Policy Paper: Cannabis Taxation & Revenues - Best Practices

Advocates for criminal justice reform and progressive revenues are working hard with lawmakers and a growing coalition in Maryland to enact a system for taxed and regulated, adult-use cannabis. (Note that advocates prefer the term cannabis to marijuana, due to its racist origins, and use “adult-use” as opposed to “recreational.” Recent polling from Goucher College found that two-thirds of Maryland residents support legalizing cannabis — the highest number to say so since the poll from Goucher College began measuring opinions on the topic in 2013. And, for the first time, 50% of Republicans polled said they support legalization.

In Strong Future Maryland’s own polling data, the support of legalizing and taxing cannabis to raise revenue for the state received support form 75% of those queried.

Ensuring that the tax structure and revenues garnered are applied equitably is of paramount importance for a state that has a history of arresting Blacks at three times the rate of Whites, despite comparable rates of usage.

Social Equity & Revenue Distribution

Arguing for strong social equity provisions in a legalized cannabis program will be pivotal in Maryland, where the Maryland Medical Cannabis Commission has been plagued by problems since the original legislation passed in 2012, slowing down the launch of the program and limiting the program’s growth. The Commission faced scrutiny and lawsuits after the first 15 companies chosen in 2016 to grow cannabis were all White-owned, and shortly thereafter, Gov. Larry Hogan (R) ordered a disparity study that determined minorities and women were disadvantaged in the industry. In 2018, state lawmakers ordered a second round of licenses and directed the medical cannabis commission to award bonus points to achieve racial and ethnic diversity.

The Black Caucus and groups like the ACLU are hoping an adult use program in Maryland will properly address diversity and equity in licensure at the start and avoid the challenges of the medical cannabis program.

In 2020, four states legalized adult use of cannabis at the ballot. Here is an article from the Appeal regarding social equity provisions in those new laws:

But when it comes to making amends for racial injustice, this year’s four legalization measures vary. Only Arizona’s initiative includes provisions to ensure that communities harmed by drug criminalization benefit financially from legalized cannabis. It allows people with past cannabis convictions to apply to have their records expunged. Everyone who applies would be presumed qualified unless proved otherwise, according to Stacy Pearson, a spokesperson for Smart and Safe Arizona, the campaign promoting Proposition 207.

Its cannabis initiative would place a 16 percent tax on marijuana sales, which would fund social services as well as a social equity ownership program to help those with past marijuana convictions get licenses to produce and sell their own cannabis.

But the majority of early priority licenses for recreational cannabis would go to existing medical dispensaries. Only 26 out of 160 licenses would be reserved for social equity applicants and rural counties without a dispensary, according to Pearson.

Advocates have pointed out similar shortcomings in other states. Illinois is considered to have the most robust social equity program, but people who qualify still struggle to secure enough capital to start a business.

From Marijuana Business Daily:

States that legalized medical and/or adult-use cannabis since 2016 and included social equity provisions are projected to have total annual sales of $12.7 billion in 2022, compared with $4.1 billion combined for those without a social equity program.

Inadequate measures to address social equity, among other reasons, caused adult-use legalization bills to stall in the New Jersey and New York legislatures.

That stands in stark contrast to Illinois – the first state to legalize recreational marijuana sales via the legislature – where lawmakers passed one of the most progressive marijuana business licensing frameworks in the country.

If successful, Illinois could serve as the blueprint for marijuana programs across the United States

Illinois

The Illinois cannabis law is considered to be a strong example of progressive social policy. Here is an overview of the law and below is the provision related to taxation:

Taxes At the wholesale level, cannabis products will be subject to a 7% tax when they are sold by cultivation centers or craft grows. At the retail level, Illinois is taking a unique approach. Rather than a blanket tax for all cannabis products, Illinois will charge a tax rate based on the relative potency of the cannabis and the type of product. The more concentrated THC is, the higher the tax rate: ● 10% tax will apply to cannabis flower or products with less than 35% THC ● 20% tax will apply to products infused with cannabis, such as edible products ● 25% tax will apply to any product with a THC concentration higher than 35%

In addition to these scalable tax rates, the state’s regular 6.25% sales tax rate also applies, along with local taxes of up to 3.5%. The range consumers will pay at the register — which does not include the 7% tax levied at wholesale — will be between 19.55% to 34.75% retail tax, depending on the product’s potency.

Revenue distribution

After covering the costs of administration and expungement, the remaining funds will be distributed as follows:

● 2% to public education and safety campaigns ● 8% to the Local Government Distributive Fund, for prevention and training for law enforcement ● 25% to the Recover, Reinvest, and Renew (3R) Program ● 20% to mental health services and substance abuse programs ● 10% to pay unpaid bills ● 35% to the General Revenue Fund

Notably, advocates continue to work to amend the law around taxation as follows:

● Illinois’ R3 Program can be a model for future success, and must be fully funded and staffed, to ensure it is accessible to community organizations seeking funding for their programming. ● Cannabis tax revenue that currently goes to law enforcement, should be redistributed to social programs, including violence prevention, education, mental healthcare, and more.

New Jersey

The measure passed at the ballot and the model bill from advocates differ, with the ballot measure silent on revenue distribution. Roseanne Scotti, state director of the Drug Policy Alliance in New Jersey, said this about social equity provisions: “There are several pieces. One would be making sure that the portion of the tax revenue that is generated goes back to the communities that are most impacted by marijuana prohibition and mass incarceration. That could be through a grants program, or some other form of funding for programs that these communities find important, and we think that these communities should say what that would be.”

In the model bill (see P. 28), advocates suggest:

Fifty percent (50%) shall be deposited in the Community Grants 8 Reinvestment Fund, and disbursed by the State Treasurer for the 9 establishment of a Community Grants Reinvestment Program that shall 10 administer the monies to qualified community-based nonprofit 11 organizations for the purpose of reinvesting in communities 12 disproportionately affected by incarceration, lack of economic 13 opportunity, and poverty—including inability to afford the basic 14 necessities of housing, food, child care, health care, and 15 transportation—as defined by a series of standardized 16 measurements.”

The ballot question is notably silent on other key aspects of marijuana legalization, including criminal justice, possession limits and home growing. It's now up to lawmakers in the state Legislature and the Cannabis Regulatory Commission, which oversees the New Jersey medical marijuana program, to decide on these and other questions.

In 2021, the Governor signed into law regulations passed by the Legislature to implement the law. The laws signed by Murphy spell out three separate taxes on legal weed purchases:

First, there's an enhanced state sales tax of 7%. Per the legal weed laws, 15% of this revenue will come off the top and be directed to "underage deterrence and prevention," specifically community groups who will use the money to educate children and young adults about the dangers of substance use.

Of the remaining 85%, 70% (or 59.5% of the total sales tax) will go toward one of 20 "impact zones," cities with cities with large Black and Latinx communities and high unemployment rates where marijuana laws were most strictly enforced.

Those funds will flow through and be divvied up by the CRC.

The remainder of the sales tax revenue, about 25.5%, will go to the "general fund" — the state's general tax coffers and budget.

The second tax is the social justice excise fee, which will fluctuate between $10 and $60 depending on the average price of cannabis. Per the laws, 100% of this revenue will go toward impact zones.

The third tax is an optional 2% sales tax which municipalities can levy on any marijuana business within its borders. This money goes directly toward the town's budget and can be used at the will of the governing body.

On the Federal Level Marijuana Justice Act of 2019

New Jersey Sen. Cory Booker has proposed a national legalization measure that includes expungements and a community reinvestment fund, and several of his fellow Democratic senators and 2020 presidential primary contenders signed on. In February, Senator Booker, alongside Reps. Barbara Lee (D-Calif.) and Ro Khanna (D-Calif.), reintroduced the Marijuana Justice Act intended to abolish the federal prohibition against cannabis. The law would legalize cannabis nationally and remove the plant from the Drug Enforcement Agency’s list of controlled substances, companion to incentivizing states to end their respective Cannabis bans. The bill offers provisions for persons currently incarcerated in federal prison for marijuana convictions to petition for resentencing. Moreover, the law would retroactively and automatically expunge existing marijuana-related criminal records at a federal level.

The federal legalization proposal includes the development of a community reinvestment fund to specifically benefit communities most ravished by the marijuana ban, and the decades-long failed war on drugs. The architects of the bill outlined some potential funding areas: job training, post-incarceration and expungement services, public libraries and community centers, youth programming, and health education.

Read the bill here

The Marijuana Opportunity Reinvestment and Expungement (MORE) Act of 2019

The Marijuana Opportunity Reinvestment and Expungement (MORE) Act of 2019, or H.R. 3884, was introduced by House Judiciary Committee Chairman Jerrold Nadler (D-NY) and currently has 55 cosponsors.

This is the first time that a congressional committee has held a vote on – let alone approved – a comprehensive bill to make cannabis legal. Perhaps even more significantly, this bill recognizes and works to address the disproportionate impact prohibition has had on marginalized communities and people of color while helping to increase access and opportunity in the legal cannabis industry – an unmistakable sign that the debate over legalization is moving from “if” to “how.”

The MORE Act would federally decriminalize cannabis by removing it from the Controlled Substances Act, and would require the expungement of past federal cannabis convictions. The bill would establish a Cannabis Justice Office to administer a program to reinvest resources in the communities that have been most heavily impacted by prohibition, funded by a 5% tax on state-legal cannabis commerce. It would also allow the Small Business Administration to provide loans and grants to cannabis-related businesses and support state and local equity licensing programs, and would permit doctors within the Veterans Affairs system to recommend medical cannabis to patients in accordance with applicable state laws, among other provisions.

Read the bill here. National Cannabis Industry Association Recommendations

NCIA has a report on equity provisions and recommendations the following for community reinvestment:

State and local cannabis laws can and should provide pathways for licensed adult-use cannabis businesses to fund reinvestment in communities that lack economic opportunity, resources, or have otherwise been disproportionately impacted by the war on cannabis and other drugs. Both government-managed and private community reinvestment funds should be considered, as well as an appropriate system of incentives and mandates to generate sufficient financial resources for real impact.

One approach is for a state legislature to enact a statutory mandate requiring that all adult-use cannabis businesses contribute to a community reinvestment fund to be allocated to select communities by an appropriate government body. Tax revenues would eventually provide a reasonably stable funding stream, but initial funding would have to be borrowed or the launch of the fund could be delayed by a year or more while the regulatory system is established and operators are licensed and become operational.

Providing incentives for businesses that voluntarily contribute to a government-managed community reinvestment fund is likely to be a less controversial approach than requiring that all or some businesses contribute through taxes or special fees. Voluntary contributions may be encouraged by offering participating businesses priority application processing, reduced renewal fees for the period in which contributions are made, and other similar benefits.

Similarly, a privately-managed community reinvestment fund could be established and supported by cannabis business contributions, whether mandated or incentivized. For example, the state could engage in a competitive procurement process in which non-profit organizations submit proposals to provide comprehensive community reinvestment fund management on a contract basis.

Alternatively, states and localities could identify eligible neighborhoods (or some other geographic unit) and provide incentives for businesses that work directly with those neighborhoods to fund reinvestment efforts that target specific community concerns. The latter option gives communities more say in how the funds are used for their benefit and encourages real engagement between businesses and impacted communities.

Potential licensees could also be required to submit community reinvestment plans, describing selected reinvestment projects that fall within approved categories or impact qualified communities. A monitoring framework would be established to ensure that licensees fulfill their obligations. Though it could be beneficial to provide the option for licensees to enter into agreements with localities or pre-established community-level governing bodies to provide funds to support approved projects in target areas, policy makers must take steps to ensure this model is not exploited by localities. This has been the case in Massachusetts, where significant demands associated with host community agreements have given businesses with deep pockets a competitive advantage. To encourage robust investment and constructive collaboration between impacted communities and cannabis businesses, temporary fee reductions, a seat on a rulemaking working group, or other exclusive benefits could be awarded to the businesses with top scoring community reinvestment plans.

Taxes: The Big Picture

Many advocates argue that the taxes shouldn't be so high that they result in prices that can’t compete with the illicit market. That said, a system should include the goal of raising significant enough revenue to allow the state to fund public needs, including reparative justice and minority-owned cannabis business start-ups, and avoiding such low prices that they increase problematic or youth use of cannabis.

From the Appeal:

Some drug policy reform advocates take issue with placing high taxes on cannabis.

“It’s like robbing Peter to pay Paul,” said Deborah Small, executive director of Break the Chains, a California-based organization that aims to change drug policies. “It gives cities and local governments the green light to impose whatever taxes that they want.” Small also said that high cannabis taxes may make cannabis inaccessible to those from low-income households which, in some cases, could drive them back into illicit drug markets.

Small made the case that the best way to make legalization more beneficial for everyone is to develop specific plans for investing in communities that have borne the brunt of marijuana criminalization . “Use the proceeds to actually reinvest in communities that were disinvested in because of drug war enforcement,” she said.

Marijuana Policy Project’s View Regarding Best Practices in Taxation ● When state-legal cannabis is legal federally, interstate commerce will be legal, and it will presumably not really be possible for cannabis to be taxed by states at the cultivation/wholesale level. For that reason, the Marijuana Policy Project has shifted its model bill recently to tax as an ad valorem (percent of sales price) tax at the point of sale.

● If a state’s tax rate is too far off from other legal cannabis states (esp. its neighbors), that could result in cross-border smuggling, as has been seen with cigarettes to some degree. That said, advocates are not aware of this being a big problem between WA and OR, though WA’s rate is more than 2x Oregon’s. WA is still bringing in vast amounts of taxes.

● Almost all advocates feel it is wrong to tax medical cannabis. Taxing at the wholesale level can also make it difficult to exempt medical cannabis from taxes, as the products would have to be separated out at the cultivation level. This could lead to supply issues if predictions are wrong. This is another reason MPP now leans toward ad valorem (percent of sales price) tax at the point of sale.

● Some have advocated for THC-based tax, but there are concerns about inconsistencies in testing, and that this may not be practical. However, IL has a simple process where rates are simply higher for cannabis extracts above 35% THC.

Additional Perspectives on Taxation

The Institute on Taxation & Economic Policy — this overview paper from 2015 states that "designing the ideal excise tax is more challenging as it requires striking a balance between taxing the product heavily enough to offset its social costs, and not taxing it so heavily so as to result in widespread tax evasion and black market marijuana sales.”

Pat Oglesby, former Congressional tax staffer, ED of New Revenue writes in this piece about CA’s mixed tax policy (weight-based + ad valorem)

The Tax Foundation — "An excise tax on recreational marijuana should target the externality and raise sufficient revenue to fund marijuana-related spending while simultaneously outcompeting illicit operators. Excise taxes should not be implemented in an effort to raise general fund revenue.” And..."A potency- and weight-based tax defined by THC levels may be the best short-term solution for lawmakers assuming that THC is an appropriate proxy for the externalities associated with consuming marijuana.”

Here’s the Libertarian-leaning Reason Foundation, which cautions against high taxes. Other Resources on Taxation

The Marijuana Policy Project has a number of resources as it relates to revenue in legalization states:

Financial Impact of Legalizing Cannabis For Adult Use

This shows both tax rates and year by year revenue, along with the total population for each state, regulatory fees and revenue. The organization will have an updated version by the end of 2021.

A Breakdown of Taxes in Adult-Use States

This covers tax rates, the types of taxes, and the interplay with the medical programs in the states.

Colorado and Washington: Life After Legalization

Colorado and Washington are the oldest adult-use laws in the country and offer important snapshots on the impact of legalization.

Related Legislation

In 2021, bills were introduced by Sen. Brian Feldman and Del. Jazz Lewis to establish an adult use market for legalized cannabis, with a few key differences.

Senate Bill 708:

● Businesses in the state’s existing medical cannabis industry would pay fees into a social equity fund to be used for low-interest loans for minority business owners to enter the industry. ● The funds would help "social equity applicants" — people from communities that have been disproportionately affected by marijuana criminalization — enter the legal market. ● Additionally, a portion of the tax revenue from the newly legalized field would be fed into a Community Reinvestment and Repair Fund, which would provide housing assistance, scholarship aid, re-entry programs and other services in communities that have been adversely impacted by mass incarceration and racism relating to the state’s current criminalization laws. ● The Community Reinvestment and Repair Fund would also aid people formerly incarcerated for petty cannabis charges in applying for expungements.

House Bill 32:

● Both bills included automatic expungement for past criminal charges related to marijuana possession below the amount that would have been legalized. ● Feldman’s bill would decriminalize the possession of under four ounces of cannabis by adults 21-years or older. Under Lewis’ bill, adults 21 and above could legally possess up to two ounces. ● In Lewis’ bill, the sale of cannabis would be subject to a 20% excise tax. Feldman’s would impose a 10% excise tax initially, which would rise gradually to 20% by 2027. ● Under Lewis’ bill, anyone who has a license from a regulator can contract with dispensaries, which he feels means that smaller, minority and women-owned businesses would have a steady stream of product.