A tax code provision means the federal government profits more from state-by-state legalization than any nationwide model.
Marijuana legalization has been touted as a possible solution to the American economy, which has faced an uphill battle toward recovery following the coronavirus pandemic. While legalizing marijuana won’t fix every financial woe, the added tax revenue generated through legal cannabis sales and licensing could provide a helpful boost.
In states where cannabis is illegal for adult-use, lawmakers have already pushed cannabis reform legislation with this mindset. Gov. Michelle Lujan Grisham expressed regret in April that New Mexico had not legalized recreational cannabis before the pandemic. Her reason? The state would have an additional $100 million in its budget and recent projections show New Mexico will have a $100 million budget deficit in the upcoming fiscal year.
Bipartisan legislators in New York and Pennsylvania have taken similar stances, seeing legal cannabis as a quick salve to economic wounds.
“It’s not enough to say the state doesn’t have money. We have to find it,” said New York state Sen. Jessica Ramos. “I believe legalizing marijuana can help.”
Read enough of these statements, and it’s easy to assume this line of thinking working its way to the White House. But that’s unlikely to happen anytime soon and it has nothing to do with Attorney General William Barr’s recent persecution of cannabis companies or Donald Trump doubling down on anti-marijuana rhetoric ahead of the election.
It’s about the money. Put simply, the federal government may not have a similar incentive as lawmakers do at the state level. As recently pointed out by The Motely Fool, the tax code contains a provision called 280E. It involves businesses that profit from drugs listed in the Controlled Substances Act, and creates a strange tension between cannabis businesses and illegality.
The provision states “[n]o 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.”
Cannabis is a Schedule I drug. That means marijuana businesses cannot take tax deductions and savings like other corporations, excluding the cost of goods sold. That amounts to a whole lot of money paid to the feds in taxes. Estimates suggest cannabis companies could pay up to a 70% tax rate as a result of this provision. State governments may gain money from legal cannabis, but the feds would actually lose money should prohibition end — possibly $5 billion over a 10-year period.
Adding a special marijuana sales tax or some other sin tax to cannabis wouldn’t make up for that lost revenue. The current model where cannabis is kind of legal, but kind of not benefits the federal government more financially than if cannabis was totally legal or totally illegal. Considering Democratic nominee Joe Biden isn’t bullish on legalizing either, the status quo will likely remain no matter who is elected President this year.