Cannabis Legalization: Fiscal Policy and Administrative Issues

The potential of recreational cannabis to generate significant governmental revenue has been part of the debate over legalization across the United States. However, no state taxes cannabis exactly the same way as any other and there are also differences in how the proceeds are supposed to be spent. How have states made and revised revenue projections given the lack of initial data on the size of supply and demand? How have taxation regimes and distribution of tax revenue changed since Colorado became the first state to start retail recreational cannabis sales in 2014? What has worked and what hasn’t?

While the potential revenues that would come from cannabis legalization are top of mind to voters and legislators, the costs to a state associated with administration, compliance and potential social impacts are generally less discussed and may extend to neighboring states that do not legalize. Additionally, the lack of access to banking for cannabis businesses means they must operate on a cash basis, which has many negative consequences including making cannabis businesses a target of crime and that can extend to the myriad of associated industries such as transportation and real estate firms that work with cannabis businesses. How do states calculate and pay for these associated costs? Are they offset by a shrinking of the black market and law enforcement costs of prohibition?