Tuesday, April 9, 2019
The title of this post is the title of a presentation to be made by one of my students in my Marijuana Law, Policy & Reform seminar this coming week. Here is part of his explanation of his topic and links to some background reading:
State legalization of marijuana, and the rising prevalence of marijuana businesses, has continually thrust Internal Revenue Code (IRC) § 280E into the spotlight. Many scholars have argued for the provision’s abolishment, but the IRS’s staunch stance remains unyielding. The literature seems to suggest a tacit assumption that IRC § 280E will remain a hurdle if/until marijuana is removed from Schedule I. Although IRC § 280E is a hurdle, other mechanisms are shifting to allow marijuana businesses to be successful despite this tax provision.
For example, in many cases, the Tax Cuts and Jobs Act of 2017 did more for marijuana businesses than a repeal of IRC § 280E would have. Yes, marijuana businesses are still worse off than other businesses from a tax perspective, but marijuana’s competition is not necessarily other sectors, it is the black market. There is something to be said for the fact that the marijuana industry continues to grow, despite claims of IRC § 280E making growth “impossible.” However, the primary focus of this paper is not to explain why IRC § 280E predictions were incorrect, it is to look forward at why and how the industry can continue to succeed regardless of IRC § 280E.
April 2015 white paper by the National Cannabis Industry Association, "Internal Revenue Code 280E: Creating An Impossible Situation For Legitimate Businesses": Download 2015-280E-White-Paper
Fortune article, "The Marijuana Industry’s Battle Against the IRS"
Cannabis Business Times article, "Tax Court Reinforces IRS Code 280E in Harborside Ruling"
Memo from Rosenberg Martin Greenberg law firm, "Are Owners of Cannabusinesses Eligible for the Qualified Business Income Deduction Under Section 199A?"
Tuesday, January 1, 2019
There has been some real impact since recreational marijuana showed up:
- Dozens of new roofs for crumbling schools across the state.
- Sprinklers in buildings built decades before they existed.
- Security systems in an age of concern for student safety.
- Additional classrooms to alleviate relentless overcrowding.
- New gyms to replace dilapidated ones.
- New schools because older ones are unsafe to enter.
But there have also been dozens of other similar projects statewide that have gone unfunded because not enough dollars are allocated to handle them all.
While the public’s attention has focused on the roughly quarter-billion dollars a year in marijuana-related revenue that flows into state coffers, the burgeoning marijuana business also has brought a bonanza in tax revenue for dozens of municipal and county governments.
Nobody comprehensively tracks the local figures, but as Colorado marks the five-year anniversary of legalization a Denver Post analysis fleshed out a large part of the picture based on available data: In 2017, at least $71 million was collected from recreational marijuana via local taxes and the “share-backs” provided by the state, which now returns a tenth of the total raised by its own 15 percent special marijuana sales tax.
Marijuana Tax Cash Fund ... is the largest pool of marijuana tax revenue in the state. Colorado collected $251 million during fiscal year 2017-2018, and 49 percent of that went into the Marijuana Cash Tax Fund. Three funds that support K-12 education received a collective $98 million, $16.7 million went to local governments and $12.4 million went into the general fund.
State law technically allows the General Assembly to appropriate its tax fund money for any purpose, but state legislators created a set of “allowable purposes” such as mental health treatment, marijuana research and law enforcement training and to provide services to school-age children. Each year, lawmakers tinker with the cash fund by running bills to create new grants and by adjusting how much marijuana money, if any, goes into programs they created in previous years.
Monday, December 24, 2018
The title of this post is the headline of this notable new New York Times piece by Ginia Bellafante. Here are excerpts:
Gov. Andrew M. Cuomo announced that he would push to make pot smoking — for fun — legal in New York State. It was quite a statement for a governor who had repeatedly questioned the wisdom before, calling it an enabler of more pernicious habits. The “facts have changed,” he had said several months before, meaning really that the polling had changed — in October of 2017, support for the legalization of marijuana reached its highest point in five decades with nearly two-thirds of Americans surveyed by Gallup expressing enthusiasm for the revision.
The governor made his argument deploying the progressive rhetoric he has turned to increasingly as his neoliberal leanings have become less politically expedient. That rhetoric rightly maintains that legalization of the drug is essential to redressing injustices in a criminal justice system that has overwhelmingly penalized young men of color for carrying or smoking pot.
Two days after Mr. Cuomo made his commitments known, in fact, Brooklyn’s district attorney, Eric Gonzalez, asked a judge to obliterate more than two dozen past marijuana convictions; his office vacated open warrants for more than 1,400 people who had missed court dates for possession cases. In the absence of such erasures on a broad scale, merely legalizing the drug would do nothing to remediate the damage inflicted on thousands of people ensnared in a legal universe that so severely handicaps them for doing what white people pull off with impunity. This is why mayor Bill de Blasio followed the governor’s announcement with his own endorsements of legalization — this too a reversal — recommending that convictions for marijuana-related crimes be expunged automatically.
In previous eras, decriminalization had been championed largely by libertarians, who saw a lot of government waste in a system that needlessly locked people up, and by hippies, who just wanted to be left alone to get stoned. It is only recently that pot has been widely imagined as an almost holy vessel of redemption, a cure-all for a full range of 21st century maladies — social division, chronic pain, chronic distraction, chronic boredom. Leafly, a journal of cannabis news, describes Cinex, a particular weed strain as providing a “wired euphoria that feeds creativity” while making daily chores less of a “drag.”
Of course, lawmakers in New York are not primarily motivated by the desire to make our daily chores less of a drag. They quickly suggested that taxing marijuana could fix the transit system, in need of $60 billion worth of repairs. They invited us to envision a world in which pot really was a gateway — to more efficient infrastructure!
Leaving aside for a moment whether these ambitions are all too utopian, it is easy to see what is problematic about legislators relying on our escapist pleasures to perform some of the most necessary functions of government. In 1951, for example, the federal excise tax on cigarettes was raised to help finance the Korean War. Given that the previous year had produced five separate epidemiological studies confirming the growing suspicion that smokers were more likely to contract lung cancer than nonsmokers, 1951 might have been a good time to mandate warning labels on cigarette packaging but, as it happened, that would take another 14 years to accomplish.
The enthusiasm for revising the legal status of pot around the country has for the most part obscured any debate about consequences to public health. That pot is regarded as relatively harmless is troubling, because much of what we know about it is based on studies conducted nearly 50 years ago at a time when what was consumed was much less potent than it is now.
Within the academic community, Jonathan P. Caulkins, a professor of public policy at Carnegie Mellon, has been a leading voice warning of marijuana’s attendant dangers. As he has put it, beyond the fact that pot use has been correlated with a wide variety of negative outcomes in terms of physical and mental health, the real issue is that more than half of marijuana is consumed by people who are high more than half of all their waking hours. Pot shouldn’t be dismissed simply because it won’t kill you.
Mr. Caulkins’s research also shows us who is likely to bear these health burdens to a disproportionate degree — and it is not snowboarders in Vail. Looking at a decade’s worth of federal surveys on drug use, he and a partner determined that Americans with a household income of less than $20,000 accounted for close to 30 percent of all marijuana use, even though they make up less than 20 percent of the population.
One fantasy that advocates of legalization have is that changes in the law will energize a redistribution of wealth, not only because tax revenue from pot sales can be funneled to various worthy causes but also because the poor will reap new entrepreneurial opportunities — in every neighborhood a Stringer Bell....
I asked Mark Kleiman, of the Marron Institute at New York University and one of the most sought-after experts on drug policy in the country, what the future looked like. He foresaw a world in which pot, legal in ever more states and eventually at the national level, will get cheaper and cheaper. The expected tax windfalls would become less likely, unless pot is taxed at the level of potency rather than sale price. The trend toward vaping means there will be greater demand for oil, and if you can melt everything down for oil, pot will be less expensive to produce, because at that point you can grow it like corn.
“You can produce all the intoxicant used in a year on 40,000 acres,” Mr. Kleiman said. “That’s 20 family farms in Iowa.” Eventually a joint could cost a nickel; Nabisco will take over edibles. “You will have pot grown in Iowa, processed by Cargill and sold by Amazon,” Mr. Kleiman said. “No one will make money except Jeff Bezos, who always makes money.”
December 24, 2018 in Criminal justice developments and reforms, History of Marijuana Laws in the United States, Recreational Marijuana Commentary and Debate, Taxation information and issues , Who decides | Permalink | Comments (0)
Thursday, December 6, 2018
New York City Comptroller Scott M. Stringer first caught my attention six months ago when he produced this notable report titled "Estimated Tax Revenues from Marijuana Legalization in New York." Today, Comptroller Stringer has my attention again with this notable new 15-page report titled "Addressing the Harms of Prohibition: What NYC Can do to Support an Equitable Cannabis Industry." I recommend the document in full, and here is part of its introductory section:
Over the last several decades, the prohibition of cannabis has had devastating impacts on communities in New York City, extending beyond incarceration to often long-lasting economic insecurity: damaged credit, loss of employment, housing, student loans, and more. Today, thousands of New Yorkers, overwhelmingly Black and Latinx, continue to endure the untold financial and social costs of marijuana-related enforcement, despite steps to decriminalize.
As New York joins neighboring jurisdictions in moving closer to legalizing cannabis for adult use, the State and the City must take action to ensure that the communities who have been most harmed by policies of the past are able to access the revenue, jobs, and opportunities that a regulated adultuse marijuana program would inevitably generate.
While the creation of a legal market brings the promise of new wealth, the uneven enforcement of marijuana policies in New York specifically and the lack of diversity in the cannabis industry generally foreshadow potential inequities in who will benefit — and, indeed, who will profit — from a legal adult-use cannabis industry. In anticipation of future legalization, this report, by New York City Comptroller Scott M. Stringer, offers a new neighborhood-by-neighborhood look at cannabis enforcement and charts a roadmap for building equity into the industry....
Together, the report findings show that the neighborhoods most impacted by prohibition are among the most economically insecure and disenfranchised in the city. It is precisely these New Yorkers then — those to whom the benefits of legalization should be targeted — who are most likely to face barriers to accessing opportunities in the industry, in particular financing. In addition to reinvesting tax revenue from legalization in these disproportionally impacted communities, steps should therefore be taken to equip those impacted by prohibition to secure the funding and other resources needed to become cannabis licensees. This report recommends that the City, in partnership with the State, develop a robust cannabis equity program to direct capital and technical assistance to impacted communities interested in participating in the adult-use industry.
December 6, 2018 in Business laws and regulatory issues, Campaigns, elections and public officials concerning reforms, Criminal justice developments and reforms, History of Marijuana Laws in the United States, Race, Gender and Class Issues, Recreational Marijuana Commentary and Debate, Recreational Marijuana State Laws and Reforms, Taxation information and issues | Permalink | Comments (0)
Wednesday, December 5, 2018
The title of this post is the title of this notable report authored by the Rudin Center for Transportation Policy and Management at NYU. Here is part of its introduction:
The centrality of the subways to the life of New York is the very reason why the public is alarmed about the condition of mass transit. The Citizens Budget Commission has systematically analyzed the failure of the Metropolitan Transportation Authority (MTA) to maintain a state of good repair and the need for fundamental reform of the MTA’s capital spending processes. A new plan, “Fast Forward,” has been proposed to improve accessibility, deploy new technologies, update signals, and acquire 21st century subway cars.
Clearly, increased fares and congestion pricing are insufficient to deal with the long-term financial needs of the subway system. This report argues that the subways need a dedicated revenue source with the potential for growth in future decades — one that does not divert funds from other public services, and that has yet to be tapped by the state and local government. The legalization of recreational cannabis offers New York State a unique opportunity to generate a new revenue stream dedicated to mass transit.
Monday, November 19, 2018
The Centennial Institute at Colorado Christian University, a think tank which has given considerable attention to marijuana issues. Its latest policy brief runs nearly 100 pages and is titled "Economic and Social Costs of Legalized Marijuana." Jeff Hunt, Director of the Centennial Institute, provides a summary of sorts at the start of the report and it begins this way:
The Centennial Institute at Colorado Christian University commissioned this study to better understand the economic and social costs of legalized marijuana. While much has been written about the tax revenue and total sales generated from commercial marijuana, there has been little research to understand how Coloradans are paying to mitigate the consequences of commercial marijuana.
No matter where you stand in the marijuana legalization debate, having more information is critical to making the best decisions for the future of Colorado and our nation. This report is an important first step in giving researchers and policymakers a sense of the breadth of costs associated with commercial marijuana. Furthermore, it is clear from the report that much more information is needed to fully understand the social costs associated with commercial marijuana.
The bad news is that the costs associated with commercial marijuana are only going to go up as the long-term health consequences have not been fully determined. Like tobacco, commercial marijuana is likely to have health consequences that we won’t be able to determine for decades. Those costs are not configured in this report.
This report is fair in presenting the economic benefits of commercial marijuana to Colorado including reporting tax revenue, jobs, and overall sales. It is contrasted with the economic and social costs of commercial marijuana, which took a very cautious approach in determining costs. Bottom line, the economic and social costs in this report are intentionally low and the comprehensive costs are likely much higher.
Here are the important findings from this report:
- For every dollar gained in tax revenue, Coloradans spent approximately $4.50 to mitigate the effects of legalization
- Costs related to the healthcare system and from high school drop-outs are the largest cost contributors
- While people who attended college and use marijuana has grown since legalization, marijuana use remains more prevalent in the population with less education
- Research shows a connection between marijuana use and the use of alcohol and other substances
- Calls to Poison Control related to marijuana increased dramatically since legalization of medical marijuana and legalization of recreational marijuana
- About 15 people are severely burned as a result of marijuana use per year
- People who use marijuana more frequently tend to be less physically active, and a sedentary or inactive lifestyle is associated with increased medical costs
- Adult marijuana users generally have lower educational attainment than non-users
- Research does suggest that long-term marijuana use may lead to reduced cognitive ability, particularly in people who begin using it before they turn 18
- Yearly cost-estimates for marijuana users: $2,200 for heavy users, $1,250 for moderate users, $650 for light users
- 69% of marijuana users say they have driven under the influence of marijuana at least once, and 27% admit to driving under the influence on a daily basis
- The estimated costs of DUIs for people who tested positive for marijuana only in 2016 approaches $25 million
- The marijuana industry used enough electricity to power 32,355 homes in 2016
- In 2016, the marijuana industry was responsible for approximately 393,053 pounds of CO2 emissions
- Marijuana packaging yielded over 18.78 million pieces of plastic
I sense many of the numbers in this report are contestable, especially given that the executive summary notes that "costs related to the healthcare system and from high school drop-outs are the largest cost contributors." Quantifying marijuana's exact impact on the healthcare system and high school drop-outs strikes me as an inherently inexact science. But it is still interesting to see this accounting effort and see who might engage with these numbers. It is also notable that a ratio of tax revenue to costs is here for marijuana "only" 1 to 4.5 given that I have seen studies showing that that ratio of tax revenue to costs for alcohol runs roughly 1 to 10.
Sunday, October 28, 2018
The folks at PoliFact have this lengthy new piece under the headline "Marijuana legalization in 5 charts: A 2018 midterm report" that is worth reading in full. This infographic under the title "Potential $7 Billion Recreational Marijuana Tax Revenue, By State," highlighting revenue from marijuana reform is alone worth the click-through, and here are excerpts from the piece providing a glimpse at what the "5 charts" cover:
About two in three Americans now favor marijuana legalization, a record-high measure of public support for a drug the federal government still puts in the same category as LSD and heroin.
With a majority of states now permitting legal use in some form, and several states poised to relax their laws this November, we decided to take a graphical look at the country’s most popular illicit drug.
Experts pointed to a number of reasons to explain the dramatic shift in Americans’ opinion of marijuana legalization over a relatively short timespan....
State marijuana laws
American laws around marijuana are complicated....
State tax revenue
Taxing marijuana can yield a large pot of money for states. The data is still somewhat scarce given that legalization is still in its infancy....
The country’s decades-long crackdown on drugs has had a disproportionate impact on minorities....
Some experts said the pros of legalization far outweighed the cons, while others said it’s too early to tell....
October 28, 2018 in Criminal justice developments and reforms, History of Marijuana Laws in the United States, Polling data and results, Recreational Marijuana Data and Research, Taxation information and issues | Permalink | Comments (0)
Wednesday, October 3, 2018
Prediction of hundreds of millions in tax revenues for Michigan if citizens vote for marijuana legalization
This local article, headlined "Estimated tax haul from marijuana sales would grow to $134 million per year," reports on a report on tax revenues being predicted if Michigan were this fall to become the 10th in the United States to legalize recreational marijuana. Here are some details:
By the time Michigan’s recreational marijuana market is fully fleshed out, $134.5 million in tax revenues will be flowing into the state’s coffers annually. But there’s a big caveat: Michigan voters will first have to pass a ballot proposal on Nov. 6 to legalize marijuana for adult recreational use.
The figures for state tax revenues — from the 6-percent sales tax and a 10-percent excise tax — come from VS Strategies, a Colorado-based cannabis consulting firm hired by the Coalition to Regulate Marijuana Like Alcohol, which is spearheading the campaign to legalize pot in Michigan. “We’re estimating $520 million in taxes from 2020-24,” said Andrew Livingston, a policy analyst with VS Strategies. “By 2023, Michigan will reach maturity with sales of just under $1.5 billion (for both medical and recreational marijuana).”
The revenues from recreational use will grow from $53.7 million in the first year to $134 million by the time the market matures, he said. When you add in the 6 percent sales tax and 3 percent excise tax on medical marijuana sales, the tax revenues jump another $40 million, according to the VS estimates.
The numbers are based on estimates of nearly 1 million Michiganders who have said that they’ve used marijuana in the past month and who could be expected to buy marijuana on a regular basis. Another 3.5 million people in Michigan have said they have used marijuana in their lifetime. The total number of marijuana users includes 300,000 people who are registered as medical marijuana users, Livingston said. Michigan’s tax rate is far lower than many of the other nine states that have legalized pot for recreational use... Michigan’s proposed rate is lower than other states in order to be more competitive and to attract more people to the state’s budding marijuana market, coalition spokesman Josh Hovey said.
The first $20 million in tax revenues for each of the first two years would go to research into the effects of marijuana use on different health ailments, including PTSD in veterans. Of the remainder, 35 percent would go toward roads, 35 percent to schools and 30 percent to the counties and communities that allowed marijuana businesses in their towns.
But the projected tax revenues, even when the market is fully established, fall well below the taxes generated in Colorado, the first state to legalize marijuana for recreational use, which collected $247.3 million in taxes in 2017.
Livingston said the Western states have higher numbers of users and he doesn’t expect Michigan to exceed those numbers. According to the annual National Survey on Drug Use and Health done for the U.S. Department of Health and Human Services in 2016, about 14.4 percent of Colorado’s population, or 727,000 people, used marijuana in the past month while 8.9 percent of Michigan’s population, or 886,000 people, used marijuana in the past month. “Mountain states have always led the rates of past-month consumption,” he said.
Michiganders shouldn’t just look at the tax revenues coming in from marijuana legalization, said Scott Greenlee, director of Healthy and Productive Michigan, a group opposing the ballot proposal. “What impact would it have in Michigan with a $57-billion budget? It’s just not that significant,” he said. “And then we have to deal with the unintended consequences of fighting increased addiction. I wonder if there would be anything left for Michigan other than a bad policy that will affect the state for decades to come.”
He said the 35 percent of tax revenues that would go toward improving Michigan’s roads would be a drop in the bucket for the state’s 120,000 miles of roads. “According to MDOT, the cost to improve roads is about $1 million per lane,” Greenlee said. “In their best case scenario, 35 miles of one lane of roads would be improved thanks to this new tax.”
Hovey said the coalition never promised that the marijuana tax revenues would be a cure-all for Michigan’s budget woes. “This will help fund the state’s most important needs. And we’ll be saving millions in wasted costs of continuing to enforce the prohibition of marijuana laws,” he said. “And I think the majority of the state’s residents would agree that our roads need more revenue.”
October 3, 2018 in Initiative reforms in states, Recreational Marijuana Data and Research, Recreational Marijuana State Laws and Reforms, Taxation information and issues , Who decides | Permalink | Comments (0)
Thursday, September 27, 2018
Notable groups set forth notable set of principles for marijuana reform as New Jersey debates legalization
The on-going debate over potential marijuana reform in New Jersey is continuing to generate lots of interesting and thoughtful discussion concerning just how states ought to approach legalizing and regulating marijuana. In that vein, I was interested to see this recent press release from Americans for Prosperity – New Jersey titled "AFP-NJ Supports Principles for Safe and Responsible Marijuana Reform" in conjunction with this document titled "Seven Principles To Guide A Successful And Well-Regulated Marijuana Market." Here are parts of the press release:
Americans for Prosperity – New Jersey (AFP-NJ) ... announced that it has co-signed a set of principles with the Reason Foundation’s Drug Policy Project regarding the state’s effort to legalize marijuana. If passed, S- 2703, the New Jersey Marijuana Legalization Act would legalize possession and personal use of marijuana for New Jerseyans over the age of 21 and would create the Division of Marijuana Enforcement and licensing structure.
Erica Jedynak, State Director of Americans for Prosperity – New Jersey issued the following statement in support of components of S- 2703:
“For too long, New Jerseyans have had their lives upended due to non-violent offenses like the recreational use of marijuana. In partnership with the Reason Foundation’s Drug Policy Project, we encourage lawmakers to follow the policy principles outlined for a successful and well-regulated marijuana market. These principles will help our state exercise its constitutional right to create a safely regulated marijuana market that spares generations of New Jerseyans from getting trapped in an endless and senseless cycle of incarceration. While S-2703 is not perfect in its current form, it makes good strides toward reshaping our criminal justice system and bringing it into the 21st century. Eventually, AFP-NJ hopes that a fully-realized effort to legalize recreational marijuana enhances public safety, provides second chances, and is free of cronyism and overregulation.”
Dr. Adrian Moore of Reason issued the following statement in support of components of S- 2703:
“As states move to legalize medical and adult use marijuana, it is vital that sensibly regulated free and competitive legal markets emerge to entirely replace black markets and all their ills. We are focused on helping to learn and adopt best practices and informed understanding of how markets work to the legislative and regulatory process of legalizing marijuana.”
The articulation of "Seven Principles To Guide A Successful And Well-Regulated Marijuana Market" makes for an interesting short read, and here are the listed "principles" without the accompanying paragraph of explanation:
1. Recognize There Is A Limit To The Tax Burden The Industry Can Bear.
2. Do Not Place Unnecessary Limits On The Number Of Licenses.
3. Award Licenses Based On Competency And Business Acumen.
4. Allow Business Owners To Operate Within A Scale And Structure They Can Manage.
5. Establish Parameters For Local Governments.
6. Regulations Based On Evidence And Allowing Alternative Approaches.
7. Do Not Penalize People For Acts That Are No Longer Crimes.
September 27, 2018 in Business laws and regulatory issues, Political perspective on reforms, Recreational Marijuana Commentary and Debate, Recreational Marijuana State Laws and Reforms, Taxation information and issues | Permalink | Comments (0)
Sunday, September 23, 2018
the title of this post is the title of this new paper now available via SSRN authored by Brett Hollenbeck and Kosuke Uetake. Here is its abstract:
In 2012 the state of Washington created a legal framework for production and retail sales of marijuana. Eight other states have subsequently followed. These states hope to generate tax revenue for their state budgets while limiting harms associated with marijuana consumption. We use a unique dataset containing all transactions in the history of the industry in Washington to evaluate the effectiveness of different tax and regulatory policies under consideration by policymakers and study the role of imperfect competition in determining these results.
We document that overall demand is relatively inelastic, that restrictions on entry result in retailers with significant market power, and that cost shocks are more than fully passed through from retailers to consumers. We combine these empirical estimates to calculate the relationship between revenue and the tax rate, the dead-weight loss of taxation and the share of the tax burden that falls on consumers and producers, each of which are significantly effect by imperfect competition.
We find that despite having the nation's highest tax rate, Washington still has significant scope to increase revenues by raising the tax rate on retail marijuana sales. That is, they are still on the upward sloping portion of the laffer curve. The amount of revenue generated by a given tax increase is also significantly larger due to retailer market power than it would be under perfect competition. We also find significant social costs of taxation, roughly 2 dollars are lost to consumers and producers for every dollar of tax revenue generated.
Sunday, September 2, 2018
Though regular readers might be a bit tired of my eagerness to reference my recent extended article, "Leveraging Marijuana Reform to Enhance Expungement Practices," I am not at all tired of the idea that marijuana reform should always focus on criminal justice concerns and that new revenues emerging from the new marijuana industry out to be committed to criminal justice needed. So I was very pleased to have had the opportunity to develop this Issue Brief through the Scholars Strategy Network to stress key parts of my longer work under the headlined "How States Can Ensure That Today's Marijuana Reforms Also Ameliorate Harms Inflicted On Past Offenders." Here is an excerpt from this short commentary:
A new criminal justice institution could be funded by the taxes, fees, and other revenues generated by marijuana reforms and assigned the mission of developing policies and practices to minimize the economic and social burdens that persist for those previously convicted of marijuana offenses.
Ex-offenders are often saddled with collateral sanctions at the local, state, and federal levels and have to deal with the widespread availability of their criminal records. These challenges justify the establishment of a permanent restorative institution in every jurisdiction, funded by fractions of the new resources generated by the legal marijuana industry and associated taxes.
A new Commission on Justice Restoration could be a public agency mandated to address the cumulative undue harms of prior convictions. The Commission could provide a much-needed clearinghouse and site for analyzing hard-to-collect data about the collateral consequences of convictions, and provide a centralized and impartial forum for statewide policymaking to redress these collateral consequences, to conduct and disseminate research on the fiscal and social costs of these collateral consequences, and to advocate for steps that can be taken to reduce long- term harms.
Thursday, August 23, 2018
The title of this post is the title of this new paper authored by Daniel Rowe now available via SSRN. Here is its abstract:
As states legalize marijuana and cannabis-derived products, both for medical and recreational use, the punitive federal tax effect of section 280E makes it economically impossible for many marijuana-related businesses to function profitably. By disallowing the deduction of otherwise legitimate business expenditures, the Internal Revenue Code places such businesses in a situation where they are potentially paying federal income tax on their gross receipts despite netting much less in actual income. This article explores the disproportionate tax burden on marijuana sellers and the growing tension between current federal tax law and states’ legalization of marijuana.
This article recommends the amendment of section 280E to eliminate this burden. It is structured in four parts. Part II discusses the history and legislative intent behind section 280E. It delves into the differing tax treatment for illegal drug traffickers versus that of other illegal activities. Part III describes the effects of section 280E, both intended and unintended, on state-legal marijuana sellers as well as on the overall marijuana industry. It explains how the original intent of section 280E, specifically as it relates to marijuana sellers, has been undermined by the changing public attitude towards marijuana and the rise of legal medical and recreational marijuana facilities. This part also considers the onerous tax regime placed on state-legal marijuana businesses due to the inability to deduct ordinary expenses, and how this regime could be counter-productive to overall tax policy. Part IV describes several alternative solutions to eliminate the reach of section 280E to state-legal marijuana businesses. It concludes with the recommendation to amend section 280E to make it inapplicable to activities that are statutorily legal in the states in which they are conducted.
Monday, July 23, 2018
Late last week the Auditor General of Pennsylvania released this notable report on “Regulating and Taxing Marijuana” that reads a bit more like an advocacy group's document than something that would emerge from a state government office. But, as this press release about the report reveals, the Auditor General of PA seems real eager to have access to a new revenue source:
Auditor General Eugene DePasquale today said Pennsylvania is missing out on $581 million per year in revenue by not regulating and taxing marijuana — money that could fund critical initiatives that affect Pennsylvanians’ lives. “Repeated polls have shown that a majority of Americans now believe marijuana should be legalized. In Pennsylvania, it’s 56 percent,” DePasquale said during a news conference with Pittsburgh Mayor William Peduto.
“Today, I’m releasing a special report that shows the staggering amount the state could reap in tax revenue if legislators simply did what their constituents want them to do: regulate and tax marijuana for adult use.”
The 14-page special report, “Regulating and Taxing Marijuana,” compiles national research data, which show that an average of 8.38 percent of the commonwealth’s adults (21 and older) currently use marijuana at least monthly — a total of 798,556 adults. In Colorado and Washington, where marijuana has been legal since 2012, adult users spend an average of $2,080 annually. If Pennsylvania’s 798,556 adult users spent the same amount, they would create a $1.66 billion retail industry.
Assuming Pennsylvania taxed the growth, cultivation and sale of marijuana at 35 percent, the state would collect roughly $581 million in tax revenue annually. If Allegheny and Philadelphia counties were allowed to add 1-2 percent local tax, they could collect an additional $3.8 million and $6.9 million, respectively. “Imagine what that $581 million could mean for Pennsylvanians,” DePasquale said. “Not only would it help balance the state budget, but it would also mean increases to initiatives that affect Pennsylvanians’ lives, such as greater access to opioid treatment and better health care access for veterans and children.”
DePasquale became the first statewide elected official to endorse regulating and taxing marijuana in March 2017. “With our neighboring states all looking at legalizing marijuana, now is the time for Pennsylvania to do the same,” DePasquale continued. “Legislators must act now so that we can be competitive and not lose potential revenue to other states.”
July 23, 2018 in Campaigns, elections and public officials concerning reforms, Recreational Marijuana Commentary and Debate, Recreational Marijuana Data and Research, Recreational Marijuana State Laws and Reforms, Taxation information and issues , Who decides | Permalink | Comments (0)
Saturday, June 30, 2018
The title of this post is the title of this short new paper authored by Pat Oglesby now available via SSRN. Here is its abstract:
Beyond the ever-present illegal market, a more subtle threat to marijuana revenue lurks: Tax competitors (think: tax havens) threaten subnational jurisdictions that can’t or don’t control their borders.
This article presents a framework for looking at threats to marijuana revenue:
1. The illegal market can be marginalized by law enforcement or low taxes.
2. Only low taxes can defeat legal tax competitors.
3. Tax competition threatens local retail taxes more than state retail taxes.
4. Tax competition threatens local producer taxes much more than state producer taxes.
5. Federal legalization would ipso facto expose state taxes to daunting competition.
Monday, June 25, 2018
"IRS cracks down with §280E": Reviewing the latest major US Tax Court court ruling highlighting burdens for marijuana businesses
Chris Nani, a student in my Marijuana Law & Policy seminar last year, has already had articles published at the Cannabis Law Report discussing federal tax treatment of cannabis businesses (see prior posts here and here). Thus I was not surprised to hear from Chris in the wake of a significant US Tax Court ruling earlier this month, and I imposed upon him to author a review of the decision for the blog. He titled his review ""IRS cracks down with §280E," and here is the account:
Altermeds, LLC, a medical marijuana dispensary near Boulder, Colorado, recently experienced the effects of § 280E after a tax audit found they had under-reported their taxes. The ruling from the US Tax Court in Alterman v. Commisioner, TC Memo 2018-83, is already being widely discussed in the marijuana industry.
In 2010 and 2011, Altermeds filed its taxes and applied normal tax deductions to its business. The IRS audited Altermeds and found a deficiency of $157,821 in 2010 and $233,421 in 2011 holding Altermeds was not eligible for business expense deductions. Additionally, the Internal Revenue Code (IRC) provides for a tax penalty of 20% the portion of the underpayment for under-reporting taxes.
280E states: "No deduction or credit shall be allowed for any amount paid or incurred during the taxable year in carrying on any trade or business if such trade or business (or the activities which comprise such trade or business) consists of trafficking in controlled substances (within the meaning of schedule I and II of the Controlled Substances Act) which is prohibited by Federal law or the law of any State in which such trade or business is conducted."
Essentially, § 280E provides no cannabis business (because cannabis is a Schedule I drug) will receive deductions or credits for any of their business related activates. Normally, businesses can deduct their ordinary business expenses under § 162 of the IRC. However, § 280E limits § 162 and theoretically was meant to deter drug dealers from writing off their business expenses. (The opposite may have occurred by giving drug dealers even less incentive to report their income.)
The origins of § 280E are slightly comical. In 1982, Jeffrey Edmondson, a drug dealer, was able to write off his business expenses under § 162. Edmondson wrote off traveling, his scale he used to measure drugs, and his rent. When Congress found out Edmondson was writing off his drug dealing expenses, they enacted § 280E.
The majority of businesses know when entering into the state legalized cannabis market they will still pay federal taxes without being able to deduce business expenses. Non-cannabis related expenses such as the sale of t-shirts are eligible for § 162 tax deductions even while selling cannabis, cannabis-infused edibles, or pipes are not deductible because of their relation with cannabis. The tax court is more likely to permit deductions the clearer the line is between a cannabis and non-cannabis business.
When Altermeds was audited, they claimed they had multiple businesses. One of their businesses sold their non-cannabis merchandise, but the tax court did not find the business to be distinct enough from their cannabis dispensary. To prove a business is distinct, Altermeds would have to show there is a separate bank account and business. The tax court held that the non-cannabis products sold by Altermeds (pipes and other cannabis paraphernalia) were sold to complement selling cannabis and were not eligible for any deductions. Lastly, the court was willing to deduct the amount for the non-cannabis business as well, but Altermeds’ brief failed to follow the court rules and the court was precluded from even contemplating the deductions.
The tax court did allow for the cost-of-goods-sold allowances that the IRS had stipulated prior in the litigation, but Altermeds was still forced to pay its overdue taxes along with the 20% penalty. With this most recent tax decision taking a hard line approach to deductions associated with cannabis businesses, participants in the industry need to be careful about, and cognizant of the tax consequences that can result from, intermingling cannabis and non-cannabis products.
UPDATE: I just noticed that Bryan Camp over at TaxProf Blog has this long posting on the Altermeds decision under the heading "Lesson From The Tax Court: Into The Weeds on COGS." Here is his concluding "Lesson" concerning the case: "Get your accounting straight and be sure to hire tax counsel who have the specialized knowledge needed for the job of representing you before both the IRS and Tax Court."
Wednesday, May 16, 2018
The title of this post is the title of this notable new report released yesterday by New York City Comptroller Scott M. Stringer. Here is how it gets started:
In just the past six years, voters in eight states and the District of Columbia have passed ballot measures to legalize the adult use of marijuana. At least seven more states may follow suit this fall. In total, over half of states have legalized marijuana for medical purposes since California first did so in 1996. This dramatic change in public attitudes is reflective of changes as measured by survey data, with 61% of Americans now supporting lifting the ban on marijuana. More than just a change in attitudes toward marijuana itself, the growing movement for legalization also acknowledges the immeasurable harm done by the criminalization of marijuana use, especially among communities of color.
New York State’s 2014 Compassionate Care Act legalized marijuana for medical use. Legislation to legalize adult marijuana use, the Marijuana Regulation and Taxation Act, has been reintroduced in each subsequent legislative session. In his Executive Budget for State Fiscal Year 2018-2019, Governor Cuomo proposed a study of the economic impacts of legalization and the implications of continuing to prohibit use while other nearby states move to legalize. In this report, New York City Comptroller Scott M. Stringer provides an estimate of the fiscal impact of legalizing adult-use marijuana sales in New York. This report estimates the legal, adult-use marijuana market at some $3.1 billion per year in New York State, about $1.1 billion of that in New York City. In turn, the Comptroller’s Office estimates that this market could conservatively yield annual tax revenues of as much as $1.3 billion total at the State and City levels. That assumes a combination of state and local sales and excise taxes in line with what other jurisdictions have passed that could yield up to $436 million in revenues for the State, $336 million for the City, and some $570 million for localities outside of the city. Of course, the total revenues realized at the State and local levels would depend on the final outcome of any legalization effort.
Beyond the mere dollars that legalization could yield, decriminalization has clear human and societal benefits. In states where adult marijuana use has been legalized, there have been declines in teenage usage of marijuana, and public health and safety concerns have been addressed. Finally, misdemeanor marijuana arrests continue to fall most heavily on young Black and Latino New Yorkers, despite a higher reported usage rate among White youth. Erasing the harmful repercussions, including the stigma of a criminal record, would open doors that have been closed to too many for too long, yielding incalculable human, economic, and societal benefits.
May 16, 2018 in Campaigns, elections and public officials concerning reforms, Recreational Marijuana Commentary and Debate, Recreational Marijuana Data and Research, Taxation information and issues | Permalink | Comments (0)
Monday, April 30, 2018
Today's USA Today has on its front-page this article headlined "Pot taxes across U.S. shore up school budgets, drug-prevention efforts." Here are excerpts:
States with legal pot have collected more than $1.6 billion since the newest sin taxes went into effect in 2014, with the money paying for everything from public schools to mental health services to programs that deter convicts from re-offending....
In an exclusive analysis for the USA TODAY Network, Beau Whitney, a senior economist with Washington, D.C.-based cannabis analytics firm New Frontier Data, forecasts collections in California could exceed $2.1 billion through 2020, based on a 15% state excise tax. For perspective, it takes about $1 billion a year to run the city of Sacramento. The New Frontier analysis doesn't count a mishmash of city, county or cultivation taxes....
Analysts say mainstay revenue such as income, property and sales taxes still dwarf marijuana taxes in local and state government budgets. However, "every dollar is important," said Stephen Walsh, a director with the U.S. Public Finance group at Fitch. "It's very difficult for governments to raise taxes." Cannabis taxes represent a welcome infusion of all-new money, he said.
Nine states and the District of Columbia have decided to legalize recreational marijuana. Cannabis consumers are willing to trade high tax rates — from 20% in Oregon to as much as 45% in California — for the freedom to partake in the small network of states.
Were the federal government to OK sales throughout the nation, New Frontier analysts forecast that through 2025, weed could bring in about $100 billion in fresh revenue for the U.S. Treasury Department. That includes a hypothetical 15% federal sales tax, business tax revenues and payroll deductions. But for now, revenue is on the rise in the handful of states that allow sales, though the way state budgets are structured makes it difficult to trace marijuana taxes from the point of sale to the purchase of school textbooks.
Colorado and Washington, which started allowing recreational marijuana sales in 2014, have so far collected nearly $1.48 billion in revenue. Washington has brought in more than $773 million to pay for healthcare services, research from state universities on the effects of short-term and long-term pot use, reducing marijuana use among minors and other efforts. Meanwhile, Colorado has received more than $702 million, with the money going toward grants that help pay schools' capital construction costs, as well as shoring up local and state tax bases. The state collected $247,368,473 last year alone, revenue records show.
In an interview, U.S. Rep. Jared Polis, D-Colorado, said bringing underground economic activity above-ground, then taxing it reasonably, creates "a more efficient market."... While Colorado's counties and cities can choose whether to allow marijuana businesses, Polis said some less-prosperous parts of the state have seen pot turn into an important revenue producer, letting officials support schools and children's scholarships, along with addressing infrastructural needs.
In Alaska, one of the smallest markets, tax proceeds are split between the state's general fund and efforts to stop convicts from re-offending. Alaska taxes pot growers, and collections have steadily risen from $577,901 when they started in July 2017 and peaking at more than $1 million this January, for a total of about $8.25 million, revenue records show.
The list of states with legal weed is growing, with others that have voted to allow it now including Oregon, Nevada, Massachusetts, Maine and Vermont. After starting tax collections in 2016, Oregon has divvied up about $126.9 million in marijuana taxes between schools, city and county governments, mental health, alcoholism and drug services, the Oregon State Police and the Oregon Health Authority's drug prevention and treatment services.
"These funds will be used in combination with other resources for drug and alcohol prevention for a comprehensive, evidence-based approach to reducing drug misuse and excessive alcohol use," said Jonathan Modie, OHA spokesman. A campaign to prevent minors from using marijuana and data collection on alcohol and drug use are part of the drug prevention and treatment program, he said.
The amount of pot money Oregon allocates annually to school districts is based on a district's weighted daily membership, a metric that takes into account how many full-time students are in a district and other factors, such as the number of students with special needs or experiencing poverty. Salem-Keizer Public Schools, Oregon's second largest school district, is receiving a little more than $2.7 million in marijuana money this year, said Oregon Department of Education spokesman Peter Rudy. That's enough to pay for the equivalent of 27 teachers, considering each costs around $100,000 with salary and benefits combined, according to district spokeswoman Lillian Govus.
In a statement, Oregon Gov. Kate Brown said, "We know that Oregonians care about our children’s education and their neighbors' health, and we see that in how they decided to spend cannabis tax revenues. Every dollar counts when supporting those values."
Thursday, April 19, 2018
The title of this post is the title of this thorough and effective review of myriad economic impacts of the marijuana industry in the first state to have a functioning recreational marijuana market. This piece was authored by the Federal Reserve Back of Kansas City, and I recommend the piece in full to anyone and everyone interested in certain economic realities flowing from legalization and commercialization of recreational marijuana. Here are some snippets from the start and heart of the piece:
In 2012, Colorado voters passed Amendment 64, making Colorado one of the first states to legalize recreational marijuana. Since then, the legalization trend has continued, and today, medical marijuana is legal in 29 states and Washington, D.C., and recreational marijuana is legal in eight states and Washington, D.C. So far in 2018, Vermont’s lawmakers have legalized marijuana starting July 1, and at least 11 other states are considering recreational or medical marijuana legalization. The marijuana industry has had many effects on the state of Colorado since it was legalized. This issue of the Rocky Mountain Economist focuses on the economic impacts of the marijuana industry in Colorado, the first state to open recreational marijuana stores....
Marijuana Sales in Colorado
To put the magnitude of marijuana sales in perspective, personal consumption expenditures on all goods and services totaled $236.3 billion in 2016 in Colorado. Marijuana sales were $1.3 billion in 2016, or 0.55 percent of all personal consumer expenditures. By comparison, spending on food and beverages purchased for off-site consumption made up 7.2 percent of personal consumption expenditures in Colorado....
To get a sense of the magnitude of the marijuana industry, we can compare the total number of marijuana-related business licenses in the state to the number of new entity business filings for all industries in the state. Between the first quarter of 2014 and the fourth quarter of 2017, there were about 431,997 new entity business filings in Colorado. By comparison, slightly more than 3,000 marijuana-related business licenses were active at the end of 2017. If all of these marijuana-related businesses started during the first quarter of 2014 through the end of 2017, then they would represent about 0.7 percent of total new business filings in the state since 2014. The actual percentage likely is lower than 0.7 percent because some marijuana-related businesses existed in Colorado prior to 2014, particularly those serving the medical side of the industry....
Employment in the Marijuana Industry
As of March 2018, there were more than 38,000 issued individual licenses in the marijuana industry, including 1,637 business owners. Of course, not everyone with a license is working in the industry, and the Marijuana Policy Group estimates that one active license equates to 0.467 full-time equivalent positions. Using this estimate, the marijuana industry currently employs about 17,821 full-time equivalent staff, a 17.7 percent increase in employment over the previous year....
Taxation of the Marijuana Industry
In 2017, the state of Colorado collected more than $247 million from the marijuana industry, including state sales taxes on recreational and medical, special sales taxes on recreational, excise taxes on recreational and application and licenses fees. Tax collections since 2014 have increased significantly, though at a slower pace over the past year. Between 2014 and 2015, total collections increased 93 percent. By contrast, collections increased about 28 percent between 2016 and 2017. To put the magnitude of marijuana tax collections in perspective, they equate to about 2.3 percent of Colorado’s 2017 general fund revenue. Although this calculation is useful for perspective, most marijuana revenue does not go into the state general fund....
Potential Costs of Marijuana Legalization
The data on legalization’s impact on public safety is limited, and therefore, the full effects of legalization on public safety are uncertain. Between 2012 and 2014, the number of marijuana arrests fell 46 percent, primarily due to a decline in marijuana possession arrests. In Denver, the number of crimes reported to the Denver Police Department that were determined to have a clear connection to marijuana increased from 234 in 2013 to 276 in 2014, but then fell to 183 in 2017. Of the crimes reported with a connection to marijuana in 2017, 54 percent were burglaries and 74 percent were industry-related.xxviii Fifteen percent of DUI summons issued by the Colorado State Patrol in 2015 were for marijuana or marijuana in combination with alcohol or other drugs although the number of these types of DUIs fell 1 percent between 2014 and 2015. Traffic fatalities with THC-only or THC-in-combination positive drivers rose from 55 in 2013 to 79 in 2014....
As the first state to open recreational marijuana retail stores, Colorado provides a case study to examine the potential economic effects from legalization. Direct employment in the marijuana sector has risen robustly since the passage of Amendment 64, contributing about 5.4 percent of all employment growth in Colorado since January 2014. Despite these solid gains, employment in the sector makes up just 0.7 percent of total employment in the state. Similar to employment, tax collections from marijuana have also increased sharply in recent years, and are equal to about 2 percent of general fund revenues in the state. Although legalization has contributed to employment growth and tax revenues in the state, it is important to weigh those benefits against the potential costs to public safety and health outcomes.
April 19, 2018 in Business laws and regulatory issues, Employment and labor law issues, Recreational Marijuana Commentary and Debate, Recreational Marijuana Data and Research, Taxation information and issues | Permalink | Comments (0)
Sunday, April 8, 2018
The title of this post is the title of this new paper recently posted to SSRN authored by Richard Thompson Ainsworth and Brendan Magauran. Here is its abstract:
On January 4, 2018, the Trump Administration through Attorney General Sessions rescinded an Obama-era policy that discouraged federal prosecutors from bringing charges in all but the most serious marijuana cases under the federal Controlled Substances Act, as well as under the Bank Secrecy Act. Federal law is at odds with state law in the majority of states on the legalization and subsequent state taxation of marijuana. Twenty-eight states and the District of Columbia have at least partially legalized marijuana. Eight of these states have legalized both medicinal and recreational use. With limited exceptions, legalized sales of marijuana are taxed.
Aside from “compassionate use” of medicinal marijuana, the States have seen real business development and job creation opportunities by legalizing the marijuana trade – estimates of 250,000 new jobs by 2020 are common.
State marijuana revenue measures are not harmonized today. Both the tax rates and the commercial stages at which marijuana transactions are taxed diverge widely. Rates range from zero for medicinal use (in Delaware, DC, Maine, Massachusetts, New Hampshire, New Mexico, North Dakota, and Oregon) to roughly 47% (for recreational marijuana, slightly less for medicinal) in Washington. For the most part, state marijuana taxes cascade with excise taxes appearing in the retail sales tax base.
This paper proposes to analyze state marijuana enforcement and taxation through the lens of European value added taxes (VAT). There is a closer harmony between the EU and the US in this area than might be expected. EU VAT proposals for tax harmonization and enforcement, and applies them to the US. The proposals are technology-intensive. They integrate well with the digital track and trace systems employed by US States to control legalized marijuana. The first proposal is to place the central portion of the marijuana supply chain on a private blockchain that is shared among the states. Transactions in marijuana will be preserved in real-time (locally and centrally). Data will be shared among State authorities to aid enforcement, and tax collection.
The second proposal is for a limited-purpose cryptotaxcurrency. This would be a crypto-token like VATCoin that is digitally minted by the government. For example, CALCoin. CALCoin would be the only currency allowed for marijuana-related purchases within California. Frauds related to excessive “home grown” marijuana, and the use of Dark Cloud-based Zappers in retail dispensaries are also considered.
Thursday, April 5, 2018
The title of this post is the title of this new article available via SSRN authored by Keaton Miller and Boyoung Seo. Here is the abstract:
Proponents of the legalization of recreational marijuana have argued that the policy would result in increased tax revenues for states. However, if legal substances are highly substitutable, tax revenues from marijuana may crowd out pre-existing revenues. We study the interaction between the marijuana, alcohol, and tobacco industries in Washington state using a combination of detailed administrative data on the marijuana industry and scanner data on alcohol and tobacco sales.
We estimate a demand system and find that alcohol and marijuana are substitutes, with the legalization of marijuana in isolation leading to a 12% decrease in alcohol demand, and a marginal cross price elasticity of demand of .16. Marijuana legalization results in a 20% decrease in tobacco demand, but the marginal relationship is unclear. When prices are held fixed, 50% of marijuana tax revenue comes from cannibalizing alcohol and tobacco taxes. When those industries adjust their prices, only 22% of marijuana tax revenue comes from alcohol and tobacco. Though Washington has the highest marijuana tax rate in the country, a 1% increase in the marijuana tax results in a 1.01% increase in total revenues collected by the state.