Taxing Pot: Risk, Reward, Revenues

Cannabis Products
Cannabis products represent a growing market as more states approve legalization. AFP / Mladen ANTONOV

With most Americans in favor of legalized marijuana -- and a growing number of states making the drug legal -- how long before recreational pot becomes available across the US?

Making marijuana legal has been a grassroots effort. Support has come from the ground up, and the laws have generally changed, not in the state legislature, in the voting booth. The latest example was approval of ballot referenda on Nov. 3, to legalize recreational marijuana in New Jersey, Montana, Arizona and South Dakota, and for medical use in Mississippi.

 “[Voters] said they wanted it, as opposed to policymakers making that decision,” said Adam Levin, a principal associate at the Pew Charitable Trusts, speaking with Medical Daily

Putting pot on the ballot is a deliberate strategy, born of necessity. “Our only option to push this public sentiment and turn it into public policy is to actually do an end-run around the legislature, around lawmakers, and put this issue to a public vote,” said Paul Armentano, deputy director of the National Organization for the Reform of Marijuana Laws (NORML). 

Using the ballot has an upside, said Mr. Armentano. “Are there advantages of using the ballot initiative process in terms of getting the legislation that you want? In some cases, yes, there are,” he said. In some states, people other than elected officials have had a hand in the wording of the legislation. On the other hand, not all states allow ballot measures, and some let the legislature rewrite what will become law. This mixed process has meant that there is a fair amount of diversity, state to state, in recreational marijuana laws. 

Benefits of tax revenue

Tax revenue from marijuana sales has been a significant driver of legalization. Last January, New York State Gov. Andrew Cuomo proposed legalizing marijuana and taxing it at 20%, for a state windfall of $300 million, reported Bloomberg . Cannabis is decriminalized in New York but not yet legal.

As to where the tax money goes, “we're seeing a lot of different things in different states, sometimes very specific to the state,” Ulrik Boesen told Medical Daily. Mr. Boesen is a senior policy analyst with the Tax Foundation, an independent nonprofit group.

“Colorado put some money into education. New Jersey's also putting some of their expected [tax] revenue into police training, so it's a little bit all over the place,” he said. 

Mr. Boesen said he would prefer an excise tax on marijuana, which is a tax paid directly by the user of the product, such as alcohol, tobacco and fuel. The tax money often goes to related programs. 

“There's some costs that society needs to bear when people consume these products, and it's legitimate to recover those costs,” said Mr. Boesen. "… [The money] should go into making sure that people don't get into a car when they're intoxicated. It shouldn't go to unrelated spending programs, such as building new schools or building roads or wildlife management." 

He also warned about making state services dependent on marijuana taxes. The marijuana market is volatile, and if it gets cheaper, tax revenue will go down. “You don't want to be in a situation where some completely unrelated spending priority only has enough revenue if enough people buy marijuana,” he said. 

In Alaska, half of tax revenue from marijuana goes to reducing recidivism of criminal offenders; a quarter of the revenue goes to education. According to Emily Walker, a tax auditor with the Alaska Department of Revenue, the education funds support such things as after-school programs to prevent substance abuse in teenagers and to support at-risk students. 

Alaska is broadly on par with other states. Marijuana taxes normally go to a combination of a general fund and to special programs, often centered on recidivism or education around marijuana. Revenue also finds its way into infrastructure projects, conservation, general education and public health. Of the states that legalized this year, Montana will allocate some of its tax revenue to conservation. 

“It's not going to fix any budget shortfalls as a result of a pandemic. It’s not going to free up all this amazing revenue, which you can lower income tax with, or whatever it may be, but it's meaningful revenue,” said Mr. Boesen. 

“When you're talking about state budgets, compared to the major tax streams, like sales tax or income tax, [marijuana revenue] is smaller than that,” said Mr. Levin. Even though it isn’t a lot of money, it may still be alluring. “States are always looking for new revenue. they won’t turn their nose up at any new source of revenue and especially right now, in the pandemic and the recession.” 

Federal legalization?

For now, marijuana is illegal on the federal level. It is on the US Drug Enforcement Administration’s Schedule 1 of the Controlled Substances Act, the most tightly restricted list.

But that has not kept most states from acknowledging marijuana use and passing regulations.

Many compare the current landscape with Prohibition, the nationwide constitutional ban on alcohol from 1920 to 1933.

When Prohibition was lifted, 10 states had already started regulating alcohol, despite the federal law. “Today, we have 36 states that regulate medical access [to marijuana] and 15 states that regulate adult-use access, again, a majority of the country,” said Mr. Armentano. 

If the federal government removed cannabis as a controlled substance, control of the drug would go to the state level, Mr. Armentano said. Federal legalization would not change any existing state regulations, and cannabis would remain illegal in those states that do not regulate it.

Federal legalization would have another, complicated impact on the states, said Mr. Boesen.

As long as the drug is illegal, interstate commerce is illegal. “So you must cultivate, process, sell, and consume the product within one state. Now, if you have federal legalization, you also have interstate commerce, all of a sudden,” he said.

It is too soon to know what would happen, but that could change where raw marijuana is sourced and how it is processed and sold -- thus changing the way state taxes are collected. 

“Too many wildcards exist to be able to prognosticate in any kind of accurate way,” said Karmen Hansen, a program director with the National Conference of State Legislatures, who tracks cannabis regulations.

Along with potential changes on the federal level, there is also a possibility that the pandemic and the current recession will change things. 

“This is the first recession that has hit since any states have had legalized marijuana,” said Mr. Levin. “So it's unclear how that's going to affect consumer behavior.”

Sabrina Emms is a science journalist. She got her start as an intern at a health and science podcast out of Philadelphia public radio. Before that she worked as a researcher, looking at the way bones are formed. When out of the lab and away from her computer, she's moonlighted as a pig vet's assistant and a bagel baker.

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