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Currently, there are 37 states that have legalized marijuana for medicinal or recreational use. Each year, additional ones join the list, and some that were  medicinal use-only change to recreational status. Based on this, it’s evident the momentum toward legalization of marijuana has continued forward. And slowly but surely, municipalities and state legislatures are coming on board. Certainly, their attitudes have changed based on popular sentiment. But marijuana tax revenues are also influencing opinions in favor of cannabis legalization. But in many cases, it appears cannabis taxation is going too far, which may ultimately undermine the industry’s initial success.

Across the country, local and state cannabis taxation policies vary significantly. However, trends suggest that the marijuana industry is being unfairly targeted by new tax policies. Compared to other industries, higher percentage tax rates are being applied at all levels of the cannabis sector. (Read up on the global expansion of the cannabis industry in this Bold story.) In many instances, these are even higher than those in the alcohol industry. In turn, this is generating tremendous marijuana tax revenues for government programs. If appropriated well, this could have valued social benefits. But at the same time, if governments get greedy, it could make it impossible for local cannabis businesses to survive. Thus, it’s critical that policymakers examine cannabis taxation policies and its lasting impact on the sector as a whole.

Cannabis Taxation Practices Locally

While municipalities vary in their approach, many are leveraging marijuana tax revenues to make ends meet. Local licensing agreements with cannabis dispensaries and businesses are typically referred to as host community agreements. The name sounds appealing enough, but the tax rates typically aren’t. In fact, most charge such businesses about 2-3 percent of their total revenues for operating in the town. Depending on the density of cannabis businesses and volumes of sales, tax income for the city can be significant. In Hoboken, New Jersey, a single square mile in one area generates about $300,000 a year.

Understandably, these marijuana tax revenues benefit the community greatly. Cities routinely use these funds for a variety of needed activities. For example, some divert cannabis taxation monies to pay for snow removal, road safety, and park landscaping. Other uses include traffic improvements, library technology purchases, and drug education programs. But in the process, some cities have gone overboard. A recent study in Massachusetts found towns have collected $2.5 million over the state-allowed limit. One Massachusetts town mayor has even been charged with corruption related to cannabis taxation activities. Even at a local level, marijuana businesses are being singled out because they appear to be the “cash-cow.”

Challenges at the State Level

While local laws and policy can be tough, state restrictions can be more difficult. This is certainly the case in California currently. At the present time, the state imposes $161 state cultivation tax per pound of marijuana in addition to a state excise tax. The state excise tax is stated to be 15%, but in actuality, it’s closer to 27% of actual revenues. Once these as well as a local sales tax of 10% is factored in, the overall cannabis taxation rate is about 50%. This permitted California to enjoy over $1 billion in marijuana tax revenues in the first 3 quarters alone in 2021. These tax pressures are forcing marijuana growers and retailers to increase their prices to consumers. And as legal marijuana prices climb, illicit sales increase. That’s not good for the cannabis industry or the state in the long run.

someone with gloves on, massaging some herb
Marijuana tax revenues make the industry appealing to municipalities, so more of them are embracing the industry.

Not every state is as aggressive as California, but cannabis taxation policies are still getting in the way of policy goals. For instance, in New York, there has been a conscious effort at the state level to support social equity in the process of marijuana licensing. This means that marijuana business licenses are being prioritized to owners who have been negatively affected by harsh marijuana laws of the past. Minorities, women, and individuals from communities significantly affected by these laws receive preferential reviews. Likewise, those who have past marijuana criminal offenses or family members with the same are also prioritized. But when bureaucracy prevents cannabis success, good intentions fall flat. Unless a less aggressive approach toward marijuana tax revenues is considered, social equity goals may not be realized.

Ongoing Issues at the Federal Level

While many states and local communities are forging ahead, marijuana remains a controlled substance at a federal level. That means it’s technically illegal even though federal prosecutors and DEA agents aren’t pursuing charges. Regardless, it continues to affect bank loan access to many marijuana businesses due to these federal regulations. This has prompted repeated efforts to legalize marijuana at a federal level. The most recent effort passed the House in March, entitled the Marijuana Opportunity Reinvestment and Expungement (MORE) Act. The legislation decriminalizes marijuana and takes it off the controlled substance list. It also expunges past marijuana-related crimes.

In all likelihood, however, the MORE Act is not likely to pass the Senate. The reason for this relates to components of the bill that seeks to address social equity issues as well. In order to support such programs at a federal level, additional federal cannabis taxation would be needed. Thus, cannabis businesses would again be subject to addition costs in an effort for the federal government to receive marijuana tax revenues. Given that state and local taxes are already excessive, this could be the kiss of death for many businesses. Thus, federal progress in this area may invite more harm that healing.

A More Thoughtful Approach Required

Initially, many communities and states justified excessive cannabis taxation because they suggested its legalization would introduce more problems. But as time passes, it has become clear that this has not been the case. Drug-related problems associated with marijuana has dropped significantly in many states. Likewise, there has not been any increase in traffic fatalities or injuries either. Regardless, legislatures continue to seek high marijuana tax revenues at the expense of cannabis businesses and owners. And in the process, they are driving increases in illicit marijuana sales and undermining the entire legal structure in place. If governments at all levels wish to attain important public policy goals, then cannabis taxation laws need to be revised. Without question, some marijuana tax revenues should help support community and state programs. But not to the point they destroy the advantages a legal cannabis industry brings to society.

 

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