Congressman Says Letting Marijuana Businesses Claim Federal Tax Deductions With 280E Repeal Will Actually Generate More Revenue
A new congressional bill to allow marijuana businesses to take federal tax deductions that are available to other industries would actually result in the government bringing in more revenue, the House sponsor said on the eve of the cannabis holiday 4/20.
Rep. Earl Blumenauer (D-OR), founder of the Congressional Cannabis Caucus, spoke about his recently refiled tax legislation, as well as the prospects of interstate marijuana commerce and the tension between efforts to enact reform incrementally and comprehensively, during a press briefing on Wednesday.
The congressman told Marijuana Moment that his Small Business Tax Equity Act would address the “hopelessly unfair” and “outmoded” Internal Revenue Service (IRS) code known as 280E that prohibits state-legal cannabis businesses from making federal deductions, driving up effective tax rate.
Asked how he planned to sell the proposal to members who might balk at losing tax revenue by authorizing the cannabis business deductions, Blumenauer said that he believes the reform would ultimately generate additional tax dollars.
There’s “an understanding that having 280E is a disincentive for people to fully and fairly reports or taxes,” he said. “As long as people are not able to fully deduct their taxes, there will be efforts to try and minimize what is declared.”
The IRS policy makes it so businesses whose activities consist of “trafficking in controlled substances (within the meaning of schedule I and II of the Controlled Substances Act)” cannot make deduct most business expenses from their federal taxes or receive tax credits, even though they are still obligated to pay taxes like any other company.
Blumenauer said that the code is being applied unfairly to the cannabis industry, as it was “based on a prohibition of drug traffickers trying to declare his yacht as a business expense,” anecdotally.
“I’m absolutely convinced when we are able to fully deduct their business expenses that there actually will be more revenue collected because people will comply fully with the law,” the congressman said.
The Congressional Budget Office, in a 2017 analysis, estimated that repealing the 280E provision’s application on state-legal cannabis businesses would actually result in a $5 billion loss to federal coffers over a 10-year period, but it’s not clear if the review examined the broader economic impact of the reform on marijuana industry activity beyond simply allowing the deductions.
For the time being, the marijuana industry continues to face tax policy challenges under the umbrella of prohibition. And as the Congressional Research Service (CRS) noted in a 2021 report, IRS “has offered little tax guidance about the application of Section 280E.”
Blumenauer also spoke more broadly at Wednesday’s press conferences about advancing cannabis reform legislation in the 118th Congress, recognizing the challenges under a GOP majority in the House but expressing optimism about both the momentum and shifting perspectives of lawmakers on both sides of the aisle.
For example, he said that he believes support has increased for the bipartisan Secure and Fair Enforcement (SAFE) Banking Act, which has passed the House numerous times, and said “there are so many Republicans who understand that this is an important equity issue, civil rights issue, economic development issue and just commonsense.”
He also weighed in on the possibility of federal guidance allowing legal marijuana states to engage in interstate commerce, as three states are now prepared to do following acts of the legislature.
A policy update from the Justice Department would be part of a “slow and steady” process, he said, but the consequence of inaction is that there’s a “tremendous surplus of legally grown cannabis that finds its way into a black market and depresses prices and undercuts the legitimate businesses.”
“I envision, sometime in the foreseeable future, where we have a North American cannabis free trade zone,” he said. “This is good for Canada, good for Mexico, good for the United States—enabling us to legally market this high quality cannabis and not tempt people sliding into the black or the gray market.”
“This has economic consequences, public safety consequences,” Blumenauer said. “It has serious environmental consequences.”
The congressman also shared his perspective on the debate over incremental versus comprehensive reform, arguing that it’s imperative not to let the perfect be the enemy of the good and to pursue any legislative vehicle that puts an end to the “immeasurable damage” of the “failed war on drugs.”
“I don’t want to be in a situation where we’re not going to move forward with progress that would make a huge difference getting us to the ultimate reform faster unless it’s all-or-nothing,” he said. “Real damage is being done the longer the prohibition is in place—and the people who pay the price are the most marginalized folks who got caught up in this failed war on drugs.”
“So I am absolutely committed to working with people to advance the equity provisions. We’ve been clear about that. We’ve included it where we could. We’re open to other elements, particularly with what happens at local and state legal markets,” he said. “But the notion that it’s going to be all-or-nothing is dangerous.”
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The briefing comes the day before the unofficial cannabis holiday 4/20, which will see key lawmakers, including Senate Majority Leader Chuck Schumer (D-NY), speak at an event inside the Capitol Building to further discuss the path forward for marijuana reform this Congress.
Several congressional cannabis bills have been filed in the week leading up to the celebration, including a bipartisan measure from Reps. Dave Joyce (R-OH) and Alexandria Ocasio-Cortez (D-NY) to incentive state and local marijuana expungements with a federal grant program.
Bipartisan House and Senate lawmakers also announced on Wednesday that they are refiling bills to legalize medical marijuana for military veterans.
Last week, Joyce and House Minority Leader Hakeem Jeffries (D-NY) filed a measure designed to prepare the federal government for marijuana legalization, directing the attorney general to form a commission to study and make recommendations about regulating cannabis in a way similar to alcohol.
On the Senate side, Schumer and colleagues have held early meetings with bipartisan members this session after failing to advance the so-called SAFE Plus package of marijuana expungement and banking reform legislation last year.
Sen. Cory Booker (D-NJ) said last week that he believes marijuana “compromise legislation” could be enacted along bipartisan lines this session.
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Photo courtesy of Mike Latimer.