Legal weed may help NJ’s budget, but it will take time

Lawmakers work to provide framework for legalization approved by voters. Taxes, regulations and more on the table
Credit: (AP Photo/John Locher, File)
File photo: A marijuana sale in Nevada

New Jersey’s economy has been bruised by the coronavirus pandemic, but last week’s vote to legalize recreational marijuana use for adults has the potential to provide some much-needed help.

However, before any new tax revenue from legal marijuana sales can begin flowing into the state’s coffers, lawmakers first have to draw up the regulations that will govern New Jersey’s cannabis market.

That tricky process began in earnest inside the State House on Monday.

WATCH: Some criticism for first draft of cannabis-enabling legislation

Industry experts are predicting the businesses that will eventually be cultivating, processing and then selling legalized marijuana products in New Jersey will create much-needed new jobs — and potentially in communities that have been hit hard by the nation’s long war on drugs.

But it will also take some time for the state to issue licenses to those businesses once the process of drafting the legal regulations is complete. That means it may be months or even longer before sales begin and before New Jersey begins to feel any economic effects from the landmark change in marijuana policy that was approved by voters last week by a 2-to-1 margin.

“I don’t think it’s going to be any time before the end of next year, realistically,” said Charles Messina, who co-chairs the cannabis industry group at the Newark-based Genova Burns law firm.

Unable to agree, lawmakers left it to voters

Lawmakers decided to go to voters this year to determine what to do on the issue of marijuana legalization after they failed to agree on it among themselves last year.

A proposed constitutional amendment seeking to make marijuana legal for adults age 21 and older starting on Jan. 1 won widespread approval from New Jersey voters last week. The lead has only built as the counting of mail-in ballots has continued across the state in recent days.

Now the initial task for lawmakers is to act before the Jan. 1 deadline to ensure there is a legal framework in place that reflects the will of the voters when it comes to recreational marijuana use by adults.

“There’s an urgency now to get something done before the end of the year when this constitutional amendment will become live,” said Bill Caruso, a lawyer who heads the cannabis practice at Haddonfield-based Archer Law and is also a founding member of the New Jersey United for Marijuana Reform steering committee.

The effort now underway in the Legislature seeks to address specific issues like decriminalization and expungement of marijuana-related criminal records along with the drafting of business regulations for the industry itself, said Senate Judiciary Committee chair Nicholas Scutari (D-Union) late last week as the implementing legislation was formally introduced in Trenton.

Trying to end underground market

“This is an historic step forward that will bring marijuana out of the underground market with a regulatory system that ensures the safe use of cannabis products by adults,” Scutari said.

“As the largest state in the Northeast to legalize the recreational use of marijuana, we have the ability to establish a new business sector that will create jobs with growers, processors, wholesalers and retailers, and generate economic growth at a time when it is desperately needed,” he said.

This isn’t the first time that state lawmakers have had to act swiftly to draft regulations and other industry guidelines in response to a shifting legal landscape. They did so in 2018 within a matter of weeks after a U.S. Supreme Court ruling paved the way for the legalization of sports betting.

Sports betting in New Jersey now rivals Nevada’s in volume. It has also become a decent source of tax revenue for the state budget, and is helping to support jobs, including in Atlantic City as it continues to recover from the Great Recession.

Scott Rudder, president of the New Jersey CannaBusiness Association, is bullish on the marijuana industry’s potential to further boost New Jersey’s economy, including the farming industry, which he said could play a role in the cultivation of legalized cannabis products.

But Rudder said as new regulations for the state’s marijuana industry are drafted, it will be important for policymakers to reduce “barriers of entry” that would keep businesses, including those based in New Jersey, from obtaining necessary licenses.

“I think it’s critical for New Jersey to get this right,” Rudder said.

Financial hurdles, federal tension

Other experts caution that businesses that pursue cannabis licenses in New Jersey will still have to navigate financial hurdles that stem from marijuana still being viewed as an illegal drug under federal law.

As one way to help address some of those concerns, the New Jersey Society of Certified Public Accountants is calling for a decoupling of New Jersey’s tax code from a section of the Internal Revenue Service’s to ensure certain business expenses can be deducted from a marijuana company’s state taxes in New Jersey.

Such deductions can be critical for small businesses, including those that would be run by women and minorities in New Jersey, said Ralph Albert Thomas, chief executive officer and executive director of the state CPA group.

Marijuana businesses will also have to manage issues related to insurance and banking, among others, in order to become successful in New Jersey, Messina said.

Under the constitutional amendment that voters approved last week, marijuana sales in New Jersey will be subject to the state’s 6.625% sales tax. The ballot question also authorizes a local tax of 2%.

More tax?

Lawmakers may decide to tack on an additional excise tax to raise even more revenue from marijuana legalization. But there are also concerns that trying to squeeze too much revenue out of legalization could make marijuana too costly to purchase and could keep a black market more viable in New Jersey.

The legalization vote is initially being viewed as a “credit positive” for New Jersey by Moody’s Investors Service. But the major Wall Street credit-rating firm also expressed some caution in a notice issued to investors last week.

“While the additional revenue will be a credit positive for the state and any participating municipalities, the impact will be limited by the relatively small size of potential marijuana tax revenues compared to New Jersey’s total general fund,” said Moody’s vice president Baye Larson.

“In addition, tax collections will not begin for two to three years while state legislators adopt necessary regulation and legal dispensaries open. Future marijuana revenue growth will also be negatively impacted if neighboring states pass similar measures,” she said.