The Effect of Legalized Cannabis on State Economies

The public has spoken on legalization of cannabis. According to a recent Pew Research Center survey, fewer than 10% of Americans oppose the legalization of cannabis. (Source) And now that we have the overwhelming data to support the voice of the U.S. population. The next step (after acting on legalization) is to look at how this monumental shift can help our communities.  Immediately, at the top of the list is funding our government via tax dollars to reinvest in our people.With states facing budget shortfalls resulting from COVID-19, revenue from recreational marijuana could be a much-needed lifeline in locations that pursue legalization or expand existing markets.As of May 2021, states reported a combined total of $7.9 billion in tax revenue from legal, adult-use marijuana sales. (Source)Let’s first understand the tax history and different types of taxes that are applied to cannabis.The first attempt at applying a tax to marijuana used for medicinal purposes was the Marijuana Tax Act of 1937. Although the legislation appears to have been an attempt at generating revenue for the government, many scholars, historians, and politicians believe that it was deceptive in nature. This is because the consequences for violating the Marijuana Tax Act — a $2,000 fine ($36,000 adjusted for inflation) and up to 5 years in prison — were far harsher than the taxes imposed, which were around $1 per ounce or $24 per year. Ultimately, the Marijuana Tax Act was declared unconstitutional and replaced with the Comprehensive Drug Abuse Prevention and Control Act of 1970. This act removed the tax and reduced the severity of punishment for possession, but also denied any medicinal purpose for cannabis and labeled it a Schedule I Substance.(Source)On November 5, 1996, California enacted Proposition 215, or the Compassionate Use Act of 1996.  This law permits the use of medical cannabis. The law passed with 5,382,915 (55.6%) votes in favor and 4,301,960 (44.4%) against. The success of California Proposition 215 in the 1990’s helped change marijuana’s image from a harmful party drug to a taxable medicine, which led to several other states implementing similar initiatives over the next two decades.One source of tax revenue is a cultivation tax. Cultivation tax varies depending on different parts of the plant. There are also excise and retail taxes. An excise tax is applied when distributors sell or transfer cannabis to a retail store or manufacturer. Retail taxes are then applied on the sale of cannabis to a consumer. Many states levy more than one of these types of taxes on marijuana. Each state has different cannabis taxation laws and percentages. And in addition to state taxes, cities may also see local sales tax revenues. For example, the city of Denver, applies an additional 5.5% local sales tax on adult-use cannabis and has collected $210.6 million as of April 2021. (Source)(Source)Since California was the only State to top the $1B mark in marijuana tax revenue, let’s take a quick look at their tax structure as recorded by The Motley Fool:

How does California tax marijuana? California taxes are as follows: $9.65 per ounce for flower, $2.87 per ounce for leaves, and $1.35 per ounce for fresh plant.

How does California spend marijuana tax revenue?

• First, the revenue covers regulatory and research costs.

• Then, 60% goes to anti-drug programs targeting kids;

• 20% goes to environmental programs; and

• 20% goes to public safety.

Compare how tax revenue is used in California to Colorado:How does Colorado spend marijuana tax revenue?

• 10% goes to local governments.

• 90% goes to the state government.

  • 15.56% of the state revenue goes to the general fund.

  • 12.59% goes to the state public school fund.

  • 71.85% goes to the marijuana tax cash fund.

As you can see, tax dollars from cannabis can be used in many ways to support different communities. Often, these are programs that would not get funded otherwise, or are far short on essential funds. Thus, the simple question applies - if the public is bullish on cannabis legalization, and doing so actually helps communities in many ways, what is taking so long for there to be ubiquitous state legalization, and for that matter, federal legalization?