By Mariah Phillips

In the past few years, proponents of legalizing marijuana in the United States have chalked up a series of impressive victories. Since 2012, nine states – including California – have legalized the drug for recreational use. Medical marijuana is now legal in 30 states and the District of Columbia, and 13 states no longer impose criminal penalties for possession of small amounts of cannabis. Meanwhile, Canada just approved legislation that will soon allow for recreational use of marijuana nationwide, joining Uruguay as the only two countries in the world to do so.

While there have been a number of reasons cited in favor of legalizing recreational marijuana use, one huge incentive for state governments has been the prospect of a new tax revenue stream. According to BDS Analytics, the legal and illegal sale of pot in the U.S. in 2017 generated nearly $9 billion in revenue, a figure that would almost certainly grow if cannabis becomes legal in more places.

States have traditionally used ‘sin’ taxes – extra levies on activities such as drinking alcohol, smoking and gambling – to help plug budgetary shortfalls or fund specific programs. (See Sidebar) And so far, marijuana is being treated no differently. Indeed, all the states that have legalized cannabis have enacted special taxes connected to its sale. In Washington and Oregon, for instance, people who buy pot pay a sales tax of 37% and 17%, respectively. In Colorado, users pay a 15% sales tax along with a 15% excise tax. And in Alaska, the government charges a tax of $50 per ounce of marijuana purchased.

With these types of high tax rates, perhaps it’s not surprising that some states that have legalized marijuana are already deriving sizable revenues from the blossoming cannabis industry. According to New Frontier Data, a non-partisan research group that takes no position on legalization, states that allow recreational marijuana use took in $655 million in tax revenue in 2017. These figures do not include California, where legalization only took effect at the beginning of 2018.

But while proponents of cannabis legalization have had a string of victories, the battle is far from over. Possession of marijuana is still illegal at the federal level. And while President Donald Trump has said he will “probably” support legislation introduced in Congress that would exempt states that have legalized marijuana from federal prosecution, the Justice Department has promised more aggressive enforcement of federal law. This, along with the lingering social stigma, has made some businesses wary of investing in a potentially lucrative but still untested market, meaning that the industry to produce, distribute and sell pot has remained relatively small.

Some proponents of legalization say if state governments want to collect sizable tax revenues from marijuana, they need to avoid heavily regulating the industry and make it easy for businesses to meet demand. “When you have lots of regulatory hurdles you make it difficult for businesses to enter the marketplace and you encourage people to stay underground and sell on the black market,” says Dr. Jeffrey Miron, an economist at Harvard University and the CATO Institute. Miron points to his home state of Massachusetts, which recently legalized cannabis for recreational use, but has so far made it difficult for marijuana retail stores to open.

Those who oppose legalization argue it will increase consumption, and not only in the states that have legalized the drug. “In states where marijuana is legal you see increases in both legal and black-market production,” says Dr. Kevin Sabet, a psychiatrist and president of Smart Approaches to Marijuana, a group that opposes legalization. “So, what you see in these states is that people are producing more marijuana than can be consumed locally and then exporting it to other states. We’re ultimately increasing the total supply and demand.”

The Debate in New York

The next round in the battle over legalization will be fought in Michigan, where voters in November will decide whether their state will allow recreational marijuana use. But many eyes have turned to New York – the nation’s fourth-most populous state – where the debate over legalization thus far reflects divided opinions among state leaders.

But this may be about to change. The issue has become pivotal in the race for New York governor. Cynthia Nixon, who is challenging Governor Andrew Cuomo for the Democratic Party gubernatorial nomination, has made pot legalization the first plank in her campaign platform. For Nixon, legalizing marijuana is about more than a new source of revenue for the state. She believes many young men – particularly African-Americans and Latinos – have been unnecessarily imprisoned for marijuana possession.

[three_fifth padding=”0 10px 0 0″]Cuomo, who in 2014 signed legislation legalizing medical marijuana, supports decriminalizing possession of small amounts of cannabis but has not endorsed legalizing pot for recreational use. Still, earlier this year, Cuomo authorized the state health department to study the feasibility of legalizing marijuana for recreational use, saying he would be open to changing the law if the study shows legalization would raise significant state revenues and would not negatively impact public health or law enforcement efforts.

As the issue heats up, the Empire State may start looking at the experiences of states like Colorado. One of the first states to legalize marijuana for recreational use (in 2014), Colorado collected $247 million in taxes and fees from legal marijuana operations and sales in 2016.  Using Colorado’s marijuana revenue per capita, a much more populous New York could potentially earn nearly half a billion dollars in tax revenue from an estimated $3.3 billion in sales of marijuana for recreational use. Given the state’s periodic budget woes (N.Y. officials worked overtime last year to close a $4.4 billion shortfall) the extra revenue could prove hard to pass up.

Assessing Legalization in Colorado

One of the first states to legalize pot, Colorado has some challenges. For instance, when it legalized marijuana, criminal groups in the state began increasing the supply of harder drugs like heroin. In addition, the state took three years to pass a driving under the influence law for marijuana, only to come under withering criticism from legalization proponents who argued it was too strict and lead to too many arrests.

State officials say the experiment, while not perfect, generally is working well and that the state is constantly looking for ways to make it better. “We’ve learned a lot in five years and we’re constantly working on best practices,” says Dominique Mendiola, Colorado’s new director of marijuana coordination. Mendiola also points out that much of the revenue derived from taxing the sale of marijuana goes to fund things Coloradans support, such as school construction and repair and drug prevention and treatment programs for young people.[/three_fifth] [two_fifth]

‘Sin’ Taxes Provide Significant RevenueSin taxes are excise taxes charged on certain goods deemed harmful to society. Originally designed to curb the use of perceived vices such as tobacco and alcohol, they cover a much broader range today, from coffee and plastic bags to fast food and pornography. In some states, they provide a significant supplement to state and local tax revenues.

In the 2014 fiscal year (the last year data is available) state sin tax collections exceeded $32 billion, which represents only about 3.8% of their total tax revenues. But a number of states – Rhode Island, Nevada, West Virginia, New Hampshire and Delaware – rely on sin taxes (mostly gambling taxes) for roughly 10% to 15% of their total revenue.

By far the largest “sin” taxed is tobacco, which provided roughly half the total sin tax revenue – more than $16 billion in 2014. This may reflect the fact that, given the hostility of much of the public toward smoking, it’s easier for state legislatures to pass tax hikes on cigarettes than on any other product. Indeed, from FY 2000 through 2015, states enacted 111 tax increases on tobacco products, while enacting only 23 alcohol taxes. In the long term, however, cigarette taxes are unlikely to be a promising source of revenue due to a general decline in smoking.

[/two_fifth]

Meanwhile, proponents of legalization are heartened by polls from Gallup and Pew Research Center that show that more than 60% of American adults favor legalizing marijuana. They contend that if a number of big states, particularly New York, allow recreational use of pot, it will be hard for the federal government and other states not to follow suit. “At some point, the federal government will want to stop missing out on the revenue windfall from all of this and Congress will do something about it,” Miron says.But Sabet counters that, as with tobacco, the “normalization” of marijuana will end up costing states much more in health care and other social costs than they ever raise in tax revenues. “In 30 years,” he says, “I think we’re going to say, ‘what were we thinking?’”