How to Spend Pot Taxes is Key Question for States: Panel

Whenever a state explores legalizing cannabis, revenue from pot taxes is usually among the first considerations. Instead of focusing on how much can be brought in from cannabis taxes, however, that conversation needs to turn to how those funds are spent, according to several industry insiders.

The industry’s growth, combined with larger societal shifts – brought on this year by a pandemic, economic turmoil and social unrest – has made it important to ensure that pot tax revenue is spent in a fair and equitable way, according to a panel of industry advocates, lawmakers and analysts who discussed the topic during an industry forum presented by Prohibition Partners, a cannabis data and intelligence firm.

That change in focus could mean redirecting revenue to programs that focus on closing the equity gap within the industry or to any number of social and criminal reform programs. Or, they said, it could mean cutting or even eliminating some taxes in an effort to increase industry participation and overall revenue generation.

John Hudak, a senior fellow in governance studies at the Brookings Institute, a public policy nonprofit based in Washington, D.C., said a lot of jurisdictions are looking to legalization and taxation to help solve budget woes brought on by the COVID-19 pandemic. But he cautioned that those revenues take time to materialize and suggested more thought be put into how the funds are effectively used.

“Yes, it’ll bring in tax revenue, and yes, it will create jobs and grow economic activity within the state,” he said of cannabis legalization. “But it’s not immediate and it’s not as huge as people sometimes make it out to be.”

De-fund police?

It’s common in many jurisdictions for at least a portion of local or state cannabis taxes to be earmarked for law enforcement. That practice, in particular, needs to be rethought, according to Justin Strekal, political director for NORML.

As states began to legalize REC over the past decade, many regulators believed law enforcement agencies would need an increase in funding to implement the policy and training changes that would be necessitated by the change in law. Increasing police funding has also traditionally been an easy sell to voters.

Strekal said that thinking was flawed, however, and that law enforcement agencies should be able to offset any added costs with the savings they will see from no longer being mandated to pursue low-level criminal marijuana cases.

He pointed to Portland, Oregon, as an example. This summer, amid widespread protests against police brutality and systemic racism, Portland officials announced the city would no longer allocate a portion of cannabis taxes and fees to local law enforcement agencies. 

In the 2018 and 2019 fiscal years, the city of Portland brought in a combined $8M in cannabis taxes, according to a report from the Portland City Auditor. About 79% of those taxes went to public safety, with about 46% going directly to the Portland Police Department. That money was redirected to restorative justice programs.

“Years ago, that was part of the political calculation,” Strekal said of directing cannabis tax revenue to law enforcement. “But I think now the political calculation is dramatically different, and I think Portland and Oregon, in general, with their recent enactment of a total drug decriminalization bill, is going to be a leader in this space. I suspect that we’re going to see numerous cities and possibly states follow their lead.”

“We’re asking law enforcement to do less,” he later added, “so why are we giving them more money?”

Hudak, with the Brookings Institute, noted that law enforcement agencies incur some upfront costs after legalization – such as for training as they transition to new laws – but that those costs should not be long-term.

“There’s not a 10-year need for police retraining,” he said. “That should be fixed in a year or two.”

Providing ‘guardrails’

California Assemblyman Rob Bonta, whose district encompasses portions of the San Francisco Bay Area, including Oakland, has tried unsuccessfully for three years to reduce California’s cannabis tax rates in an effort to increase tax revenue. Bonta has authored bills that call for a reduction in the state’s excise tax rate from 15% to 11% and for the state’s cultivation tax to be completely eliminated.

He said the state’s high cannabis tax rates have hampered the growth of the legal market – and thus helped the continuance of the illicit market, which is estimated to make up about 75% of the overall state market – and suppressed the overall amount of tax revenue that could be generated.

“We need to be thinking creatively and strategically around how do we [speed up] that migration, how do we remove barriers and encourage” those illegal operators to become legal, he said.

He said temporary tax reductions have already proven effective in states like Washington and Oregon, which were able to increase participation in their legal market after tax cuts. He blamed the failure of his own bills on the common thought that if you reduce taxes, you reduce tax revenue.

“That is sort of intuitive, but by lowering the taxes you bring in hundreds and thousands more businesses into the regulated marketplace who are now part of the tax base,” he said. “Although they’re paying at a lower rate, there’s many more taxpayers and, overall, the tax revenue grows.”

California is projected to bring in about $333M in the 2020-21 fiscal year in cannabis tax revenue. Sixty percent of the state’s $200M in cannabis tax revenue from the previous fiscal year went to youth-focused anti-drug programs, while 20% went to environmental conservation and another 20% to public safety initiatives.

Each city and county is able to set its own tax rates on top of the state’s, so municipalities are also able to benefit from cannabis taxes and use those revenues in ways they feel are most appropriate.

Amber Littlejohn, executive director of the Minority Cannabis Business Association, said she is hopeful more states and municipalities will give increased thought to where their cannabis tax dollars go. Because the industry is already so heavily taxed, she said she would like to see tax revenue used to lower the barrier to entry for business owners, particularly those from economically disadvantaged backgrounds. That could be done by funding professional development programs and other resources.

Doing so, she said, would not only improve the overall business landscape, but would help legal cannabis operators lower their prices to be more competitive with their illegal counterparts.

“I have absolute confidence that the cannabis industry can be supportive of state economies, however we have to be mindful of where that money goes,” she said. “Failed businesses do not pay taxes.”

Littlejohn is involved in the establishment of the REC regulatory framework in New Jersey, which is one of four states that approved a REC program on Election Day. She noted that police unions have a heavy influence in the Garden State, so it’s unlikely the state will be able to follow in the footsteps of Portland and fund social services at the expense of law enforcement.

But, she said, regulators and advocates can and should help provide “guardrails” for how the tax revenue is spent.

“We have to be watching and monitoring the rates of arrests continuing for Blacks and Latinos, because what we’re seeing in legal states is that while overall arrests go down, arrests for Blacks and Latinos does not, or it doesn’t go down proportionally to the rate of everyone else,” she said.