Pennsylvania is deep in the red, and the culprit is COVID-19. But if the federal government can’t save the state, can marijuana?
That’s what the Keystone State appears poised to try. If it does, the state might need to prepare to be disappointed.
Gov. Tom Wolf imposed strict social-distancing measures in March to smash the novel coronavirus, and while it worked—Pennsylvania’s rate of new infections is among the lowest in the United States—it came at great cost.
As of last month, the state had a staggering $3.2 billion budget shortfall.
With no fix-everything bailout from President Donald Trump and the federal government on the way, Wolf is looking for other ways to raise cash quickly.
That would include legalizing and taxing marijuana, as Wolf urged state lawmakers do on Tuesday morning.
But if Wolf is serious about using cannabis sales to even partially patch his budget, he may be setting himself up for failure. Cannabis taxes will help, but they won’t come close to filling a multi-billion dollar hole—especially when people are broke and aren’t buying much of anything at all.
And if it doesn’t work framing legalization in this way will be an unforced error that will allow legalization opponents claim the experiment failed.
“Pennsylvania will, like other legalizing states, be disappointed in the revenue this brings in,” said Keith Humphreys, a drug-policy expert and professor of psychiatry and behavioral sciences at Stanford University School of Medicine.
Under the federal coronavirus relief bill originally passed in March, the CARES Act, Pennsylvania has about $1 billion in federal money to dole out—not enough to save small businesses from bankruptcy or stave off massive cuts in public services.
“One other place the money might come from is if the Legislature does what the lieutenant governor and I asked it to do back in the summer of last year and that is to legalize recreational marijuana, and use the income from the sale and the taxes that come from recreational marijuana to supplement” cash coming from the CARES Act, Wolf said at a press conference on Tuesday.
In a statement released by the governor’s office, Wolf wants marijuana sales tax revenue to go to small businesses in need of loans to stay afloat. “Fifty percent of the funding” would go towards “historically disadvantaged businesses,” the statement read.
“Along with the call to the General Assembly to pass legislation legalizing the sale and use of recreational marijuana, the governor proposes that a portion of the revenue be used to further restorative justice programs that give priority to repairing the harm done to crime victims and communities as a result of marijuana criminalization,” the statement added.
No other details were released, and it’s unclear which, if any, of the three legalization bills currently in the Pennsylvania state Legislature Wolf favors. A spokesman for the governor did not immediately comment on Tuesday.
Medical marijuana is currently legal in Pennsylvania, and is available in flower form from privately owned, state-licensed dispensaries.
Even with medical-only restrictions on who can access cannabis and the coronavirus pandemic—access is currently limited to less than 5 percent of adults—medical-only sales may exceed $500 million in 2020, according to an estimate from Marijuana Business Daily.
As of last fall, the state had collected $6.45 million in tax revenue from state cannabis businesses, who recorded $94 million in profit.
Those are all mild and modest numbers—and nothing close to the kind of numbers required for marijuana legalization to float loans to struggling small businesses and prop up the rest of the economy, as Wolf suggested on Tuesday.
In fact, banking on marijuana tax revenue to rescue floundering governments—and, in this particular instance, provide anything resembling coronavirus relief—is a recipe for disappointment, several experts said.
Legalization advocates hailed Wolf’s advocacy. They noted that the governor’s support is in line with the 62 percent of Pennsylvania voters who say they favor ending criminal prohibitions for adults using cannabis.
“The legislature should heed the governor’s call and put Pennsylvania on the path away from its failed prohibition and towards a more humane and sensible marijuana policy,” said Erik Altieri, the executive director of NORML.
Legalization would have “innumerable positive effects,” including an end to nearly 20,000 annual arrests for marijuana charges, Altieri noted.
But how much pot would Pennsylvania dispensaries have to sell in order to patch up the budget—and how heavily would lawmakers tax the newfound commodity?
Herein is the classic legalization conundrum.
Legalization presents a balance that’s not unlike the paradox of crossing the desert carrying water. The more water you carry, the heavier the load—and, thus, the more water you have to carry.
With cannabis, if governments tax too heavily, consumers will flee to the illicit market, and legalization will begin to fail. Legalization also collapses prices—which is good for the consumer, but bad for lawmakers who were expecting quick and enormous bucks.
As Marijuana Moment reported, Wolf appears leaning towards a state-run sales model. Recreational cannabis would not be up to the market, but be administered in state-run weed outlets, in a way similar to how some states administer sales of liquor.
That might “maximize” state income from marijuana sales, “but most projections don’t account for price drops or what would happen if the federal government legalized,” said Beau Kilmer, a policy analyst and legalization expert with the RAND Corporation think-tank.
“It also takes time to create a new market and move a large share of consumers to the legal market,” Kilmer added. “It doesn’t happen overnight.”
Which means even if legalization happened tomorrow, it could be mid-2021 or later before the cash really started rolling in—far too late for Pennsylvania businesses struggling now.
Another bit of irony inherent in legalization is that the more you sell, the cheaper the product becomes—thus also depressing tax revenue.
“In every single state, legalization has been followed immediately by a collapse in the price of cannabis,” Stanford’s Humphreys observed.
Ending criminal penalties for marijuana arrests is still good public policy, but in an effort to make cannabis sales palatable for the general electorate, “politicians supporting legalization scrabble around for some unique benefit and come up with the oversold promise that we are all going to get rich,” he added.
Only in a few states has that actually worked. Colorado, the first state to legalize recreational sales, is perhaps the prime example. California, on the other hand, is a counterfactual: in part because lawmakers tax the product too heavily, many consumers still patronize the illicit market. And tax revenue has repeatedly missed promised projections.
A more realistic framing would probably identify cannabis legalization as a “drop in the bucket,” a reliable but modest source of revenue that’s a “nice bonus” for pursuing what’s still good policy, as Mason Tvert, a partner in pro-legalization lobbying firm VS Strategies, put it.
“Cannabis tax revenue is not the primary aim of legalizing and regulating marijuana,” Tvert said. “The real reward is ending the failed policy of prohibition, which has caused more harm than it has prevented, especially in communities of color, and replacing it with a system that more effectively protects public health and safety.”
“Cannabis tax revenue cannot fix all of a state’s fiscal problems, but it can go a long way in addressing some of the gaps.”
The other irony about using a regressive sin tax to fix a budget hole in an economic recession should be obvious: when people aren’t working and owe rent and mortgage bills they can’t afford, they don’t shop as much. Early in the pandemic, cannabis sales briefly spiked before dipping again to below pre-pandemic levels.
There are currently three legalization bills pending in the state Legislature. One projects sales tax revenue from recreational cannabis at $500 million. That would still leave Wolf with major holes to fill—and that may even be too rosy.
In Pennsylvania, a survey of medical-marijuana patients revealed that costs were too high and driving them away from dispensaries—and that was before the pandemic.
All this adds up to a cautionary tale that Gov. Wolf may want to heed. Legalization is popular and, by most accounts, good policy. With savings on enforcement and new tax revenue, regulated sales will be a net fiscal positive. But it won’t rake in the billions that Pennsylvania will still need.
Cannabis legalization won’t save Pennsylvania from its COVID-19 budget crisis, and suggesting otherwise risks painting the whole exercise as a failed experiment. Wolf should take notice, and other states may want to avoid falling into the same trap.