Ulrik Boesen, a Senior Policy Analyst at the Tax Foundation, recently joined Bank of America for an investor call about U.S. cannabis tax policy.
Boesen said tax policies toward cannabis in the U.S. today need a lot of improvement, but regulators also have to be careful to avoid negative consequences.
Cannabis Tax Goals: There are three potential approaches to take for taxing cannabis. All but three of the U.S. states that have legalized cannabis take a price-based approach to taxation. Alternatively, cannabis can be taxed based on weight or even on potency.
Boesen said the ideal tax framework would generate tax revenue that is stable and transparent while minimizing “negative externalities.” He said taxes on weight or potency accomplish these goals better than taxing based on prices, which will fluctuate over time. Similarly, gasoline, tobacco and alcohol are all taxed based on quantity rather than price.
Today, Boesen said California has the worst state cannabis tax laws of any state. Not only are effective cannabis tax rates near 50% at times, but he also said California has done a bad job of converting cannabis users from the black market to the licensed market.
He named Oregon, Washington and Illinois as three states that have successful cannabis tax systems.
States Unprepared: Looking ahead to potential U.S. federal cannabis legalization, Boesen said individual states are unprepared for the tax implications of a potential flood of interstate commerce. He said it will likely take some time for regulators to adjust for interstate commerce in the event of federal cannabis legalization.
Finally, Boesen said criminal justice reform, not tax revenue, has been the primary driver of cannabis reform on a state-by-state basis. In fact, the Joint Committee on Taxation recently conducted a study of the MORE Act and found that the federal government would only collect about $6 billion in cannabis tax revenue over 10 years if it were enacted.
Benzinga’s Take: After a hot start to the year, the ETFMG Alternative Harvest ETF (NYSE: MJ) is down 11.6% overall in the past three months.
Cannabis investors had high hopes for policy reform under the Joe Biden administration, but they may now be coming to grips with the idea that cannabis reform, including tax reform, may not happen as quickly or easily as they had initially expected.
© 2021 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.
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