Federal Marijuana Legislation and What It Would Mean to State Tax Revenues

Senate legislation to deregulate marijuana could give a boost to states that have legalized and taxed the drug and dedicated the revenues to social programs.

Last week, Sen. Cory Booker (D-NJ), alongside Senate Majority Leader Chuck Schumer (D-NY) and Sen. Ron Wyden (D-OR), introduced the Cannabis Administration and Opportunity Act, which would end the federal marijuana prohibition by removing cannabis from the Controlled Substances Act and leave marijuana laws to states to legislate.

While many of the goals surrounding the legislation involve criminal justice — for instance, the bill would expunge federal cannabis records — the plan also opens the door for states to bring in more revenue through taxing the plant.

States that already have legal marijuana sales would benefit from some of the hurdles of federal criminalization being removed, and the legislation could spur new states to pass laws permitting the drug’s sale.

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“States who have legalized it bring in hundreds of millions of dollars every year in revenue,” said Richard Auxier, a senior policy associate at the Tax Policy Center, pointing out that states that have had legalization in place for longer tend to have better sales infrastructure and thus bring in even more money.

Currently, 18 states and Washington, D.C., have legalized the recreational use of marijuana for those over 21. Many of those state governments have received an infusion of capital by regulating and taxing sales of the drug.

Washington collected the most in tax revenue, bringing in $559 million last year from sales of the drug, according to data from the Urban Institute. Colorado hauled in $437 million, Illinois brought in $317 million, Oregon collected $172 million, Arizona raised nearly $200 million, and Nevada netted some $144 million.

It is worth noting that sales only account for about 1% of state-level general revenue in places such as Colorado and Washington and less than that share in other states. Still, the taxes have managed to boost the states’ coffers and will likely increase as the industry becomes more established.

Auxier told the Washington Examiner that in well-established cannabis states such as Colorado and Washington, marijuana taxes bring in more money for the government than alcohol and cigarette taxes.

Different states handle revenue from marijuana in different ways.

While one might think it wise to put funds from legal cannabis toward a state’s general fund, Auxier explained that politically, it plays better to earmark funds toward one specific cause — be it education spending, health and wellness, or criminal justice reform.

“It’s easier to get approved when you tell people where it’s going,” said Auxier.

For example, revenue from marijuana sales in Colorado goes toward education programs, while Massachusetts dedicates the funding to a variety of public safety programs. Washington state allocates the funds to healthcare programs, while some states, like Montana, split it between several programs, including conservation, substance abuse prevention and treatment, and veterans’ services.

Some states like California put the revenue toward the administrative work that comes with legalizing and regulating a new substance. Legalizing cannabis in such a large state invariably creates administrative burdens.

Public acceptance of marijuana use has helped pass laws decriminalizing or legalizing the substance.

In 1989, as the war on drugs continued after the Reagan administration, a mere 16% of people said they supported legalizing marijuana, according to the Pew Research Center. By the turn of the century, that number had ticked up to 31%. After 2010, more began supporting rather than opposing legalization.

Now, a majority think the drug shouldn’t be criminalized. Sixty percent of people think it should be legal both medically and recreationally, while an additional 31% say it should be legal medically — a net total of 91% of people supporting some form of legalization.

While one might think there is a sharp dichotomy between red states and blue states when it comes to legalizing marijuana, some Republican-led states have moved toward deregulation. Marijuana became legal in Alaska in 2015, voters in Arizona approved the drug’s use in 2020, and legal recreational sales of cannabis began in ruby-red Montana at the start of this year.

Still, even though marijuana is legal in several states, there are major obstacles to overcome for growers and sellers, given that it is still criminal at the federal level — something the new federal legislation is meant to rectify.

Marijuana shops can’t take credit card payments and currently have to operate only using cash. They are limited in their banking capabilities, and when they go to pay federal taxes, they are unable to claim most deductions.

If marijuana were to be decriminalized federally, marijuana shop owners would have an easier time selling their goods, and states would likely haul in more in cannabis revenue because many of the obstacles to selling would be removed.

“The limits that are on it are a significant drag, and so it is definitely being held back by the federal ban and the inability to sell across state lines and the inability to get access to banking resources,” Auxier said.

Despite the momentum in public opinion and the new marijuana legislation itself, the bill faces daunting obstacles to passage.

Sixty votes are needed to approve the measure, and some Democrats, such as Sen. Jon Tester (D-MT), have said they don’t support federal decriminalization. All Democrats would need to vote in favor, plus 10 Republicans, for it to pass.

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While the legislation faces an uphill battle, Schumer is still pushing for decriminalization while Democrats hold a slim majority ahead of this year’s midterm elections.

“McConnell would never bring these things to the floor,” Schumer said last year. “We’ll move forward and try to get this done as soon as we possibly can.”