Does It Make Sense to Take Regional Approach to Taxing Legal Marijuana?

John Reitmeyer | October 22, 2019 | Budget
If pot were taxed at same rate in New Jersey, New York, Connecticut and Pennsylvania, there’d be no reason for smokers to cross state lines for better deals
Store selling paraphernalia for legal marijuana useCredit: Creative Commons
Store selling paraphernalia for legal marijuana use

While tax rates for products like beer and cigarettes often vary from state to state, Gov. Phil Murphy and his counterparts from nearby states are considering a regional approach to taxing legalized adult-use marijuana.

That was among the many issues that came up at a recent meeting of Murphy and the governors of Connecticut, New York and Pennsylvania — three other states where legalization has been discussed but has yet to make it across the finish line.

Credit: NJTV News
Gov. Phil Murphy, second from right, joined the governors of New York, Pennsylvania and Connecticut on Oct. 17 to discuss interstate marijuana regulations.

It’s too early to tell how the regional discussions will end up. But the governors’ cooperation on legalization suggests the states could try to align their regulatory policies, thus ensuring there will be no incentive for marijuana users to cross state lines to shop for better deals.

“Our impact is much greater when we break out of our own silos as individual states and collaborate on the tough issues plaguing our region and nation,” Murphy said in a statement issued after the meeting, which was billed as a regional summit on issues related to marijuana and vaping.

Other regional regulatory policies

And it’s more than just aligning on taxes for legalized marijuana that the four governors, all Democrats, have agreed to discuss as a regional concern. Other issues highlighted by the governors after the meeting were calls to coordinate things like social-justice reform and cannabis research.

“Together, we can ensure that these challenges are met with thoughtful, comprehensive action for those who live and work in our region,” Murphy said.

Right now, recreational marijuana has been legalized in 11 states, although some, like Maine, are still figuring out how to regulate sales, according to a recent report published by the Tax Foundation, a Washington, D.C.-based group that closely watches state tax trends.

Some states have decided to tax marijuana at both the wholesale and retail levels, including Colorado, which legalized recreational use in 2012, the report said. Some states are also levying sales tax on marijuana products, including Massachusetts, where recreational use was legalized in 2016, followed by marijuana sales in 2018.

Pondering pot taxes

Among the issues hotly debated by Murphy and lawmakers earlier this year as a legalization bill was drafted was how much the state should tax marijuana products. Some favored setting a higher rate to bring in more revenue for the state’s cash-strapped budget, while others argued a lower rate would undercut the drug dealers selling marijuana illegally.

Ultimately, lawmakers settled on a flat, per-ounce excise tax of $42 in the legalization legislation that moved through committee but was eventually pulled back from consideration in March by Senate President Steve Sweeney (D-Gloucester) due to a lack of support in his chamber. (The same bill would have allowed local taxes of up to 3%.) Later, lawmakers and the governor did agree to reform the state’s medicinal marijuana rules, including ending by 2020 the current practice of levying the state’s 6.625% sales tax on medicinal-marijuana sales.

Following last week’s meeting in New York, the governors listed “implementing a similar overall effective tax rate for cannabis products” among the areas where they generally agreed. But no specific details or proposed tax rates were released.

Price of pot in Pennsylvania

Despite that consensus, Pennsylvania recently released a bill that calls for adult-use marijuana sales to be taxed at 17.5%, on top of 6% state sales tax, according to the Tax Foundation report. That would put the proposed combined Pennsylvania tax rate at 23.5%.

While it’s unclear whether a similar proposal could pass muster in the New Jersey Legislature, lawmakers are expected to take up legalization again during the legislative session that will follow the upcoming elections. (All 80 Assembly seats will be on the ballot.) But lawmakers could also decide, as Sweeney has previously proposed, to put the issue before voters in 2020.

Another key issue for states to consider, according to the Tax Foundation, is how much revenue they should expect to generate from legalized marijuana sales. Murphy as a candidate for office in 2017 often touted the potential for up to $300 million in annual revenue from marijuana legalization. But his administration’s projections were scaled back as talks with lawmakers progressed.

The Tax Foundation report warned that policymakers should expect to work through “considerable obstacles” once marijuana is legalized as businesses scale up and get used to each states’ new regulations.

“Forecasts have generally overshot, with a few exceptions,” according to Ulrik Boesen, a senior policy analyst who wrote the report.

Boesen also warned against earmarking marijuana proceeds for specific purposes, given that the marijuana market is still volatile and remains subject to issues like changing consumer behavior.

“Lawmakers should keep this in mind when appropriating projected funds from marijuana taxation,” Boesen wrote.