There are now 33 States in the US with some form of medical marijuana program and 10 States that have legalized cannabis for adult use, and the question on everyone’s mind is “what will the impact of legalized Cannabis be on the US once prohibition ends?” This article will examine the potential impact on the US from several different perspectives.
- Government: State and Federal Tax revenue
Looking at a few States, Colorado reported a billion dollars in sales in 2018, adding $200 million to state coffers in tax revenue. Nevada collected almost $70 million in tax revenues in its first year of adult use sales and exceeded projections. Other states that are considering adult use legalization are releasing estimates. A 2018 report by the Illinois Economic Policy Institute (ILEPI) and the project for Middle Class Renewal at the University of Illinois at Urbana-Champagne projected that an estimated $1.6 billion would be sold in the state of Illinois with approximately $525 million generated in new tax revenues (pdf file) based on a 26.25 percent excise tax on retail cannabis in addition to the 6.25 percent general tax. In addition, over 23,600 jobs would be created and more than 2,600 new businesses would be formed. This would be a significant boost to the Illinois economy and represents a microcosm of the overall impact legalization would have on tax revenue, jobs and new business creation on a national level. On the federal level, a 2017 report by New Frontier Data estimated that legalizing cannabis at the federal level would lead to $131.8 billion in aggregate tax revenue being collected between 2017 and 2025. The number was based on a 15% retail sales tax, payroll tax deductions and business tax revenue. Although this estimate was based on a 35 percent retail tax rate before the tax cuts in December 2017, the revenue is still enormous. However, there is a catch-22…
- Balancing Act
The catch-22 in regards to federal legalization is that there are currently no tax exemptions available to cannabis companies under tax code 280E. This forces cannabis companies to pay tax on their gross profit rather than net profits, resulting in real taxation rates of 70% to 90% on income by some estimates. So while the plant remains classified as a Schedule 1 drug, the federal government continues to rake in an increasingly large windfall in tax revenue as the industry matures and larger players enter the space. The Motley Fool points out that “if the federal government removed marijuana as a controlled substance, it would no longer be subject to 280E. If marijuana businesses were allowed to take normal business deductions, its estimated that the federal government would lose $5 billion in tax revenue over the next decade.” Further, these numbers are based on 2017 projections which are low considering the financial breakout the industry experienced in 2018. Therefore, this reduces the fiscal incentive for federal policy makers to legalize nationally since they would see a reduction in taxes collected on cannabis companies.
- Addition by Subtraction
Yet, in the big picture, by removing cannabis from being a Schedule 1 Drug, the cost savings from the reduction in unnecessary arrests and incarceration to US taxpayers is significant. A 2013 report from the American Civil Liberties Union (pdf file) found that federal cannabis enforcement costs were approximately $3.6 billion per year. Also, by removing cannabis from the controlled-substances list, it would reduce the number of marijuana related court cases that go to trial every year. This number is difficult to extrapolate but undoubtedly in the tens if not hundreds of millions of dollars in terms of legal, law enforcement and judicial hours wasted combined with the burden on tax payers to incarcerate people who could be leading productive lives and contributing to the U.S. economy by paying their federal taxes. While the private prison industry might take a hit, the hidden benefit is that law enforcement agencies would not be wasting their time on minor offenses such as possession and minor trafficking and would instead be focused on reducing serious crime, which would be of benefit to all of society.
By Leslie Bocskor
About the Author
Leslie Bocskor is the Executive Chairman of Electrum Partners, a venture management company in the legal cannabis industry. Please direct inquiries to the Contact form on our website.