(The Center Square) – With state legislatures grappling with budget shortfalls in the next fiscal year, they are faced with cutting spending, increasing borrowing, and increasing taxes as options to fill significant gaps.
One excise tax increase that some legislatures are considering is on the sale of marijuana, which according to a new analysis by the Tax Foundation, should not be relied on as a long-term budget fix.
To date, nine states have legalized and tax recreational marijuana. Taxes can be based on a percentage of the retail or wholesale price, on weight per ounce, on the THC level, or as a combination of all three, according to the Brooking Institution’s Tax Policy Center.
Some states also levy their general sales taxes on the purchase of marijuana in addition to the excise taxes, the center adds.
In 2018, in Colorado and Washington, marijuana taxes totaled roughly 1 percent of their respective state and local own-source general revenue. In Alaska, California, Nevada and Oregon, revenue totaled less than 1 percent of their general revenue. None of these totals, the policy center notes, include local tax revenue.
Ulrik Boesen, senior policy analyst at the Tax Foundation, argues that taxing by potency could complicate tax collection and add significant costs to both tax collectors and the industry.
Boesen also said that the goal of an excise tax on recreational marijuana has generally been to limit the harm resulting from illicit consumption and should not be relied upon to raise general fund revenue.
There also might be unintended consequences as a result of how marijuana taxes are raised, he added.
“Taxing by price may not be stable, taxing by weight could encourage use of high potency products, and taxing by potency could complicate tax collection and add significant costs to both tax collectors and industry,” Boesen said.
And while high taxes might limit use by minors and non-users, it could hurt the competitiveness of the legal market, he added.
On the flip side of raising taxes, low taxes may allow easy conversion from the illicit market but could increase consumption among non-users and minors, Boesen said.
The Tax Foundation suggests that state legislatures adopt a hybrid potency- and weight-based tax defined by THC levels, which may be the best short-term solution to address budget shortfalls.
Other factors impacting state policies include changes to federal law, which Boesen says “would have implications for the tax revenue in states with legalized marijuana. If businesses had better access to banking, federal tax deductions, or interstate trading, prices would most likely fall.”
If the federal government were to legalize and tax recreational marijuana, a new tax would impact price levels and could potentially hurt competitiveness of legal marijuana, the Tax Foundation report suggests.
If a federal excise tax were levied by weight at $3 an ounce, for example, the foundation projects federal tax revenue would be roughly $860 million per year.
Despite state laws legalizing marijuana consumption, the Controlled Substances Act of 1970 still classifies marijuana as a Class I controlled substance.
In 2005, the U.S. Supreme Court in Gonzales v. Raich ruled that Congress has the authority under the Commerce Clause of the U.S. Constitution to ban local marijuana production and consumption. Under the Commerce Clause, Congress has the power to regulate local activities that fall under an economic "class of activities" that are deemed to have a substantial impact on interstate commerce.
Last fall, the Democratically controlled U.S. House Judiciary Committee passed the "Marijuana Opportunity Reinvestment and Expungement Act of 2019," called the MORE Act, to officially remove cannabis from the list of federally controlled substances.
The bill would expunge federal marijuana convictions and arrests and approve allocation of resources for communities impacted by the war on drugs, according to the bill proposed by Rep. Jerrold Nadler, D-New York.
The bill also establishes a federal Cannabis Justice Office, funded by a 5 percent sales tax on cannabis sales in states where recreational use is legal.
The bill did not advance beyond the Judiciary Committee and was referred to several other committees.