Marijuana legalization may get a big push next year if only for the fact that governments could really use the tax cash

Americans aren’t divided on everything. Sixty-seven percent favors legalizing marijuana, according to a Pew Research Center survey. When including those who support allowing its use for medicinal purposes, the proportion jumps to 91%.  

In November, five more states, including deep-red Mississippi, Montana and South Dakota, passed ballot measures allowing marijuana use. That makes 46 states with laws permitting or decriminalizing the use of marijuana or marijuana-based products. Adults may now consume marijuana recreationally in 15 states, though it remains illegal at the federal level. One day, it seems, marijuana could be as American as apple pie.

Also as American as apple pie: Taxes. Consider the billions in revenue that flows into federal, state and local coffers each year from the estimated one-in-seven adults who smoke cigarettes. Now consider that more than one-in-10 Americans already use marijuana products on a monthly basis, according to the Tax Foundation.

Rising cannabis use

Unlike cigarette smoking, which has been declining for decades, the use of cannabis is surging. This despite the fact that recreational use is still illegal in most of the country, and at the federal level. But this is changing quickly.

“We’re approaching critical mass,” says Ulrick Boesen, who tracks cannabis matters for the Tax Foundation. He says state revenue from cannabis is only now ramping up, and that the federal government will inevitably follow. And that’s not only because of broad public support for greater use of marijuana, but also because Uncle Sam needs the money.  

But don’t think the feds aren’t already taxing pot. The IRS always seems to find a way, and in the case of cannabis it says that “many marijuana-industry businesses conduct transactions in cash (yet) need to be reported, like any other form of payment.” And taxes should be paid, the agency adds, with “the highest degree of voluntary compliance.”   

I don’t know how well voluntary compliance works in terms of generating tax revenue, but I’ll venture a guess that legalizing marijuana at the federal level and regulating it — as is the case with tobacco and alcohol — would bring in a lot more money.

“There’s a lot of (cannabis-related) economic activity that’s illicit and in the black market that is moving into the regulated and taxed market,” says Boesen. “People are starting to pay income taxes, property taxes, sales taxes and all the other taxes that we levy on legitimate businesses.”

That has been a boon to states that are always looking for new sources of revenue. The Brookings Institution is forecasting that state and local government revenue will drop by as much as 5.7%, or $167 billion, in the next three fiscal years.

Biden supports decriminalization

This is clearly getting more traction in Washington, D.C. On the campaign trail, Joe Biden, now the president-elect, said he favored cannabis decriminalization, along with erasing the records of anyone convicted of non-violent marijuana-related crimes. But he has stopped short of fully embracing legalization, marijuana advocates say. But not Vice President-Elect Kamala Harris, who sponsored a Senate bill last year to do just that.  

At least one-half of Congress is receptive to the idea of decriminalization. Last week, in a 228-164 vote, the House passed a sweeping decriminalization bill that would also erase non-violent marijuana-related convictions from anyone’s record. The bill would also remove marijuana from the Controlled Substances Act and authorize a 5% marijuana tax that would finance community and small-business grants to help those most impacted by its prior criminalization. Five Republicans broke ranks and sided with Democrats in backing the legislation. 

The bill is in limbo pending next month’s Senate runoffs in Georgia. In all likelihood, Democrats will have to win both races to have any hope of passing the bill and sending it to the White House for President Biden’s signature. If Republicans hang on, the bill isn’t expected to advance.  

There are other considerations. Another bill — the Secure and Fair Enforcement Banking Act of 2019 — passed the House in September. According to congress.gov, it would “generally” ban the federal government from penalizing any bank that works with a legitimate marijuana- or hemp-related business. In plain English: Banks could treat state-licensed cannabis businesses like any other business, and do away with current, expensive regulations that impede commerce. You can read the entire bill here.

That, in turn, would speed up the development of the legal U.S. cannabis industry, currently estimated to be a $15 billion-plus industry, according to a UBS study.

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