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Legalizing Cannabis in U.S. Could Generate $100 Billion in Tax Revenue

By Alexander Beadle
Published: Oct 15, 2018   
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Federally legalizing cannabis across all 50 states could lead to the generation of $105.6 billion in federal tax revenue and the creation of over 1 million new jobs by 2025, according to one report from New Frontier Data.

New Frontier Data is a data analytics and business intelligence firm which specializes in studying and advising the cannabis industry. Having previously correctly predicted the fall of cannabis prices in Colorado and the introduction of the first exchange-traded fund in the cannabis market, the firm’s predictions are generally widely respected within the cannabis industry, which is what will make this report so exciting to many.

Current cannabis taxation practices

While cannabis is still considered a Schedule 1 controlled substance under U.S. federal law, individual states do have the right to legalize the use, cultivation or sale of cannabis on the state-level. As a result, 31 states plus the District of Columbia have chosen to introduce some form of legal framework supporting the use of cannabis for medicinal reasons, with 9 states and the District of Columbia also allowing recreational cannabis use to some degree.

Under the current patchwork of state-by-state legislation, states can collect taxes on cannabis that is sold in their state, but due to the cannabis remaining federally illegal, the federal government is unable to collect any taxes from the cannabis industry.

The study from New Frontier Data outlines the effects of a hypothetical scenario in which the U.S. decides to federally legalize cannabis and impose the standard corporate tax rate on cannabis businesses.

This study, published in March 2018, is actually the updated version of a previous New Frontier Data study which was published in January 2018. Updates were necessary due to major changes from the Trump administration to the U.S. tax code, which saw the corporate tax rate fall from 35% to 21%; updating the study allows for this new business tax rate to be taken into account when calculating changes in federal revenue.

Anticipated impact of federal legalization

The report found that if full federal legalization of cannabis was to happen in 2018, there would be approximately 654,000 jobs created in the short term, with this figure rising to 1 million jobs by 2025. This would be as a result of full legalization prompting more businesses to enter the legal cannabis market, especially in states where cannabis was previously illegal on the state level; this would lead to the creation of additional job opportunities throughout the cannabis supply chain - from farmers to distributors to sellers.

These employment figures would equate to an estimated $3.3 billion generated in payroll taxes, rising to $5.3 by 2025. In addition to payroll taxes, the study also assumes the introduction of a federal sales tax of 15%, which could generate approximately $46 billion alone in the 8 year period until 2025.

By combining the payroll taxes and sales tax estimates with the revenue predicted to be generated by the imposition of the 21% business tax rate on cannabis companies, the analysis estimated a combined total of $105.6 billion would be generated as a result of immediate cannabis legalization.

The analysis also predicts that legalizing cannabis will drastically reduce the amount of black market activity surrounding the drug. Figures from 2016 attributed 87% of all cannabis sales in that year to the black market or, in monetary terms, around $46.4 billion. Upon federal legalization, the New Frontier Data study expects this figure to fall to 25%, with room to fall further if the legal marketplace is reasonably priced.

“Consumers want to do things legally in general, but they don’t want to do it at too much of a price,” explains Beau Whitney, a senior economist at New Frontier Data, in an interview with the Washington Post. “If they go to the 7-11 to pick up cannabis, they’re willing to pay 10 to 15 percent on top of what they get on the street. Once they get above that, it slows the transition and makes the consumer think twice about making that legal purchase.”

The likelihood of federal legalization

Despite the strong economic motivations that are revealed by the New Frontier Data projection, it is unlikely that the U.S. will join Canada in federally legalizing cannabis under the Trump administration.

Recently Rep. Dana Rohrabacher (R-CA) has hinted that President Trump would be willing to entertain federal medicinal cannabis legalization, saying to FOX Business that “the President intends on keeping his campaign promise” when questioned on the issue. However, it should be noted that Mr. Trump did not campaign on the issue of federally legalizing medicinal cannabis, and in fact stated on the campaign trail in a television interview with 9News Denver that he believes “it’s up to the states, yeah. I’m a states person. I think it should be up to the states, absolutely.”

The Trump administration is currently seeking public comments on whether cannabis should be rescheduled on account of its medicinal properties, though due to international drug treaty obligations it seems more likely that any reform will affect CBD and CBD-based medicines, rather than whole-plant cannabis.

Still, recent polls show that on average 62% of the American public support the legalization of cannabis, which shows the support for legalization is growing year-on-year. As public opinion continues to shift, government officials may eventually feel the pressure to review cannabis legislation, and if they do, economic projections such as this will help legislators consider fully the possibilities that a federally legal cannabis industry might bring.


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