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No Let-Up on Marijuana for Governor Who Projects Millions in Revenues, Taxes

Murphy wants full legalization in New Jersey by January 2019 as lawmakers are still deep in the weeds over what that could entail

Marijuana shop

Governor Murphy is pushing ahead on marijuana legalization but has offered big promises and few details in his first budget speech.

The governor is calling for full legalization in New Jersey by January 1, 2019 but, with several competing bills stuck in the Legislature and multiple listening sessions scheduled for the coming months, Murphy’s plan seems optimistic.

In his first official budget address yesterday, the governor announced projected state revenues of $80 million from marijuana sales and taxation — $60 million from recreational use and $20 million from medical sales. The proposed tax rate would be 25 percent plus an additional 7 percent sales tax, bringing the total tax on recreational marijuana to 32 percent.

“The only sensible option is the careful legalization, regulation, and taxation of marijuana sales to adults,” Murphy said.

By the numbers

The little we know right now about a possible market for marijuana in the Garden State seems optimistic, but not altogether unlikely. Indeed, last year’s New Jersey Policy Perspective (NJPP) report estimated that a “fully implemented regulated marijuana marketplace for adults in New Jersey could generate at least $300 million in annual direct tax revenue” based only on a 25 percent retail tax alone.

With a higher starting tax rate of 32 percent, that revenue could conceivably increase. However, any market would need to find a sweet spot. If the tax rate is set too high, the black market could explode — something that Colorado, Washington, and Oregon all experienced, leading those states to gradually reduce the tax rate over time. Setting the tax rate too low, however, could return less-than-exciting cash amounts to state coffers and leave the governor unable to fulfill the funding promises he’s made based on high cannabis revenues.

“The higher the tax the less people are going to participate,” Brandon McKoy, policy analyst with NJPP said. “I think [Murphy’s] intention is in the right place, but minute details must be figured out.”

Murphy’s $80 million estimate seems to fall in line with what has happened in other states. In calendar year 2014, Colorado’s first year selling recreational marijuana, the state projected $70 million in tax revenue and returned around $67.6 million at a 27.9 percent tax rate. Washington state projected $162 million and returned close to $70 million its first year (2014 to 2015) at a tax rate of 37 percent. As of their most recent fiscal estimates, in year four of legalization Colorado received $205 million and Washington received over $91 million in total revenue from legalization. (Both of those states have significantly smaller populations than New Jersey.)

Eye on Massachusetts

Massachusetts, meanwhile, is on track to legalize recreational use with a tax rate of 20 percent — one of the lowest in the country. McKoy said watching Massachusetts’s roll-out will be crucial for New Jersey. If it can fund enforcement, education, and everything else on its wish list at 20 percent, that could shift projections for the Garden State.

Furthermore, the governor’s $80 million number is split into two parts: $60 million in revenue from adult use and $20 million from expanded medical sales. Without more details, that $20 million is a source of significant uncertainty.

Under current state law, medical marijuana sales are subject to the state sales tax but revenue data for the medicinal market is hard to come by. The state has not released tax revenues for the medicinal marijuana industry in any of its annual reports though some advocates estimate that the industry brought in nearly $2 million last year. That would mean Murphy’s extended plan would need to create ten times last year’s amount to hit his $20 million projection.

McKoy said he’s not surprised Murphy did not offer many specifics in his budget address but that by announcing his intention to begin recreational sales by January 2019, Murphy will need to move on legislation quickly.

Three bills

There are three prominent pieces of legislation dealing with marijuana currently under consideration in the Legislature: In the Senate, Nicholas Scutari (D-Union) introduced a bill allowing up to one ounce of recreational possession and proposing a new system to regulate and tax it and Sen. Ron Rice (D-Essex) introduced a decriminalization bill; in the Assembly, Reed Gusciora (D-Mercer) quietly introduced his own hotly anticipated legalization bill.

Gusciora’s bill (A3581) would legalize marijuana for adult recreational use and make ten possible dispensary licenses available for each of the 40 legislative districts — bringing the total possible pot shop count to 400 in the state. It would also allow limited home grow (no more than six plants per household) and establish an excise-tax system that would gradually increase over the years. Under Gusciora’s plan, the tax would start at seven percent during the first year, move to ten percent in year three, and reach 15 percent by year five and beyond. In contrast, Scutari’s proposal in the Senate sets an escalating tax rate that would end at 25 percent by year five.

However, both plans also propose abolishing the tax on medical marijuana, an action that would most likely dampen Murphy’s $20 million anticipated revenue.

Legislators have meanwhile signaled that they are still deep in an information-gathering phase and do not seem eager to move on any of the bills in the next few months.

“As we move forward,” McKoy said, “it will be interesting to see what this actually looks like and how it will manifest in New Jersey. It will be important to see what details emerge and what the reality of legalization will look like.”

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