How the U.S. Government Is Profiting From Keeping Pot Illegal
The Rolling Stone
Wanda James is great at following rules. A former Naval officer and restaurant owner, James has spent the past decade jumping through all the hoops required to run a marijuana dispensary in Colorado: filing all of the appropriate paperwork to get licensed, complying with each new round of regulations and paying “easily double” what a non-cannabis business would in taxes to a federal government that still considers her a criminal.
“No other business that I’ve run has had to operate like this. It is almost impossible to turn a profit,” James says. “It is so frustrating to be treated like drug dealers and effectively taxed double when this industry has already brought Colorado over $500 million to build new schools and support education.”
James is not alone. Because of the discrepancy between state and federal law, legal marijuana businesses are often stuck paying twice as much as normal businesses – effective rates of up to 70 percent – in federal taxes. Exactly how much extra tax revenue makes it to the feds because of marijuana’s illegality is not entirely clear. But last December, the Congressional Joint Committee on Taxation responded to a request from Colorado Senator Cory Gardner with the projected additional amount that will be collected from legal cannabis businesses between 2018 and 2027 if the drug remains federally illegal: $5 billion.
So while Attorney General Jeff Sessions is out here presenting marijuana legalization as a moral problem and encouraging prosecutors to go after state-legal weed businesses, it is becoming increasingly difficult to ignore the fact that the federal government may have a financial incentive to keep cannabis listed as Schedule I on the Controlled Substances Act. And if the feds continue to act in their own best interest, economically, it could be a very long time before we see marijuana legalized nationwide.
The federal government’s legal weed windfall can be traced back to a little tax code provision called 280E, which says that anyone trafficking in Schedule I or Schedule II drugs cannot take deductions or receive credits on their taxes. It was written in the 1980s to prevent the Scarfaces of the world from writing off the cost of packaging for methamphetamine. But now that a majority of states have legalized the medical or recreational sale of marijuana, the 280E tax provision has become a key point of contention between the federal government and state-legal businesses.
So where did the Joint Committee on Taxation’s numbers come from? Several marijuana industry groups have done their own estimates of 280E’s impact, but the numbers that seem closest to what the JCT put out were developed by a Washington D.C. economic research firm hired by Tom Rodgers, a Native-American advocate and lobbyist. About 15 years ago, Rodgers was the whistleblower in the infamous Jack Abramoff case, helping authorities to uncover criminal lobbying and bribery activities that ultimately led to convictions for 21 people, including a congressman and two former Bush White House officials. These days, Rodgers has expanded his oeuvre to include some work on behalf of the cannabis industry. In 2016, in conjunction with a chain of Colorado marijuana dispensaries called the Green Solution, Rodgers commissioned the research firm to develop an analysis of 280E in the hopes of ultimately getting the provision repealed.
For a year, the research firm worked on crunching the numbers, hoping that they could eventually be used by Congress. “A critical first step in the formation of any public policy initiative in Congress is a Joint Tax Committee estimate,” Rodgers tells Rolling Stone. “You will not be treated seriously on the floor of the U.S. Senate unless you have [that]. You need it in order for your issue to get addressed.”
Finally, at the end of last year, as the GOP was developing its comprehensive new tax bill, Senator Gardner publicly considered attaching an amendment that would allow state-legal marijuana businesses to be taxed like normal businesses. Gardner requested estimates from the Joint Committee on Taxation on how a repeal of 280E might affect tax revenue during the next decade, assuming a 20 percent corporate tax rate. (The final version of the GOP tax bill had that rate at 21 percent.) The firm then presented their findings to the JCT. According to Rodgers, the final estimates from the JCT were “in alignment” with the work done by the people he hired.
In the end, Gardner did not end up even introducing the anti-280E amendment, but the response he received from the JCT constitutes the very first official government estimates of how repealing 280E would affect federal tax coffers. As for how accurate the $5 billion figure is, well, that’s difficult to say. The marijuana industry is notoriously difficult to quantify. The firm that Rodgers hired (which asked to remain anonymous because they consider taking public credit for their work to be unethical) tells me that they primarily relied on data from state governments. In places like Colorado and Oregon, where legal sales are rigorously tracked, that makes sense. But in California, by far the biggest market in the country, nothing marijuana-related has ever been tracked, and it’s impossible to say how long it will take for the state to implement a tracking system now that recreational sales have begun. In addition, the research firm did not include projections for states like Michigan or New Jersey, which will likely both legalize recreational marijuana sales in the next year or so.
If anything, the $5 billion incentive to keep marijuana federally illegal seems to be more of a minimum benchmark. The actual figure could end up being much, much higher.
“In this shadow-and-mist environment, we tried to come up with the most reliable data possible,” Rodgers says. “Is that data imperfect? Contextually, yes. But this was the best that we could do. We used state data because that’s what matters in Congress. You can’t just say to the chairman of the Joint Committee that it’s the Wild West out there.”
And what about the 280E money that the federal government has already made on legal cannabis? The firm that Rodgers hired refused to share their findings on that, so I asked a few different marijuana industry analysts to try to figure it out. Matt Karnes, of GreenWave Advisors, estimates that between 2012 and 2017, the feds took in an extra $8 billion or so in federal taxes from legal pot businesses through 280E – though he emphasizes there was no perfect way to calculate this number. Tom Adams, of BDS Analytics, estimates that between 2014 and 2017, the feds took in an additional $2.7 billion because of 280E. Adams, for his part, points out that most legal marijuana businesses get creative with their taxes in order to minimize the impact of 280E. “You of course have to have the good advice of an accountant and lawyer to decide how aggressive to be,” Adams said in an e-mail. “There is risk, but it’s not cheating to use all legal means to minimize your tax payments.”
Why is there such a big difference between the past numbers and the projected future numbers, when the marijuana industry is slated to grow enormously in the next decade? Remember, the new tax law that passed in December changed the corporate tax rate from 35 percent to 21 percent. And then, as the D.C. research firm hired by Rodgers pointed out, industry analysts like GreenWave and BDS are generally aimed at enticing investors, and therefore may use numbers that are not as conservative as the ones used by government analysts. But Pat Oglesby, an attorney who specializes in cannabis tax policy and worked for the JCT from 1982 to 1988, says that the $5 billion estimate sounded far too low, and that Karnes’ $8 billion estimate regarding the past few years was likely closer to the truth.
Oglesby suggests that in order for the feds to consider legalization, there would need to be a significant excise tax imposed on the sale of cannabis.
“The federal government is not going to do this for zero,” Oglesby says. “And an excise tax would need to be very high in order to compensate for 280E.”
Of course, the higher the taxes on legal cannabis, the more difficult it will be to convince black market operators to join the legal market. For this reason, Oglesby says that the ideal situation would be to keep taxes as low as possible at first — even though that may be difficult, because the government will not want to lose out on the revenue it is already taking in from 280E.
Opinions differ within the marijuana industry about how to get 280E overturned, and whether that is even feasible. Prominent California marijuana attorney Henry Wykowski is leading a lawsuit challenging the legitimacy of 280E in U.S. Tax Court on behalf of Oakland-based Harborside Health Center, the biggest marijuana dispensary in the country. A decision on that suit is still pending. At the same time, separate bills have been introduced in the House and the Senate to try to eliminate 280E: at last count, the House bill had 41 cosponsors, and the Senate had six. However, considering the intensive gridlock currently stalling pretty much all legislative action in Congress, it’s unlikely that either will proceed.
So for now, the next time you hear Jeff Sessions or another member of the federal government say something unscientific about how legal pot is destroying the good Christian soul of the United States, just remember: the feds might be making way more money by keeping weed illegal than they would by legalizing. And as we all know, that’s likely what matters most in the end.
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