Following the repeated failure of Congressional Republican plans to pass healthcare legislation, all eyes on Capitol Hill have turned to a tax reform agenda that President Trump and GOP lawmakers are now pushing.
Some marijuana policy observers believe the overhaul provides an opportunity for cannabis businesses to finally break free from a 1980s provision — known as 280E — that forces them to pay a much higher tax rate than companies in other industries.
WHAT IS 280E?
Enacted in 1982, Section 280E of the Internal Revenue Code states:
No deduction or credit shall be allowed for any amount paid or incurred during the taxable year in carrying on any trade or business if such trade or business (or the activities which comprise such trade or business) consists of trafficking in controlled substances (within the meaning of schedule I and II of the Controlled Substances Act) which is prohibited by Federal law or the law of any State in which such trade or business is conducted.
While it was initially intended to stop drug cartel leaders from writing off yachts and fancy cars, today its plain language means that that growers, processors and sellers of marijuana — which is still a Schedule I substance under federal law — can’t take business expense deductions that are available to operators in other sectors.
And it doesn’t matter if they are strictly in compliance with state or local policies. Federal law is federal law.
As a result, cannabis businesses often pay an effective tax rate upwards of 65-75 percent, compared with a normal rate of around 15-30 percent.
HOW 280E REFORM COULD HAPPEN THIS YEAR
Over the past several Congresses, standalone bills to amend the provision so that it doesn’t apply to state-legal businesses have earned increasing numbers of cosponsors, but haven’t received hearings or votes.
Now that a broader tax reform package is on the agenda with the support of Congressional leadership and the White House, advocates and industry operators are pushing to attach a 280E fix to the moving vehicle.
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Learn which five GOP House members and three Democrats cannabis businesses need to target with advocacy efforts to win a key committee vote on 280E reform language.
Plus: See which three GOP senators reformers could pick up key votes from.
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UPDATE: Neither the House nor the Senate voted on a 280E amendment as part of consideration of tax reform legislation.
With support from the targeted House and Senate members named above, cannabis businesses would succeed in attaching 280E reform language to the tax plan at the committee level before the legislation reaches the floor.
THE LOBBYING PUSH
But they aren’t alone. Powerful conservative anti-tax crusader Grover Norquist is also working on the issue. In an interview earlier this year, he said he has “brought it up with leadership” but hadn’t yet gotten solid indications that House Speaker Paul Ryan or other members are on board with the plan.
But that could change if a significant number of GOP members make it clear that fixing 280E is important enough to them that they’d make their support for the overall bill contingent on it.
“Marijuana could get into that [tax reform] package if some of the libertarian Republicans made that a condition of voting for the whole package,” Norquist said.
Marijuana businesses that could stand to benefit from a 280E fix and want to bolster the campaign would likely do well to focus resources conducting grasstops and grassroots outreach in the districts of those House Ways and Means Committee and Senate Finance Committee members singled out in the section above.
In addition to the tough legislative math in House and Senate committees detailed previously, 280E reform advocates may encounter a bigger problem: The deficit.
While rescinding the provision’s application to state-legal cannabis providers is a matter of basic fairness, it would also, on its face, amount to a large tax cut from current rates for those businesses. And that could be a roadblock to success, as Republicans are already struggling to find ways to pay for broader tax cuts they are proposing in the plan.
While most legalization advocates would gladly agree to a federal sales tax on legal marijuana to make up for the 280E fix, the kinds of broader changes needed to existing drug laws seem far beyond the scope of the tax package.
An even simpler pitfall for 280E reform is that even if it is successfully attached to the broader tax legislation, there is no guarantee that the bill will be enacted. Healthcare reform efforts that GOP leaders put a lot of stake and effort into passing have fallen short on several occasions in recent months. Budget proposals necessary for clearing a legislative path for the tax bill to advance have only very narrowly been approved by the House and Senate, meaning that leadership has very few votes to spare when negotiating the finer points of the legislation.
If reformers aren’t able to earn enough support for a full 280E carveout for cannabis businesses, there are two potential compromise approaches they may consider.
One would be to push for a reform that only protects medical cannabis, and not recreational marijuana, businesses. While that would certainly leave a significant portion of the industry behind, it may be more palatable to certain lawmakers. GOP Sen. Susan Collins or Maine, for example, said during a 2014 committee debate on a marijuana banking amendment that she would have supported the measure if it only protected medical cannabis businesses. But, because of its broader reach, she voted against it.
Similar concerns led to the complete removal of banking language between last year’s version of the comprehensive Senate medical cannabis bill known as the CARERS Act and this year’s introduction of new legislation, according to marijuana lobbyists.
Another potential compromise, floated by former Joint Congressional Committee on Taxation staffer Pat Oglesby would enact a 280E fix but maintain the non-deductibility of marijuana businesses’ advertising expenses. NORML has signed off on the plan.
This will all move fairly quickly. The House bill will be introduced this week, and the Ways and Means Committee is set to begin marking up the legislation on Monday. The Senate will move sometime after that. Lawmakers have said they plan to have a bill on President Trump’s desk by the new year.
The chances of attaching a 280E fix to the broader tax reform plan are non-zero, but broader political factors and whip count math mean that it will be far from an easy task.
A serious, targeted and well-funded lobbying effort aimed at four Republican House members, three Democratic House members and three Republican senators is needed to ensure any chance of success.
Legal Marijuana States Have Generated Nearly $8 Billion In Tax Revenue Since Recreational Sales Launched, Report Finds
States that have legalized marijuana for adult use have collectively generated nearly $8 billion in tax revenue from cannabis since legal sales first began in 2014, according to a new report from the Marijuana Policy Project (MPP).
The analysis examined the tax structure and revenue streams of all 18 states that have legalized recreational cannabis, though sales have not launched yet in seven of those states. Overall, it shows that establishing regulated marijuana markets gives states a steady and generally growing source of revenue that can support various programs and services.
Last year alone, the adult-use states collected $2.7 billion in taxes from cannabis sales. And as more markets come online and others mature, that’s expected to continue to grow.
As of May 2021, states reported a combined total of $7.9 billion in tax revenue from legal, adult-use marijuana sales. Check out MPP's new report on tax revenue generated from state-legal, adult-use cannabis since sales began in 2014!https://t.co/yv4ImL2s1s
— Marijuana Policy Project (@MarijuanaPolicy) May 25, 2021
For example, California took in more than $1 billion in tax revenue from recreational marijuana in 2020—a 62 percent increase from 2019.
Illinois has consistently been breaking monthly cannabis sales records since its program started in January 2020, and if the trend keeps up, it could create upwards of $1 billion in tax revenue this year. For the first time, marijuana taxes outpaced those derived from alcohol in the state last quarter.
The report does not factor in local tax revenue that individual municipalities may impose on cannabis sales, like in Denver where residents pay an additional 5.5 percent tax that has generated hundreds of thousands of dollars for the city.
“Legalizing cannabis for adults has proven to be a wise investment,” Jared Moffat, state campaigns manager at MPP, said in a press release. “Not only are states seeing the benefits of a regulated market and far fewer cannabis-related arrests—they’re benefitting in a direct, economic way, too.”
MPP also broke down different ways that adult-use states are using those tax dollars.
In Colorado, $404.5 million in marijuana tax revenue has supported the state’s public school system. Oregon invests 40 percent of its cannabis revenue to public education, as well as 25 percent to fund mental health and treatment programs. And in California, $100 million in cannabis tax dollars have gone to community groups to help people most impacted by punitive drug laws.
“Before legalization, money from cannabis sales flowed through an underground market that endangered public safety and disrupted communities. But now, we see all across the country that revenue from the legal cannabis industry is supporting schools, health care, and a range of other beneficial public programs,” Moffat said. “It’s no wonder that residents in legalization states overwhelmingly see legalization as a success.”
Reform advocates aren’t the only ones interested in seeing how states are approaching the tax side of marijuana legalization. The U.S. Census Bureau also has plans to begin collecting and compiling data on revenue that states generate from legal cannabis.
Illinois Will ‘Blow Past’ $1 Billion In Legal Marijuana Sales In 2021, Chamber Of Commerce President Says
“Are we going to get to a billion dollars? I think we’re going to blow past the billion dollars based on the experience in smaller states,” the Chamber leader said.
By Elyse Kelly, The Center Square
Illinois’s cannabis industry is growing up fast, with adult-use recreational cannabis sales expected to hit $1 billion by year-end.
In March alone, Illinoisans spent $110 million on recreational marijuana.
Todd Maisch, president and CEO of the Illinois Chamber of Commerce, said one factor contributing to Illinois’ explosive growth is that most neighboring states haven’t legalized marijuana yet.
“What we saw early on in states like Washington and Colorado is they did have demand come in from surrounding states, which frankly benefits our industry and benefits the taxes collected,” Maisch said.
Cannabis sales have already surpassed alcohol’s tax revenues for the state, and Maisch said he thinks $1 billion estimates are conservative.
“Are we going to get to a billion dollars? I think we’re going to blow past the billion dollars based on the experience in smaller states,” Maisch said.
There are only a couple of things that could stop Illinois’ explosive cannabis market growth, Maisch said. He said that policymakers could ruin things by pushing taxes too high as evidenced by the tobacco market.
“As taxes have gone up and up and up, they’ve pushed people all the way into the black market or they’ve created this grey market in which people are ostensibly paying some of the taxes, but they’re still getting sources of tobacco products that avoid much of the tax,” Maisch said.
The other thing that could head off continued growth is other states opening up recreational-use markets.
“So if you start to see surrounding states go to recreational, that’s definitely going to flatten the curve because we’re not going to be pulling in demand from other states,” Maisch said.
Maisch points out some concerns that accompany the explosion of Illinois’s recreational cannabis market including workforce preparedness.
“All of those individuals who are deciding to go ahead and consume this product are really taking themselves out of a lot of job opportunities that they would otherwise be qualified, so there’s a real upside and a downside,” Maisch said.
While it’s easy to track the revenues this industry brings into state coffers, he points out, it will be harder to track the lack of productivity and qualified individuals to operate heavy machinery and other jobs that require employees to pass a drug test.
Missouri Regulators Derail Medical Marijuana Business Ownership Disclosure Effort With Veto Threat
Missouri regulators say they feel requiring medical marijuana business license ownership disclosures under a House-approved amendment could be unconstitutional, and they may urge the governor to veto the legislation.
By Jason Hancock, Missouri Independent
An effort by lawmakers to require disclosure of ownership information for businesses granted medical marijuana licenses was derailed on Thursday, when state regulators suggested a possible gubernatorial veto.
On Tuesday, the Missouri House voted to require the Department of Health and Senior Services provide legislative oversight committees with records regarding who owns the businesses licensed to grow, transport and sell medical marijuana.
The provision was added as an amendment to another bill pertaining to nonprofit organizations.
Its sponsor, Rep. Peter Merideth, D-St. Louis, said DHSS’s decision to deem ownership records confidential has caused problems in providing oversight of the program. He pointed to recent analysis by The Independent and The Missourian of the 192 dispensary licenses issued by the state that found several instances where a single entity was connected to more than five dispensary licenses.
The state constitution prohibits the state from issuing more than five dispensary licenses to any entity under substantially common control, ownership or management.
On Thursday, a conference committee met to work out differences in the underlying bill between the House and Senate.
Sen. Eric Burlison, a Republican from Battlefield and the bill’s sponsor, called the medical marijuana amendment an “awesome idea. I think it’s awesome.”
However, he said opposition from the department puts the entire bill in jeopardy.
“The department came to me,” he said, “and said they felt that this was unconstitutional.”
DHSS has justified withholding information from public disclosure by pointing to a portion of the medical marijuana constitutional amendment adopted by voters in 2018 that says the department shall “maintain the confidentiality of reports or other information obtained from an applicant or licensee containing any individualized data, information, or records related to the licensee or its operation… .”
Alex Tuttle, a lobbyist for DHSS, said if the bill were to pass with the medical marijuana amendment still attached, the department may recommend Gov. Mike Parson veto it.
The threat of a veto proved persuasive, as several members of the conference committee expressed apprehension about the idea of the amendment sinking the entire bill.
Merideth said the department’s conclusion is incorrect. And besides, he said, the amendment is narrowly tailored so that the information wouldn’t be made public. It would only be turned over to legislative oversight committees.
Rep. Jered Taylor, R-Republic, chairman of the special committee on government oversight, said the amendment is essential to ensure state regulators “are following the constitution, that they’re doing what they’re supposed to be doing.”
The medical marijuana program has faced intense scrutiny in the two years since it was created by voters.
A House committee spent months looking into widespread reports of irregularities in how license applications were scored and allegations of conflicts of interest within DHSS and a private company hired to score applications.
In November 2019, DHSS received a grand jury subpoena, which was issued by the United States District Court for the Western District. It demanded the agency turn over all records pertaining to four medical marijuana license applications.
The copy of the subpoena that was made public redacted the identity of the four applicants at the request of the FBI. Lyndall Fraker, director of medical marijuana regulation, later said during a deposition that the subpoena wasn’t directed at the department but rather was connected to an FBI investigation center in Independence.
More recently, Parson faced criticism for a fundraiser with medical marijuana business owners for his political action committee, Uniting Missouri.
The group reported raising $45,000 in large donations from the fundraiser. More than half of that money came from a PAC connected to Steve Tilley, a lobbyist with numerous medical marijuana clients who has been under FBI scrutiny for more than a year.