Marijuana Legalization and Tax Law: Past, Present, and Future

As Marijuana Legalization becomes a reality in more states, questions arise as to how it will be regulated and taxed within and across states. Legislators look to past and current trends and laws, political climate, and public policy to determine how and when to legalize marijuana. 

Marijuana Legalization amid COVID-19
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Happening Now

Due to the COVID-19 global pandemic, the Treasury Department and Internal Revenue Service announced that the federal income tax filing due date has been automatically extended from April 15, 2020, to July 15, 2020. The extension followed President Trump’s emergency declaration in March pursuant to the Stafford Act, a federal law designed to bring a systematic means of federal natural disaster and emergency assistance for state and local governments in carrying out their responsibilities to aid citizens. 

Businesses around the country have been forced to close or operate under strict CDC guidelinesmillions of Americans have filed for unemployment, and employers are struggling to adapt to the new business environment. 

What about Marijuana Businesses? 

Marijuana legalization continues to be a hot topic, even though it may be seen as a liability by both sides of the political aisle. While both Congress passed a $484 Billion bill to aid small business and stimulate the economy, this aid does not apply to legitimate marijuana businesses because the federal government still classifies marijuana as illegal. Federal legalization is a far-off concept that likely won’t change soon, especially during an election year. However, as marijuana businesses are deemed essential in some states and demand has skyrocketed, some legislators push to protect those business owners.

Rep. Ed Perlmutter (D-Colo.) and Rep. Earl Blumenauer (D-Ore.) introduced the Emergency Cannabis Small Business Health and Safety Act to include marijuana businesses in the federal COVID-19 relief aid to benefit small businesses. The proposed bill would make legal marijuana businesses eligible for the Paycheck Protection Program (PPP), Economic Injury Disaster Loans, and other federal aid.

Developments of Marijuana Tax Law

While Marijuana legalization and “fair” business dealings seem grim, the passage of the SAFE Act shows some hope for federal movement. Contrarily, on a state level, things are moving, but are all over the place. States vary widely about how marijuana tax law works and the standards by which to follow. 

For example, Marijuana was legalized in Colorado after proponents sold the benefits of marijuana tax benefits to the state. Both sides of the political aisle came together and decided that the best thing to do is to reduce the state and local taxes while the states wait around for the federal government to catch up. 

Similarly, other states have reaped the benefits of taxed legalized marijuana. In 2016, Oregon officials levied a 25% tax on recreational marijuana, which generated $60.2 million in tax revenue that year alone. In 2019, Colorado collected more than $302 million in taxes and fees on medical and recreational marijuana. And in 2019, the Massachusetts Cannabis Control Commission reported that in the first year of opening legal adult-use marijuana retailers, $393.7 million was generated in gross sales.

The Future of Marijuana Tax Law

While several states, including New York, have yet to legalize adult-use marijuana, the biggest selling point in a proposed bill is the tax revenue that may be used to benefit communities that have been disproportionately targeted by previous marijuana laws, and boost the state’s economy. 

However, there are three specific tax issues that may follow the enactment of legalized marijuana:

First, “Adequate enforcement” cannot be guaranteed after marijuana is legalized, leaving room for loopholes and problems falling through the cracks. Illegal sales of marijuana will not be stopped by low tax rates offered by states, alone. Critics argue that it is not only important to tax marijuana but to strictly enforce its legal and illegal sales to promote good public policy.

Second, state producer taxes will decline if the federal government legalizes marijuana. Producers currently provide long-term revenues to jurisdictions that prohibit imports, but new Federal legalization will change that. Currently, states that have legalized marijuana can prohibit interstate commerce because the Federal Commerce Clause does not apply to marijuana, as long as it stays federally illegal. Once marijuana becomes federally legal, interstate commerce will start.

Third, regardless of federal legalization, as more states legalize marijuana, the interstate tax competition will open the door to interstate retail tax arbitrage, like tobacco taxes do now.  After marijuana was legalized in Oregon in 2016, Washington marijuana sales plummeted from sale because of the low-taxed marijuana in Oregon. Unless federal taxation dictates state taxation, the states’ race to lowest taxes may put every competing states’ marijuana taxes at risk.