Cannabis is a Solution for States & Municipalities to Combat Recession Deficits
The great American economic boom has been put on pause as COVID-19 ushered in a recession. States and municipalities can feel more pain during a recession than the federal government. That is because unlike the federal government, which can run budget deficits, virtually every state must balance its annual budget. Meaning spending cannot exceed revenue. During recessions, state tax revenues often don’t meet the increasing demands on their services, such as Medicaid, Unemployment Insurance, and other education programs. In the Great Recession of 2009–12, states faced more the $500 billion in cumulative shortfalls, and The Center on Budget and Policy Priorities believes states will collectively see a deficit of $291 billion in 2021 alone. California is now projected to face a $54 billion budget shortfall; the California Department of Finance attributes $41.2 billion of the deficit to declining tax revenues over the 14 months.
So what is a state or local government to do? Raise taxes on suffering industries and individuals? Cut crucial services at a time they are needed the most?
States should be proactive in combatting coming budget shortfalls by focusing on new and emerging industries with growing revenues. In the first half of 2020, COVID-19 has been an economic trend accelerator. COVID-19 has taken the positive trends in America’s economy and accelerated them. Working remotely, food delivery applications, and on-demand content was already trending upward going into 2020; now these are an inseparable part of almost every American’s day. Negative trends have also been accelerating downward. Movie theaters, houses of worship, and department stores are among the highest in permanent closures and bankruptcy filings; all of which were not in promising positions before this recession.
Cannabis is a positive economic trend COVID-19 is accelerating. Adult-use cannabis was already gaining traction. More and more states were bringing Cannabis online, and industry revenues have been increasing consistently. Every state with legal cannabis experienced growth in sales from 2018 to 2019. Since COVID-19 sent America into lockdown, legal cannabis markets have set new records. Even Oregon, a mature market that is notoriously challenging to be profitable in, shattered its monthly sales record, with $103 million in May 2020 sales—there were $64.5 million in sales in May 2019.
The cannabis industry’s rising revenue can provide a new, growing, and stable tax base that flows exclusively into state and local governments' general funds. A look at eight states year-over-year tax revenue growth from legal cannabis from 2018–19 showed a net tax revenue increase of $570 million with a total of $1.9 billion in 2019 tax revenue, with every state growing. Since recreational came online in 2018 to March 2020, California yielded $1 billion in total cannabis tax revenue. Analysts believe that California cannabis will generate $1 billion in 2020 tax revenue alone. The newly legalized Illinois market generated nearly $200 million in sales through May 2020, which in turn produced tens of millions of dollars in new tax revenue.
States, municipalities, and advocacy groups are looking to cannabis as a source of tax revenue more seriously than ever before. “I expect a record number of states to legalize marijuana in 2021, in part due to the financial pressures…” said Karen O’Keefe, director of state policies for the Marijuana Policy Project, in a recent CNN interview. In Montana, an advocacy group submitted a petition with over 130,000 signatures (that’s 12% of Montana's total population) to put marijuana legalization initiatives on the ballot, citing the Governor's Budget Office forecast that legal cannabis revenue will reach $48 million in 2025. In California, where over 80% of municipalities do not allow any licensed cannabis activity, cities are now looking to either expand or onboard cannabis businesses. The Orange County Voice reported earlier this week on a number of OC cities planning to expand their relationship with the cannabis industry.
Cannabis should be part of every government's tax and revenue planning because it is good and timely policy. Cannabis has proven in every legal market to increase tax revenue, create jobs—which will lessen demands on state unemployment services, and hurt the black market. Instead of waiting for budget deficits to get worse and worse, states should proactively build adult-use architecture. There is typically a year delay from when states legalize adult-use retail sales and when the first stores open up. Even with that delay in realizing tax revenue, states and municipalities that act diligently can lessen the pain for their 2022 budgets without relying exclusively on significant budget cuts. For states and municipalities that have legalized cannabis but have been slow to issue licenses, now is the time to turn the faucet on. Licensing is typically for the bureaucracy and administrative bodies to oversee, and so executive officials can fast-track the industry coming online or expanding in their jurisdictions.
In addition to the direct financial gains from tax revenue, legalizing cannabis would be a major cost-saver for governments that unwind anti-cannabis law enforcement and prison policies. By commuting prison sentences for cannabis offenders and diverting the billions spent annually on cannabis arrests, states can free up considerable dollars to help balance their budgets.
COVID-19 and the accompanying recession will redefine America’s economy. New industries will rise and expand, while antiquated industries will fall. As part of this transformative moment government has a role to play. Just as the free market is reshaping industry to match our new realities, our elected officials, executive administrators, and other policy makers must also seize this moment to help our communities and country prosper.
