Another bill proposes the establishment of a National Commission on Federal Marijuana Policy that would review the potential revenue generated by taxing marijuana, among other things. Overall, the debate concerning marijuana legalization is complex, as it spans across issues ranging from criminal justice to public health and safety. The revenue-raising potential of a marijuana tax could become a contributing factor in the desirability of legalizing marijuana. This report focuses solely on one aspect of the economic debate over federal marijuana legalization: imposing an excise tax on legalized marijuana. First, it provides a brief overview of marijuana production. Second, it presents possible arguments for taxes and, in some cases, estimates the level of tax suggested by that rationale. Third, possible marijuana tax designs are analyzed. Marijuana is a preparation of the plant, C annabis sativa , generally used as a recreational drug or medicine primarily for its psychoactive and physiological effects. The term marijuana refers to the dried leaves and flowers of the cannabis plant. The main psychoactive ingredient in marijuana is delta-9-tetrahydrocannabinol (THC). THC is the primary cannabinoid responsible for the "high" that users experience when consuming the drug. Still, THC is only one of many "cannabinoid" chemical compounds in marijuana that contribute to the effects of the psychoactive effects of marijuana (in terms of strength, onset, duration, etc.). Consumers could desire different strains of marijuana for the contents of other cannabinoids that do not produce a psychoactive effect. For example, marijuana strains high in cannabidiol (CBD) are often sought to provide relief from anxiety. Depending on its preparation, the potency, or relative concentration, of a particular product derived from marijuana can vary. The stalks and stems of a marijuana plant have almost no psychoactive content, whereas the leaves and flowers (buds) of the plant have increasing concentrations of THC. The hair-like trichomes on the buds are coated with a translucent resin that contains the highest concentration of THC on the plant. Marijuana plants are also either male or female. If female plants are grown in controlled environments, separate from pollination of male plants, then the female plants are capable of growing buds that produce more resin. This process is used to grow sinsemilla (Spanish for without seed) varieties of marijuana, which typically contain 10%-18% THC content (about three times the level of conventional, commercial-grade marijuana derived from pollinated plants). Marijuana consumption methods vary. Marijuana is generally consumed by smoking the dried plant matter. A "joint" is made by rolling marijuana in cigarette paper whereas a "blunt" is made by hollowing some or all of the tobacco from a cigar and replacing it with marijuana. Although smoking habits vary by user, a typical joint contains less than half a gram of marijuana, and each "hit" or drag on the joint contains approximately one-twentieth of a gram of marijuana. Numerous other devices for consuming marijuana exist, ranging from glass pipes to vaporizers (which heat the chemicals in marijuana, but avoid creating the smoke irritants associated with combustion). Cannabis can also be processed into a number of different products, all with their own THC concentration levels and typical methods of consumption. For example, hashish or "hash" is made by pressing trichomes together into a brick-shaped product with more than 40% THC content. THC is also capable of being dissolved in fats, oils, and alcohol for use in the creation of "edibles," such as candy or baked goods. Economic analysis as a general rule suggests that excise taxes are less desirable than more general taxes (such as income or broad based sales taxes) because they distort prices of different commodities. This section discusses several possible reasons for imposing an excise tax on marijuana: (1) reflect external, or spillover, costs to society; (2) discourage use, particularly for youth; (3) prevent too rapid a fall in price; (4) fund related programs; and (5) raise revenue. Economic efficiency occurs when the price of a commodity (at the margin) equals its costs. If consumption of marijuana imposes costs on others, then the consumer cost is too small and economic efficiency could be achieved by imposing a tax equal to consumption cost. This rationale has often been used for similar commodities, such as alcohol and tobacco. In considering this justification and the level of tax economic analysis suggests, the external costs should be separate from the costs the user bears. For example, if a substance causes early death, the value of the lost years of life and the individual's own costs in treating illness falls on the individual. Society bears the loss of tax revenue from those lost earnings and some of the costs of treating illness that fall on private or social health insurance. However, society also receives gains from the early death in the amount of smaller health costs and transfer payments (such as Social Security) in the future. These future costs should be discounted. At least in studies of other substances, these external costs are typically much smaller than the total costs. A 1991 study by Manning et al. used this method to estimate the external costs of alcohol and tobacco. Adjusting these estimates for price changes, those results imply a cost of $30 billion for alcohol, which will be used to estimate the cost for marijuana, for which no study of this nature exists. As with the case of tobacco, these external costs are typically much smaller than the total costs. Although no U.S. study of marijuana of this nature could be located, it is possible to investigate the likely magnitude of a tax necessary to correct for externalities of marijuana use by examining studies that compare the costs of cannabis use to alcohol. A British study ranked different drugs by harm on a scale of 1 to 100. Overall, alcohol ranked 72, whereas cannabis ranked 20, or 28% of alcohol. Considering just the external harm, alcohol ranked 47 and cannabis ranked 9, or 19% of alcohol. A Canadian study found an even smaller ratio of health costs per user, about 12%. It is also likely that the non-health costs of marijuana are lower than for alcohol. For example, part of the spillover effect of alcohol is in the effect of traffic accidents, but studies tend to find that marijuana impairs driving ability less than alcohol. Evidence also suggests that smoking marijuana is inversely related to domestic violence. The Canadian study found larger enforcement costs for marijuana, but that effect is probably due to marijuana's illicit status. (For additional discussion of some of the various social effects of marijuana, see Appendix A .) In addition to indications that the externalities of marijuana are smaller per user than alcohol, the prevalence of marijuana use is smaller. According to the National Survey of Drug Use and Health (NSDUH), alcohol usage in 2013 for the population 12 and older was 66.3% in the past year and 52.2% in the past month, whereas marijuana usage was 12.6% and 7.5% respectively. Thus marijuana usage is 19% (based on use in the past year) and 14% (based on use in the past month) as common as alcohol usage. These numbers suggest that the external costs of marijuana range from $0.5 billion to $1.7 billion. To translate this amount into a tax per ounce requires an estimate of the total market size and the price. A 2014 report issued by the White House Office of National Drug Control Policy (ONDCP) provides estimates of the unit price, total expenditure, and total consumption weight of marijuana in the United States. The calculations extrapolate from two sets of data: (1) the NSDUH, which is a self-reported survey of drug use habits; and (2) survey data from drug-offense arrestees in a limited number of areas designated as Arrestee Drug Abuse Monitoring (ADAM) jurisdictions. The report finds that from 2002 to 2010, the amount of marijuana consumed in the United States likely increased by about 40%.