Congressional Researchers Warn That High Federal Marijuana Taxes Could Inhibit Industry’s Economic Potential

As the Biden administration’s marijuana scheduling review continues, the Congressional Research Service (CRS) has released a report cautioning that if cannabis is eventually legalized, lawmakers should consider the potential unintended consequences of imposing high federal taxes on marijuana products.

The non-partisan research body isn’t necessarily suggesting that federal legalization is imminent, but it pointed out that there are a number of comprehensive reform proposals that Congress may consider as the Drug Enforcement Administration (DEA) completes its scheduling review and decides whether to follow the recommendation of the U.S. Department of Health and Human Services (HHS) by moving marijuana to Schedule III of the Controlled Substances Act (CSA).

As it argued in another recent report, CRS said it’s “likely that DEA will reschedule marijuana according to HHS’s recommendation,” based on past precedent. Meanwhile, lawmakers have put forward several federal legalization proposals that could expand on that incremental change, including legislation that would tax and regulate cannabis.

“Recreational marijuana’s potential economic effects may be a factor in any congressional actions on the substance,” the report says, caveating that federal data on the topic is limited given the ongoing prohibition of cannabis. Congress could collect additional data if it moved to require agencies like the Bureau of Labor Statistics (BLS) and Bureau of Economic Analysis (BEA) to start gathering such material, it said.

While federal data is generally limited, the U.S. Census Bureau did recently release its first report on state-level marijuana tax revenue following what the agency calls “a complete canvass of all state agencies” going back to July 2021.

“If Congress were to decide to de-schedule or reschedule marijuana or otherwise allow for a federal system of legalized recreational marijuana, there may be questions of whether and how to impose a federal tax on marijuana,” it said. “By way of comparison, the federal government imposes excise taxes on tobacco. Recreational marijuana’s tax structure could affect its economic development potential.”

CRS said that the same arguments in support of state-level legalization concerning the economic benefits of taxing marijuana products could apply to federal reform as well. But it noted that there’s a balancing act when it comes to cannabis taxes, requiring lawmakers to weigh the pros of increased revenue against the cons of a potential consumer resistance to high taxes that could allow the illicit market to thrive.

“For example, some research has suggested that high marijuana tax rates—and resulting high recreational marijuana prices—may contribute to the risk of turning potential consumers toward the untaxed black market, in turn jeopardizing recreational marijuana’s economic potential,” the report says.

The research service also gave a counterargument, pointing out that high taxes may deter some people from trying marijuana altogether—”especially those that may be new to recreational marijuana and unlikely to purchase from the black market.”

That “may be a policy goal for some lawmakers,” it said. “In this way, public health and economic development goals for recreational marijuana could, to some extent, be at odds.”

Short of legalization, CRS also noted that there are more modest pieces of legislation on the table that could help ameliorate the unique financial challenges that marijuana businesses in state markets face under the umbrella of prohibition.

Because of the current law, “recreational marijuana businesses often have difficulty accessing certain financial services, including deposit accounts and insurance,” the report says. “This can create uncertainty for recreational marijuana businesses, and could make it harder for them to grow and provide greater employment.”

The Secure and Fair Enforcement Regulation (SAFER) Banking Act—which cleared the Senate Banking Committee in September and is now pending floor action before potentially moving to the House—could reduce those financial burdens, it said.

The bill would, “among other things, restrict federal regulators’ ability to terminate a deposit account for a recreational marijuana business and create a safe harbor from federal law for transactions with a state-sanctioned recreational marijuana business and any entity handling that business’s proceeds.”

But the prospects of advancing the cannabis banking reform have come into question amid the leadership shakeup in the House, where members selected a new speaker who has opposed virtually every marijuana reform proposal that’s come before him. The chances of even broader legislation advancing to tax and regulate cannabis at the federal level is even more doubtful under the current political dynamics.

It’s also not a given that DEA will abide by the top federal health agency’s rescheduling recommendation. While HHS’s scientific findings are binding, DEA reserves the right to make any scheduling determination it sees fit, regardless of the precedent CRS cited.

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