Federal marijuana legalization could tax drug back to the street, experts say

PORTLAND, Ore., Sept. 22 (UPI) -- As more states and the public embrace legal cannabis, Congress is considering a bill to legalize the drug at the federal level and clear up legal ambiguity that's hampered the burgeoning industry.

But drug reform advocates and the cannabis industry have reacted cautiously to what may be the best shot at federal marijuana legalization. The Cannabis Administration and Opportunity Act, backed by U.S. Senate Majority Leader Chuck Schumer, D-N.Y., would disrupt the varying tax structures for the 19 states that have legal recreational weed.

The cannabis industry and its allies worry that federal legalization will come with higher taxes that'll put smaller companies out of business and send consumers back to the unregulated market.

"We need to be careful not to kill the goose that laid the golden egg," said Eric Gaston, owner of Evergreen Market, a chain of five recreational cannabis stores in the Seattle area.

The bill faces an uncertain future with Republican opposition, unease among moderate Democrats and no clear signals from the White House, The New York Times reports. But the bill's backing from Schumer, as well as Sen. Ron Wyden, chair of the powerful Senate Finance Committee, shows how mainstream the once fringe idea has become.

The proposal shows how taxation will remain a stumbling block for any federal legalization measure.

Gaston's business is an example of the complicated -- and expensive -- relationship weed stores already have with the tax collector.

Evergreen Market has many common business expenses: attorneys fees, rent, utilities and payroll for 170 employees. But unlike more conventional businesses, Gaston can't deduct common expenses from his tax bill to the federal government because it recognizes no legal use of marijuana.

Gaston must pay Washington state's 37% excise tax and 10% sales tax on recreational cannabis -- the highest of any state that has legalized the drug. The state tax rate, along with being blocked from writing off many expenses, means that more than half of every dollar he makes goes to taxes.

The bill would allow cannabis businesses to access write-offs used by other businesses. It also funds programs intended to assist communities affected by the drug war. That funding comes from a 10% excise tax placed on cannabis in the first year the bill is enacted that would grow to 25% by the fifth year.

Industry groups have complained that the 25% rate still leaves businesses burdened.

Beau Whitney, a Portland, Ore.-based cannabis economist, said many cannabis businesses have little left after paying expenses and taxes. The legislation would increase the taxes for cannabis businesses that would disproportionately affect smaller operations owned by women or minorities.

Even with normal business deductions, cannabis businesses would pay $1.1 billion in higher taxes between 2021 and 2025, according to his analysis.

"If businesses have increased costs, it's hard to push those costs onto consumers," he said. "If it goes to the consumer, they will go back to the illicit market, but if operators absorb those costs, they are under stress. It's a lose-lose scenario."

A federal marijuana tax would also disrupt the existing tax structure in the 19 states that have legalized the drug for recreational use.

In a letter sent this month to Schumer, Karen O'Keefe, director of state policies for the Marijuana Policy Project, pointed out, for instance, that Alaska only taxes cannabis at the point of sale from a state-licensed cultivator. So Alaska would see no revenue from products brought in from out of state under relaxed federal restrictions, she wrote.

Colorado Attorney General Phil Weiser also weighed in with a letter arguing that the proposed cannabis tax rate "would pressure states to consider cutting their tax rates," reducing revenues they rely on for social equity and education programs. He also warned that national cannabis regulations could spur consolidations and push smaller, local businesses out.

"We are learning that the cannabis industry is quickly becoming a piggy bank for special projects," said Peter Marcus, spokesman for Terrapin, a chain of six recreational stores in Colorado.

He said headlines of how much money is flowing through the industry obscure its tight margins and how many are struggling or going out of business.

Colorado has a combined 30% wholesale and retail transaction tax on cannabis. Marcus said the rate could be higher as the state government seeks money to cover services. He pointed to Initiative 25, an education funding measure Colorado voters will decide on in November. If approved, it will add another sales tax on cannabis that will rise to 5% by 2024.

Vicki Christophersen, executive director of the Washington CannaBusiness Association, said that if taxes become too high they'll undermine the legal market and send consumers back to the black market, which doesn't have safeguards to keep products safe and out of the hands of minors.

She said she's grateful that Congress is seriously discussing legalization and expects there to be some taxation. But she said that discussion needs to consider how state and local cannabis taxes will play into any national regulation framework.

"Every state has a different tax structure, and I don't think we necessarily know what that sweet spot is," she said.