The coronavirus has put N.J. in financial trouble. But is legal weed the ticket out?

By Published On: July 23, 2020Categories: News

Calls to legalize weed and create a new source of revenue have taken on fresh urgency as New Jersey faces a years-long financial crisis following coronavirus outbreak.

But how much cash could sales really net? With uncertainties around the virus and only a vaguely-worded ballot question seeking to jumpstart the industry, pinning down figures proves tricky.

Dated estimates said the state could see hundreds of millions in taxes. Others guess the industry, which will create jobs that stretch beyond dispensaries, could have a larger impact. Gov. Phil Murphy’s past budget proposals, when he thought the state would see marijuana purchases in 2018 and 2019, put the first-year figure at a lower $60 million and then $80 million for both medical and adult use.

But obviously, the state never saw a penny from legal weed sales as lawmakers failed to pass a bill legalizing recreational-use marijuana. And all while the black market continued to flourish, selling an estimated $850 million in weed a year while police arrested nearly 100 people a day for marijuana-related crimes.

Murphy said last week legalizing adult-use weed would be “incredibly smart” to offset the state’s budget issues.

“We’re not inventing marijuana,” he said. “It exists.”

That’s the familiar rallying cry of legalization advocates. A recent gallup poll found 12% of Americans use cannabis already, a number that comes out to nearly 1 million of the Garden State’s roughly 9 million residents. Those people, along with maybe 12% of the state’s 100 million annual visitors, could become customers in a fully-realized market, where steady supply and the presence of numerous dispensaries can make prices more competitive with the black market.

But even if the voting on the ballot question to legalize this fall flips a switch, generating tax revenue won’t come so easily.

“Can it change the budget woes tomorrow? No, because we haven’t done the things we need to do to get us there,” said Jackie Cornell, chief of policy and health innovations at 1906, a cannabis edibles brand seeking a state license to grow and sell in New Jersey.

While state lawmakers could work to pass enabling legislation that would outline the legal market prior to the vote, they haven’t done so. And a Cannabis Regulatory Commission, which should have taken over operation of the medical program and established regulations by January, has only one of five necessary appointees to steer it.

State Sen. Nicholas Scutari, D-Union, who sponsored a former bill seeking to legalize marijuana sales for those over 21, said he hopes the Legislature can use that framework and quickly pass enabling legislation.

“Luckily, we’re in a better position heading into legalization,” he said. “We were very close in passing enabling legislation. That legislation, probably, is a framework for the enabling legislation. There was a lot of effort given to it.”

But this industry is no stranger to delays, and lawmakers failed to pass that very bill before. Dispensary licenses and opening dates in New Jersey’s medical marijuana program have hit holdups. Ten years after lawmakers passed medicinal marijuana, the state has just 11 dispensaries, two of which opened in June. Three others which received licenses to operate in late 2018 have yet to open their doors.

Even as cannabis sales will certainly raise revenue, it’s unclear how much.

“From a tax revenue prospective, there’s a lot of unknowns,” said Scott Rudder, president of the New Jersey CannaBusiness Association, the state’s largest industry trade group. “There are people who have talked about attaching potential fees to help with infrastructure, help with education. It’s still an unknown. COVID-19 has had a significant impact on projections.”

A 2016 report from the New Jersey Policy Perspective estimated direct marijuana sales would yield $305 million in tax revenue, if the rate rose to 25% and some 100,000 people from New York and Pennsylvania came to New Jersey to purchase marijuana.

But the ballot question on which voters will decide subjects pot to state sales tax, at 6.625%, with the possibility for local taxation.

“If lawmakers are going to insist on sticking to that absurdly low tax rate, I think people should expect very little revenue,” said Brandon McKoy, president of New Jersey Policy Perspective and author of the 2016 report.

Massachusetts made $420 million in taxes off of 33 retailers in 2019, its first full year of sales. But the state set the rate at 17%, with some municipalities tacking on an additional 3%.

Illinois, which saw its first sales in January, netted $52 million in six months. The state has some of the highest taxes in the nation, at 26 to 41%.

But McKoy did say he purposefully kept his 2016 estimate conservative.

“I did not take into account the paraphernalia, all of the spillover services that could be generated: accountants, law firms, purchasing property,” he said. “If you throw all of that into there, and use that as your frame, it could be a billion dollars.”

Those huge estimates are becoming common. Nationwide, cannabis businesses could bring $130 billion annually to the U.S. economy by 2024, according to the latest estimate in the Annual Marijuana Business Factbook.

But legalization could also bring immediate savings to New Jersey. A 2017 report from the American Civil Liberties Union estimated the state spent $143 million prosecuting marijuana possession crimes, with a disproportionate target on Black consumers.

“It’s a major industry in and of itself, where taxpayer dollars are spent like water in a stream to chase around this naturally occurring substance called cannabis,” said Scutari, who has advocated for legalization as social justice reform. He also said the lower tax rate could help New Jersey to stamp out the illicit market.

Still, it will take time for the legal market to grow large enough to compete with the black market. Nearly 80,000 patients must use the few dispensaries scattered around the state, and they report poor product quality, high prices and shortages, thanks to a lack of competition.

“That is part of the reason why it’s not booming in the way that it could be,” said Cornell, a former principal deputy commissioner at the state Department of Health. “Competition is what you see drive down price. If we approached this from the mindset of, ‘how do we open as many facilities as fast as possible?’ I think that would create a really huge incentive and a boost to the budget.”

New Jersey is not the only Northeast state eyeing revenue relief from cannabis sales. Pennsylvania and New York have taken initial steps to legalize weed, but the Garden State could win the race, drawing out-of-state consumers who not only would pay tax here, but might fill up on gas, stop at Wawa or make other purchases that benefit Garden State businesses.

Should the licenses of dispensaries, and thereby sales, languish, New Jersey could lose those customers.

And even with the lower state tax rate, some say, potential fees and local taxes could aid school districts and municipal services, like sanitation workers.

“All of that stuff is going to have a dramatic impact at the local level,” said Rudder, a former mayor and state assemblyman. “Those towns that allowed cannabis businesses into their jurisdiction will derive a benefit.”

But skeptics remain. The brief ballot question includes no clues as to how the industry would handle social and criminal justice issues and equity in the industry. It reads as follows:

“Do you approve amending the Constitution to legalize a controlled form of marijuana called ‘cannabis’? Only adults at least 21 years of age could use cannabis. The State commission created to oversee the State’s medical cannabis program would also oversee the new, personal use cannabis market. Cannabis products would be subject to the State sales tax. If authorized by the Legislature, a municipality may pass a local ordinance to charge a local tax on cannabis products.”

“The ballot question doesn’t really fix anything,” McKoy said. “All it does is give legislators more time to figure out what they’re going to do. That doesn’t fix any of the really micro-issues that people were in disagreement on. We’re just going to be right back at square one of this things.”

With just 104 days left until the election, some may see the clock ticking down to the close of a long fight. But for others, it’s just the start.

“November isn’t the end,” Cornell said. “In some ways it’s only like the new beginning of the next chapter in this journey.”

That all depends, of course, if New Jerseyans vote in favor of legalization.

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