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Pennsylvania’s proposed pot tax may find its way to municipal coffers, experts say

Legalizing adult-use marijuana in Pennsylvania could generate $255 million in new tax revenue for the state, Gov. Josh Shapiro said during Tuesday’s budget address.

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And if the experience of other states is any guide, local municipalities will end up with a taste of the cannabis action as well.

A dozen states, including New Jersey, New York and Oregon, allow local municipalities to levy taxes that generally range between 2% and 5% on the sale of legal pot, said Steven M.

Schain, senior counsel at Smart Counsel LLC, a Philadelphia-based law practice specializing in cannabis issues. Weight and potency are other ways that municipalities tax marijuana.

Regardless of how it’s taxed, legalization in Pennsylvania would bring a windfall for pot stores, Mr. Schain said. “The number of medical marijuana patients drops; the number of people using cannabis increases dramatically,” he said. “It takes off.”

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But Pennsylvania municipalities may well have a seat at the revenue cookie table, too, when — and if — adult-use legalization happens, said Meredith Buettner, executive director of the Pennsylvania Cannabis Coalition.

“The details are up to the legislature,” she said. “There’s certainly an opportunity to include municipalities in the conversation.”

Mr. Shapiro offered few details about the 20% tax he envisions on the wholesale price of cannabis products, which he wants to see enacted by July 1 with sales starting Jan. 1, 2025.

Under his plan, the tax would deliver $5 million for restorative justice, $5 million for the Department of Agriculture for operations, $2 million for the state police for enforcement and $500,000 to the Department of Revenue for administration.

Any remaining money would benefit the state’s general fund.

The General Assembly will determine whether municipalities can tax pot, or even if they can prohibit stores from opening within their jurisdictions. Figuring out those details is an ambitious goal with just five months remaining to create the necessary regulatory framework.

The state’s next fiscal year starts July 1.

David M. Sanko, executive director of the Pennsylvania State Association of Township Supervisors, said he and his colleagues favor an arrangement where municipalities would get a share of the state tax on sales rather than every community coming up with its own method of taxation.

“We would expect some portion of that 20% tax to come back to the municipality,” he said. “That would be our preference and it has been the historical model for stuff like this.

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“We all collectively need to remember there is a local impact in these communities” from marijuana sales, he said.

State Sens. Dan Laughlin, a Republican from Erie, and Sharif Street, a Democrat from Philadelphia, have re-introduced a bill creating the legal mechanism for pot sales, prohibiting marketing to children and adding marijuana to the definition of driving under the influence.

Similar bills have been introduced in the General Assembly over the years, but none has gotten traction in the legislature.

In any case, cannabis producers say they’re prepared to quickly ramp up production when pot becomes legal in Pennsylvania, Ms. Buettner said. There are already 33 grower-processors and 177 medical marijuana dispensaries in the state to meet an anticipated spike in demand, with the potential to license another 63 stores.

And in legalizing pot, there’s no need to reinvent the wheel because 24 states have already gone through the process, including every state surrounding Pennsylvania except West Virginia, Ms. Buettner said.

Local tax rates for marijuana sales in states where it’s legal are not uniformly recorded, so tracking revenue is difficult to glean from government reports. But in Oregon in 2022, the state marijuana sales tax of 17% raised $170 million while a municipal tax of 3% generated another $27 million, according to Richard C. Auxier, principal policy associate, Tax Policy Center in Washington, D.C.

“It’s very real money,” he said. “But this is not going to come in and solve all your problems. It’s a complement, not a solution.”

Before cash-hungry municipalities pop the champagne, Tim Hawkins, commercial general manager at Chicago-based Green Thumb Industries, which sells medical marijuana under Dogwalkers, &Shine and other brands at 18 dispensaries in the state, had some words of caution.

State government will have a heavy lift in creating a new market in a place where illicit marijuana sales still thrive, he said. Burdening recreational cannabis sales with taxes could drive price-conscious consumers to the illegal market, he said, reducing the government take.

“The illicit marijuana market in Pennsylvania is very alive and well,” Mr. Hawkins said, “and, of course, the tax rate on that is 0%. And we’re competing against that.”

“Consumers will weigh their options,” he said.

The legalization of adult-use pot by a number of states aside, possession and use of marijuana is still prohibited by federal law. That’s the case even though marijuana is the most widely used illicit drug, according to the World Health Organization, and 70% of U.S. adults favor legalization, up from 68% in recent years, a Gallup poll taken in October found.

Only a congressional dispensation in 2014 allows states to sanction medical marijuana sales.

The Internal Revenue Service prohibits plant-touching pot businesses from deducting things like security expenses, wages, rent, utilities and insurance in determining federal income tax obligations. Those are deductions that virtually every other commercial outfit is entitled to claim, said Smart Counsel’s Mr. Schain.

But all of this may soon change.

In August, 2023, the U.S. Department of Health and Human Services asked the Drug Enforcement Agency to reclassify marijuana as a Schedule III drug, a category that includes certain over-the-counter pain relievers and anabolic steroids, from a Schedule I drug, which includes such drugs as heroin and LSD.

Among other things, the reclassification would suddenly allow marijuana businesses to enjoy the IRS tax deductions, boosting profits.

It’s uncertain when the DEA will act, but Howard Sklamberg, a former deputy commissioner at the Food and Drug Administration and now a partner at the Washington, D.C.-based law firm of Arnold & Porter, predicted the rescheduling would come before the fall presidential election.

“They’re wanting to get this done,” Mr. Sklamberg told MJBiz magazine in November. “They’ll want to have the final rule done certainly by 2024 — and probably not too late in 2024, given the political cycle.”

The impact of reclassifying marijuana would be dramatic, with reductions in the cost of doing business, smoother operations and an increase in profit for pot vendors, Mr. Schain said.

“It would help the industry enormously,” he said. “It would definitely be amazing for municipalities.”


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