Vermont May Be the Next State to Legalize Recreational Marijuana Sales

According to news reports, the Vermont legislature is ready to advance S54 this month or next, to legalize cultivation and sales of marijuana in the state beginning in 2022. Versions of the bill have been approved by both chambers. The current regulatory situation in Vermont is unique, as marijuana possession has been legal since January 2018. Before heading to the governor for signature, the two chambers will have to work out their differences in bicameral committee.

Under the House version, an excise tax rate of 14 percent of retail value (and the state’s 6 percent general sales tax) would be imposed, whereas the Senate version would impose a 16 percent rate and allow for a local option of 2 percent. Under the Senate bill, recreational marijuana would be exempt from the general sales tax. Notably, the Senate proposal would also ban flower with more than 30 percent of THC and solids containing more than 60 percent of THC. That would make Vermont the only state to ban products exceeding certain THC levels.

If S54 passes, Vermont would follow the trend of taxing marijuana by retail price. (Alaska is the only state that does not tax marijuana by retail price; see the table below.) Even though this may the simplest and most popular option, it is not ideal. A principled excise tax design that best captures the externality would be based on a combination of potency and weight. Although this introduces complexity to the tax design, it makes the tax more equitable.

In Vermont, the Legislative Joint Fiscal Office (JFO) estimates that a 14 percent excise tax would raise $4.2 million in the first full fiscal year. The revenue would be allocated with 30 percent to misuse prevention and 70 percent to the general fund. The other option, a 16 percent retail tax, would, according to the JFO, raise $5.4 million in the first full fiscal year (both estimates are mid-range). Revenue allocations are not described in the Senate bill. The excise tax proposed by the Senate bill raises 29 percent more revenue even though the rate is only 14 percent higher. This is likely due to the effect of the sales tax exemption in the Senate bill, which produces a lower overall tax burden, with an effect on overall sales volume.

Authorizing a legal market for recreational marijuana is not free, however. The state will incur some costs before the sale is made. Both bills appropriate more than $800,000 to establish a Cannabis Regulation Fund.

Forecasting excise tax revenue has proven difficult in the past as states have generally over- or underestimated demand. In 2014, Vermont commissioned a RAND Corporation study that estimated that Vermont could raise between $20 million and $75 million in tax revenue a year from marijuana legalization, but also cautioned that these figures were highly uncertain and could be affected by federal regulation or neighboring states offering lower rates on marijuana.

A report authored by Denver-based law firm Vicente Sederberg, published August 5, estimates that Vermont is likely to collect up to $12 million from the 14 percent retail excise tax in the first full year, and $13.9 million from a 16 percent retail excise tax. The report estimates excise revenue between $37 million and $42 million after five years depending on the final tax rate. The significant difference in revenue projections is caused by differences in the estimation of total consumers: JFO does not include border consumers and assumes lower average consumption per consumer. Our own analysis, based on tax collections in Alaska, Colorado, Nevada, Oregon, and Washington, suggests that Vermont would raise $12 million in the first full year after legalization and $32 million annually in a more mature market. To put this in perspective, Vermont’s Joint Fiscal Office expects a $332 million shortfall in FY 2021.

While there has long been a desire to legalize recreational marijuana in Vermont, many other states are considering legalization in light of the coronavirus pandemic and the resulting fiscal difficulties for states. The hope is that tax revenue from legal marijuana sales may provide much needed revenue for struggling states and localities. Whether legalization can actually deliver on that promise remains to be seen—at least in the short run. The revenue estimations above illustrate that excise revenue is unlikely to solve long-term budget woes.

There is still much we do not know about the recreational marijuana market and how best to regulate and tax it, as legalization is a still relatively new trend. Nonetheless, it is likely that more states (and maybe the federal government) legalize in the coming years. As more states consider legalization, lawmakers should take note of the experiences of the states already allowing legal sales and consumption. While some challenges will change as the legal U.S. market grows and matures, many will remain. Designing excise taxes (and regulations) will play a key role in allowing the legal market to undercut and outcompete the illicit market, which should be one of the first priorities. Legalization of recreational marijuana should not be done in expectation of a short-term revenue bump from excise collections.

To that end, policymakers would be well-advised to remember that excise taxes should only be levied when appropriate to capture some externality or to create a “user pays” system—not as a general revenue measure. Due to their narrow base, excise taxes are not a sustainable source of revenue for general spending priorities. That is not to say that there is no new revenue available to states that choose to legalize. As any other consumer product, recreational marijuana should be taxed under the general sales tax. Additionally, legal marijuana businesses would pay business taxes and employees would pay personal income taxes. Revenue from these broad-based taxes, combined with a potential saving as illicit operations decline, does represent general fund revenue. Expecting a large and sustained boost from marijuana-specific taxes, however, is shortsighted, and represents poor tax policy.

Original Article Posted at : https://taxfoundation.org/vermont-recreational-marijuana-sales/