Tax revenues from marijuana legalization in jeopardy, but states continue to legalize

According to a Jan. 5, 2018 Pew Research Center survey, as of last October, 61 percent of Americans support the legalization of marijuana. This is up a bit from a year ago, when that figure was 57 percent, but almost double what it was in 2000, 31 percent.

The Pew survey found that support varies widely between different groups. For example, millennials (born between 1980-1994), Gen-Xers (born between 1965-1979), and baby boomers (born between 1946-1964) support legalization at rates of 70 percent, 66 percent and 56 percent respectively. In contrast, 58 percent of the silent generation, those born between mid- 1925 and 1945, oppose legalization, while only 35 percent favor it.

Despite the variations, the trend is unmistakable, as reflected by the increasing number of states that have legalized marijuana for medical and/or recreational purposes.  A National Conference of State Legislators (NCSL) marijuana overview from last August recognized that eight states plus the District of Columbia have legal recreational marijuana, by way of voter approved ballot initiatives: California, Maine, Massachusetts, Nevada, Colorado, Washington, Alaska, and Oregon. Different NCSL research, dated Jan. 15, 2018, shows that 29 states, along with the District of Columbia, Guam and Puerto Rico have legalized pot for medical purposes:

1. Alaska
2. Arizona
3. Arkansas
4. California
5. Colorado
6. Connecticut
7. Delaware
8. District of Columbia
9. Florida
10. Guam
11. Hawaii
12. Illinois
13. Maine
14. Maryland
15. Massachusetts
16. Michigan
17. Minnesota
18. Montana
19. Nevada
20. New Hampshire
21. New Jersey
22. New Mexico
23. New York
24. North Dakota
25. Ohio
26. Oregon
27. Pennsylvania
28. Puerto Rico
29. Rhode Island
30. Vermont
31. Washington
32. West Virginia

Hundreds of millions at stake

Despite the trend, marijuana distribution for any purpose remains illegal at the federal level, via the Controlled Substances Act. The Obama administration, in 2009, encouraged federal prosecutors not to pursue people who distribute marijuana for medical purposes in accordance with their states’ laws, but current attorney general, Jeff Sessions, is doing the opposite. In a Jan. 4, 2018 Memo on Marijuana Enforcement, the Justice Department announced “a return to the rule of law and the rescission of previous guidance documents.”

States are not happy about the uncertainty that the memo has generated, at least in part because they are so pleased with the revenue that pot brings in. In Colorado, for instance, CNNMoney reported last July that the state had “harvested half a billion dollars in taxes and fees since it legalized recreational weed,” in 2012. Sales began there in January 2014.

A spring 2017 Forbes article revealed that in 2017, states expected to realize $559 million from cannabis taxes, relative to $655 million of total retail sales taxes. Anticipating the action that Attorney General Sessions just took, Forbes cautioned that “[t]his money isn't easily replaceable if the Department of Justice reviews its current approach to marijuana. Plus, the Trump administration is calling for deep cuts in many programs with its proposed budget and this puts further pressure on state governors to continue providing services its residents have come to expect.”

What is more, Forbes quoted one business person who observed that “’states' economies are feeling the effects on real estate, the effects on the job market, the effects on travel and hospitality and the effects from a reduction in taxpayer burden from the criminal justice system’…The direct cannabis taxes combined with the indirect taxes such as income tax on newly created jobs and retail taxes on consumer spending from these new jobs has created a tax boom.”

States react to federal marijuana enforcement

Now though, states are ready to fight back. A Bloomberg piece cited Colorado’s Gov. John Hickenlooper, who is considering litigation, and Washington’s attorney general, who said that “his team is ‘very prepared’ to mount a legal challenge to the Sessions rescission, depending on what the Justice Department does next…’We have a structure, an organization of states that have legalized marijuana to talk about this…Our legal arguments have been crafted; they are prepared. We are not messing around with defending the will of the voters.’”

In California, where both recreational and medical marijuana are now legal, Attorney General Xavier Becerra promised that his “Department of Justice will vigorously enforce state laws and protect state interests.” Officials in Maine, Massachusetts and Nevada expressed similar views about defending their states’ laws in accordance with the will of their people.

Imperiled banking arrangements

Another headache for marijuana businesses is the danger that robust federal enforcement poses to their banking arrangements. A Jan. 5, 2018 Pew Charitable Trusts analysis suggested that “U.S. Attorney General Jeff Sessions may compel many banks and credit unions to stop working with marijuana businesses… Without access to the banking system, the rapidly growing marijuana industry — valued at $6.7 billion in 2016 — would have to rely on cash. That would make cannabis businesses, owners and employees vulnerable to theft and complicate state efforts to collect taxes on drug sales.”

The analysis noted that as the industry has grown, so has the number of institutions willing to support it, to the extent that there are now about 390 banks and credit unions that provide accounts to marijuana businesses. If the federal government issues new guidance to accompany its Memo on Marijuana Enforcement, these financial entities may have no choice but to drop marijuana accounts or risk the possibility of federal prosecution for money laundering, according to a chief risk officer for an Oregon credit union. Similarly, a Los Angeles attorney predicted that “banks and credit unions that were thinking about entering that line of business may steer clear…[she is] ‘positive that it will chill participation for those who are thinking about it.’”

What’s next?

In spite of all this, Vermont’s legalization of recreational marijuana, by way of H. 511 appears to be all but imminent. On Jan. 4, 2018, the measure passed the House, and on Jan. 10, 2018, the Senate concurred with the last amendment. Gov. Phil Scott has said he will sign it, which would make the state the first to legalize recreational marijuana legislatively, rather than by ballot initiative, proclaimed the Marijuana Policy Project. Medical marijuana has been legal in Vermont, also via legislation, H. 200, since 2013.

An LA Times piece asserted that Connecticut, Michigan, New Jersey, and Rhode Island may follow suit this year. “The marijuana movement is charging ahead.”