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Legalizing Pot Could Generate $28 Billion in Annual Tax Revenue

May 18th 2016
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You know it’s coming, people. Marijuana will be legal in the United States. So, inhale deeply and consider a couple of new studies from the Tax Foundation that focus on the tax benefits after that happens.

We won’t save the good stuff for last: The upshot is that legalization nationwide could generate billions of dollars for federal, state, and local governments. It’s all about taxes on businesses, income and payroll, the product (just as tobacco is taxed), and sales.

Sounds like more work for accountants and tax attorneys, doesn’t it? It’s no pipe dream. Four states (Alaska, Colorado, Oregon, and Washington) and the District of Columbia have legalized the sale of retail marijuana by popular vote, another 25 allow medical marijuana or have decriminalized pot possession, and 10 states currently have legislative proposals or proposed ballot measures to legalize weed.

Consider some of the specifics from the first study, Marijuana Legalization and Taxes: Federal Revenue Impact.

  • Once mature, the marijuana industry could generate as much as $28 billion annually in federal, state, and local taxes. That includes $7 billion in federal revenue, $5.5 billion in business taxes, and $1.5 billion from income and payroll taxes.
  • A federal product tax of $23 per pound, similar to the federal tax on that other plant – tobacco – could bring in $500 million annually. Or, a 10 percent sales surtax would bring in $5.3 billion annually. Obviously, higher tax rates would bring in more.
  • Business income from producing marijuana initially would generate about $5.5 billion in federal revenues and another $1.5 billion in state and local revenues. That would drop, though, as more pot businesses enter the market and drive down profits.
  • Individual income tax and payroll taxes from workers in the marijuana industry, which would be reported after legalization, would contribute $1.5 billion in federal revenue and another $1 billion in state and local revenues. These revenues are expected to increase as more pot is grown and sent to market.
  • Workers in the pot trade will face far less risk. That will lower the profits required and should draw more entrepreneurs into the business, which will increase supply and lower prices. That, plus taxation, will reduce profits and tax collections from the initial level after national legalization.

The Tax Foundation’s second study, Marijuana Legalization and Taxes: Lessons for Other States from Colorado and Washington, indicates that tax collection in the two states have exceeded initial estimates. Nationwide legalization and taxation could expect states to raise billions of dollars annually in taxes.

Colorado, Washington, and Oregon (which made recreational pot legal last year) have cut their tax rates – Alaska is considering it – when the initial 30 percent rate didn’t do enough to reduce the black market. Other states now considering legalization propose rates between 10 percent and 25 percent.

Taxes on final retail sales have been the most workable taxation model, according to the study. That’s because marijuana can be bought in cigarette, food, liquid, or vapor form in different concentrations, making a specific excise tax unworkable.

Naturally, there is a plethora of issues to consider: enforcement, zoning, number of licensed stores, sellers’ licensing, health and safety requirements, employment issues, how much can be purchased, and the fact that it’s still against federal law. The latter has kept the pot biz on a cash basis, which means some businesses hide what they do and could face a federal tax bite, the study states.

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