Federal action on marijuana could spur more state legalizations

Colorado Gov. Jared Polis declared “the long wait is over” as he cheered the Biden administration’s action this month to reclassify marijuana in the eyes of the federal government. 

The move, which is now in a public comment period, would change marijuana from a Schedule I drug on par with heroin and LSD to Schedule III’s less-dangerous drug category, while remaining a controlled substance under federal law.  

“This action from the president is pro-freedom, and forward-thinking, and will help our economy and improve public safety,” Polis, a Democrat, said in a statement. 

Colorado has raised $2.7 billion in tax revenue since becoming the first state to commence legal sales of adult-use, recreational marijuana in 2014, although annual collections have fallen from a 2021 peak of $423 million.

Because the potential rescheduling falls short of full federal legalization, any impact is expected to be modest, according to Gregory Sobel, a Moody’s Rating analyst.

“It may prompt more states to legalize recreational marijuana,” he said in an email. “For those states, it would be a modest credit positive. We have seen taxes from legal recreational marijuana sales provide a revenue benefit of between 0.2% and 2.5%.” 

He added that legalization in additional states could create a more competitive national landscape, which would reduce revenue benefits in established markets, noting marijuana prices have declined partly due to increased supply and competition between neighboring states for customers. 

In Pennsylvania, Gov. Josh Shapiro believes the federal action will boost his push to tax recreational cannabis sales. 

“Governor Shapiro has made clear that we need to catch up — practically every one of our neighbors has legalized marijuana and is benefiting from hundreds of millions of dollars in economic activity and revenue — and this important step by the federal government only adds support to the governor’s proposal,” Manuel Bonder, his spokesperson, said in a statement. “The Shapiro administration stands ready to work with the General Assembly to take advantage of this opportunity to legalize marijuana and make our commonwealth more competitive and more just.”

Marijuana Policy Project, a group advocating for the legalization of marijuana, said rescheduling cannabis won’t resolve conflicts between state and federal laws and that Congress should pursue federal legalization.  

The American public appears to support that view. A Pew Research Center survey released in March found 57% of adults believe marijuana should be legal for medical and recreational use, while 32% say it should only be legal for medical use.  

“About half of Americans (52%) say that legalizing the recreational use of marijuana is good for local economies; just 17% think it is bad and 29% say it has no impact,” according to Pew.

Marijuana Policy Project reported this month that state taxes on adult-use, non-medical cannabis sales generated a record  $4.18 billion in 2023, up from $3.8 billion in 2022, with California topping tax collections at $1.08 billion.  Possession has been legalized in 24 states with Delaware and Ohio yet to begin sales.

“With over $20 billion generated in adult-use cannabis tax revenue since the first sales began, the legal cannabis industry is providing much-needed funding for crucial services and programs in states across the country,” Karen O’Keefe, the group’s director of state policies, said in a statement.

In Colorado, marijuana tax revenue last year fell 35% below its 2021 peak. 

“The decline in marijuana tax revenue is largely due to falling consumption after the surge during the COVID pandemic, alongside falling prices as the marijuana market matures,” the state’s March Economic & Revenue Forecast said.

The report added that marijuana tax revenue is expected to rebound, but with slower growth rates as prices and consumption return to normal. A 7% climb to $276.4 million was forecast for fiscal 2025 and a 6.8% increase to $295.3 million in fiscal 2026.

Colorado collects a 2.9% state sales tax and a 15% marijuana retail sales tax on marijuana products sold in stores, as well as a 15% excise tax on wholesale sales/transfers of retail marijuana. Medical marijuana, which was authorized in the state in 2000, is only subject to the 2.9% sales tax.

The majority of the tax revenue flows into the Marijuana Tax Cash Fund to be spent on programs, including health care, substance abuse and treatment, and law enforcement. Public school districts get a share of the revenue for operations and to fund construction and renovation projects. Some of the revenue flows into the state’s general fund, as well to local governments based on marijuana sales within their borders. 

Pennsylvania’s Democratic governor included recreational marijuana in his proposed fiscal 2025 budget. The state would impose a 20% excise tax on the wholesale price of cannabis products sold and retail sales would be subject to the sales tax. The plan would generate $41 million for the state’s general fund in fiscal 2025, growing to $271 million in fiscal 2029, according to an Independent Fiscal Office report. 

The addition of recreational marijuana and online gaming taxation to traditional so-called sin taxes on alcohol and tobacco has created new sources of revenue and markets “that are growing in importance to the public sector,” according to a Moody’s April report.

States that tax all four “generate a minimum of 2.5% of own-source revenue, compared to a minimum of 0.7% for those that only tax alcohol and tobacco,” the report said. 

Colorado and Nevada in fiscal 2021 were the only states where marijuana taxes came close to generating 3% of own-source revenue, it added. In fiscal 2022, marijuana tax revenue exceeded alcohol tax revenue in eight states.

Growth shows signs of slowing. The continued spread of legalized recreational marijuana has reduced what was “a rapidly expanding revenue source in some states,” according to Moody’s.

The report noted that legalized recreational sales effective in January in Ohio could detract from the market in Michigan, where voters approved adult use in November 2018. 

“Florida will vote on the issue in November, and if it passes, the third most populous state in the country could shift the market significantly,” Moody’s said.

Even in smaller states, the impact of legalized marijuana is being felt. New Mexico Gov. Michelle Lujan Grisham announced in March that cannabis has become a $1 billion industry in the state with $75 million in cannabis excise taxes flowing into the state general fund and to local governments. 

“Nearly two years after beginning (adult-use) sales, New Mexico is on the map as a premier hub for legal and safe cannabis and the thriving business community that comes with it,” she said in a statement.