Marijuana State Taxation – A Federalism and Taxation Remedy for Conservatives?

March 13, 2015 Updated: April 23, 2016

A recent Marist poll discovered that “[w]hile nearly six-in-ten Republicans and Republican-leaning independents say they value a candidate who stands on conservative principles over someone who can win, the proportion who stresses electability has increased.”  This will likely be a highly contentious issue among hardline conservatives who fear a candidate who is too moderate and could waffle too much on issues that matter.  The way elections have gone recently, candidates – on both sides of the isle – have been chastised and ostracized for not being conservative or liberal enough.  Rather than gravitating towards the middle, the parties have lately gravitated toward the edges.

Though, the last eight years of a Democratic president who held a full majority in Congress for two years and a majority in the Senate for six, is likely the driving factor toward a compromise for electability versus values – an “anyone but a Democrat,” manta is likely pushing this notion.  However, there are certainly ways Republicans can try to stay true to their conservative values while appealing to popular social issues across the country.  One such shift is in the vein of marijuana legalization and taxation therein.

Marijuana legalization has become a very strange issue for both parties as some states and the District of Columbia have legalized the drug for recreational use while several others have legalized it for medicinal purposes.  Conservatives should be jumping on the chance to buck the federal government’s authority in the name of state’s rights and individual freedoms, though, for some, this runs contrary to stereotypical “hard on crime” stances taken by (some) conservatives.

Senator Rand Paul, the only real traditionally libertarian politician in the GOP 2016 field, recently introduced legislation with two Democratic senators that “would end the federal prohibition on medical marijuana and eliminate the ambiguity surrounding related state laws.”  Additionally, it will free up funds and opportunities for increased marijuana research for medical and recreational use, facilitate limited interstate trade, and roll back the scheduling of the drug from a Schedule I (the most severe, which includes heroin) to Schedule II.  Republican presidential hopefuls Senator Ted Cruz and former Florida governor Jeb Bush indicated they would likely support legalization efforts in the name of federalism despite potential personal animosity toward the drug.

For Republicans, adopting a marijuana-federalism friendly policy could serve another deeply held interest – supplementing tax cuts.  It is no secret that a big conservative tenet is harsh opposition to higher taxes, with several conservatives in recent years pledging not to raise them.  In Colorado and Washington State where marijuana has been legal for recreational use and has been state regulated for the past year, local economies are reaping serious benefits.

Republicans are generally opposed to taxes on earned income and related personal revenue such as capital gains.  A few Republican governors were able to experiment in their states cutting taxes across the board – and it was not pretty.  As the USA Today Editorial Board wrote regarding Louisiana, “the state budget has gone from a nearly $1 billion budget surplus in 2007-08 to a projected $1.6 billion shortfall” due to a large tax cut.  “[P]rivate-sector job growth in Kansas,” the Editorial Board continued, “has badly lagged the overall U.S. rate — 3% in Kansas vs. almost 5% nationwide. Meanwhile, the tax cuts have caused revenue to fall far short of expectations, and the shortage has caused [Governor] Brownback to pursue damaging cuts in education and spend virtually all of the state’s operating surplus.”  The Wall Street Journal reported that since Governor Brownback cut the income-tax rate and lowered the sales tax, the state’s tax collections have gone down 12 percent.  Governor Brownback envisioned an economy similar to that of Texas, but as the Wall Street Journal indicated, Texas and other states such as South Dakota (who also reduced taxes), have other sectors from which they can draw revenue, such as oil – a huge money maker and economic supplement for tax cuts.

Additionally, while conservative governors and legislators from surrounding states hold similar principles, they chose to wait on tax reductions until certain metrics were achieved.  For example, in Oklahoma, a five percent income tax cut was planned but only after revenue hit a certain amount.  Similarly, in Missouri, taxes were slated to be cut by eight percent as long as tax collections did not dip significantly.  In Ohio, income taxes were cut by 10 percent, though the sales tax was increased.

For states, taxing and regulating marijuana, similar to the way alcohol is regulated, could supplement some revenues from cutting income taxes.  However, as legalized marijuana is still in its infancy, a perfect model has not yet been achieved.  Colorado has introduced a series of excise taxes on their legalized marijuana.  According to the Tax Foundation, a Washington think tank, there is an $8.59 tax levied on a $30 eighth of an ounce of marijuana, which equates to a 29 percent overall tax rate.

States are still experimenting with ways to implement taxes for legalized marijuana.  A recent Congressional Research Service report from November provides some insight into various factors regarding legal marijuana taxation at both the state and federal level.  The report lists five reasons for a federal excise tax on marijuana: 1) reflect external, or spillover, costs to society; 2) discourage use, particularly for youth; 3) prevent too rapid a fall in price; 4) fund related programs; and 5) raise revenue.  Excise taxes are typically issued to raise revenues.  “Cigarette taxes have been used to offset higher spending levels on health care, such as the Children’s Health Insurance Program (CHIP), in recent years,” the CRS report stated.  High demand expectations for marijuana can be utilized to design excise taxes to achieve certain revenue targets the report maintained.

The report also indicated that marijuana prices are likely to fall once it becomes legal in more jurisdictions due to higher production, though estimates are difficult to predict given the quasi-legal nature of marijuana in the United States currently.  It is important to note, marijuana taxation is still in the experimental phase and an ideal system has yet to be devised.  This is also confounded by the quasi-legal status in the United States – legal in some states but still outlawed by the federal government.

Marijuana legalization, or at the very least, permitting and accepting states that allow for legal marijuana to operate freely from the federal government could be an acceptable path to marry the two ideas of federalism and income tax reduction.  In fact, Republican congressman from California, Dana Rohrabacher, an advocate for legalized marijuana at the state level, spoke about his convictions and principles with a roundtable of reporters at the Huffington Post.  For Congressman Rohrabacher, the issue comes down to conservative principles of freedom.  In fact, Congressman Rohrabacher stated that Senator Paul, who holds libertarian principles, will not be the leading voice in the debate regarding support for shielding or protecting states from federal laws against legal marijuana policies passed by voters or state legislatures.  Rather, the congressman stated that, based on conversations he’s had, Wisconsin Governor Scott Walker will lead this debate based on his commitment to the 10th Amendment and state’s rights.  Congressman Rohrabacher stated that these commitments will be a hallmark to Governor Walker’s approach to the American people regarding state’s rights.

Conservatives typically view liberal tax policies as a distorted Robin Hood approach that punishes those who have worked hard to achieve the American Dream by subjecting higher earners to higher tax rates and redistributing their income.  Take President Obama’s tax plan rolled out during his State of the Union address this year that received heavy Republican criticism.  It called for an increase in capital gains taxes, closing of the trust fund loophole, providing an earned income tax credit for certain families, and a tax cut for families with children, among other things.

Senator Marco Rubio, a presidential hopeful who recently released a new tax plan that cuts several taxes, has nagged about the disastrous effects of higher taxes and how they diminish the American Dream.  “There was once a time when we were one of the few developed economies in the world. But now there are dozens of developed economies that have lowered taxes and cut regulations in an effort to attract job-creating investments away from us…Instead of attracting jobs to our shores through simplifying taxes and regulations, it imposes higher taxes and more regulations that push investment and innovation to other countries,” Rubio stated at a speech last summer.  He continued, “Liberals offer up increases in taxes and the minimum wage as ways of helping the struggling earn more. But these policies would result in many people [] losing their jobs.”  (For the record, Rubio has stated that he is opposed to legalized marijuana).

For those like Jeb Bush, Scott Walker, and Rand Paul, conservative values are important.  Bush was thought to be a “model of conservative governance” and once elected, he cut taxes and battled public sector unions.  However, his refusal to sign an antitax pledge is viewed as a weakness heading into 2016.  Compromising those values for someone who is electable, as recent polling indicates, could be a necessary evil for those who are tired of a liberal executive.  But federalism under the guise of marijuana legalization as a potential supplement for tax policy could be a way to stay true to principles while appealing to wide-held social issues.

The trick for some who maintain strong law and order principles but strong federalism principles as well is to take the good with the bad.  As marijuana legalization is becoming more popular, with more voter approved initiatives likely, tax revenue from legalized marijuana would be an added bonus.  Many conservatives harp on the rising deficit and national debt and urge the nation to take a serious look at curbing it.  Moreover, consider the fact that the economy is slowly rebounding from the recession, yet wages are not returning in kind.  Many liberals believe taxes will have go up to compensate for the wars waged on a credit card, yet many Americans cannot afford higher taxes.  Offering tax deductions with marijuana taxation could prove worthwhile for those states seeking robust income tax cuts but who also do not have significant industries such as oil to make up the difference.  Keep an eye out for this debate in the coming years.