The Government Could Make a Buttload of Tax Cash Off of Legal Marijuana

The Government Could Make a Buttload of Tax Cash Off of Legal Marijuana
File photo by Timothy Norris/L.A. Weekly

As more and more states legalize marijuana for medical and recreational use, federal state and local governments are in for a tax bonanza, according to a new pair of reports from the nonprofit Tax Foundation.

While there's a bubble-like sense of profit hype surrounding the burgeoning cannabis business, one of the two reports notes that "marijuana tax collections in Colorado and Washington have exceeded initial estimates," according to a statement from the tax organization.

"A mature marijuana industry could generate up to $28 billion in tax revenues for federal, state and local governments, including $7 billion in federal revenue: $5.5 billion from business taxes and $1.5 billion from income and payroll taxes," the foundation says in its report, "Marijuana Legalization and Taxes: Federal Revenue Impact."

That's more than enough, for example, to cover the University of California system's statewide budget for a year. In other words, that's a lot of cash.

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"If all states legalized and taxed marijuana, states could collectively expect to raise between $5 billion and $18 billion per year," the report states. "While these amounts are not stratospheric, they are considerable and exceed additional enforcement and regulatory costs incurred by the states."

But don't get excited just yet. The foundation warns of two issues as we head into the era of green-rush fever.

First, legalization leads to lower prices, which could lead to lower revenues.

Those tax revenues could flatten out to $22 billion "as production increases and profit margins fall," the report says. Increased production would lower prices and thus lower tax revenues, it says.

Second, taxes that are too onerous would encourage a black market, which is pretty much the opposite of what legalization proponents are trying to do. And if a black market flourishes under the protection of legal possession of pot, the people won't be getting as many tax dollars.

"If high tax rates or other factors perpetuate the black market, tax collections would be less," the report says.

A second Tax Foundation report, "Marijuana Legalization and Taxes: Lessons for Other States From Colorado and Washington," says that "Colorado, Washington and Oregon have all taken steps to reduce their marijuana tax rates" in order to fend off an encroaching black market.

California voters are expected to weigh an initiative, the Adult Use of Marijuana Act, in November. It would legalize holding up to one ounce of cannabis while taxing and regulating recreational sales. The proposed tax rate is 15 percent.

"Legalization is happening in several states, and that number is going to go up," said Tax Foundation vice president Joseph Henchman. "Federal and state policymakers can benefit from the lessons learned in the first few states."

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