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While New Jersey revenues are down due to the coronavirus-induced economic downturn, state officials shouldn’t count on taxes from legal recreational marijuana to make up the gap, according to a new study.
The report by the Pew Charitable Trusts said the amount of weed revenue is too unpredictable and could vary from year to year based a number of different trends.
“What we emphasize is that the revenues are pretty unpredictable,” said the report’s co-author, Alex Zhang, a research officer with Pew’s state fiscal health project. “If the intention of policy makers is to use it for ongoing programs, they need to be cautious about relying on it too heavily.”
New Jersey voters last month approved a constitutional amendment to legalize marijuana for recreational use. Legislation to enable marijuana sales and decriminalize weed is expected to pass the state Legislature next week. Fourteen other states and the District of Columbia have legalized cannabis for recreational use.
State marijuana taxes eventually could bring in as much as $450 million, according to estimates by Gov. Phil Murphy’s administration.
But there are no assurances, Zhang said.
“It so far has a track record of bringing in revenue but in the long term, we just don’t know how it’s going to perform,” Zhang said. “It’s highly dependent on consumer preferences and consumer whims.”
Unlike tobacco and alcohol taxes, there is not a lot of data on marijuana revenues in states that have legalized the drug, Zhang said.
“Policymakers can hedge against the uncertainty and volatility of marijuana revenue by budgeting it cautiously,” the report said. “They can put the money toward savings, for example, or spend it after it is collected. If states are considering using the funds for ongoing spending priorities that require sustainable revenue streams, they should be careful about relying too heavily on marijuana taxes.”
That’s what New Jersey plans to do. None of the marijuana revenues are earmarked for the state’s general fund under the legislation authorizing New Jersey’s legal recreational cannabis program. Municipalities, though, could impose their own 2% tax and spend the revenues as they wish.
On a state level, the measure allocates 70% of the state sales tax revenue and all the revenue from an excise tax on marijuana growers to help minority communities hard hit by the war on drugs.
The other 30% of sales tax revenue would fund police department programs to train drug recognition experts and for the upcoming Cannabis Regulatory Commission.
One variable affecting how much revenue states will receive will be if there is any marijuana tourism, where visitors come to a state primarily to partake of legal weed.
And there is no data to predict how much revenue marijuana sales will bring in during an economic downturn, Zhang said.
There’s also the sweet spot in levying cannabis taxes.
“The higher the taxes, the more revenue you will bring in but it may make the legal market less competitive with the black market,” Zhang said.
When states raised cigarette taxes, for examples, that had the effect of reducing tobacco consumption and lowering revenues.
And while New Jersey is ahead of its neighbors in legalizing cannabis for recreational use, the state also had a monopoly on casino gambling but lost that as New York, Pennsylvania and Delaware all opened casinos, hurting Atlantic City to the point where several gaming halls shut down.
New Jersey’s so-called sin taxes — alcohol, tobacco and gambling — accounted for 4.8% of the state’s revenues in 2015, 21st among the 50 states, according to Pew.
Jonathan D. Salant may be reached at firstname.lastname@example.org. Follow him on Twitter @JDSalant.
Amanda Hoover may be reached at email@example.com. Follow her on Twitter @amandahoovernj.
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