Post COVID-19 World: Cannabis Tax Revenues Needed

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Post COVID-19 World: Cannabis Tax Revenues Needed

By DataTrek co-founder Jessica Rabe

There’s a simple and effective solution for states and cities to help cover their huge budget shortfalls after the COVID-19 pandemic subsides: legalize recreational sales of marijuana. We’ve been thinking a lot about how life will change post-virus, and one big difference will be that state and local governments are going to encounter large unexpected tax receipt shortages. That’s particularly true when it comes to sales and income taxes amid stressed consumer balance sheets and massive layoffs. And unlike the Federal government, states can’t print unlimited amounts of money.

The easiest way many state governments can start to close their budget gaps is first legalizing and then taxing adult use-sales of marijuana. Traditional means of boosting state and local government’s revenue, such as increasing income, sales or real estate taxes, will further dampen demand and possibly drive people out of states like New York. Taxing sales of retail cannabis is a new source of state and local income that’s successfully raised hundreds of millions of dollars annually in states like Colorado.

Certain states that have failed to legalize recreational marijuana sales through their legislatures also face some of the biggest fiscal holes as a result of the economic fallout from COVID-19. For example:

  • New York State Comptroller Thomas P. DiNapoli estimates that tax revenues in State Fiscal Year 2020-21 will be upwards of $4 – $7 billion below the projections in the Executive Budget of $87.9 billion due to the spread of COVID-19.
  • New York Governor Andrew Cuomo has been trying to legalize recreational marijuana through his state legislature for over two years, but has not been able to garner enough votes to pass a bill.
  • Back in 2018, New York City Comptroller Scott M. Stringer estimated that the legal, adult-use marijuana 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, actual state and local revenue from adult-use cannabis sales will come down to how the drug gets taxed and regulated. California has consistently missed its revenue projections because retail marijuana is overtaxed and the market is heavily regulated, which keeps the black market relevant.
  • By contrast, Colorado is a great example of how to properly tax and regulate the recreational marijuana market. It is also the most mature market since it was the first US state to start selling adult-use recreational marijuana in January 2014. With a population of just 5.8 million (and likely just as many tourists), Colorado’s Department of Revenue reports that marijuana taxes, licenses and fee revenue reached a record $302.5 million last year.
  • New York has a population of +19.5 million people and gets many more tourists than Colorado. The population in New York City alone is bigger than all of Colorado at over +8.5 million people. If Colorado can raise +$300 million from recreational and medical marijuana sales in a year, New York can certainly earn over $1 billion as long as the state taxes and regulates adult-use sales reasonably.

    Additionally, New York already has the infrastructure in place as medical marijuana dispensaries first opened in the state in January 2016. They would likely be first to receive licenses to also sell recreational marijuana like in other states that have already legalized adult-use sales.
  • Bottom line: If New York legalized recreational marijuana sales and the state received a conservative $1 billion in tax revenue, that would cover up to a quarter of New York’s range of projected revenue shortfall from the COVID-19 outbreak.

The upshot: legalizing recreational marijuana could provide a new, reliable and lucrative source of revenue for states with large budget shortfalls from COVID-19. The economic impact from this virus may be enough for some states, such as New York, to finally get enough votes to pass such legislation. While we recognize legal marijuana is a controversial topic for many people, the budget shortfalls that COVID-19 will create may sway opinions about the issue.