The federal criminalization of marijuana has evidently failed, with recent reports indicating that 72% of the marijuana market in the U.S. remains illicit. Facing widespread nullification of federal marijuana prohibition, popular support for legalization and the accompanying excise revenues, policymakers are continue to consider reforms. As the Tax Foundation reported, members of Congress introduced the STATES 2.0 Act last December. The bill would remove marijuana from the Controlled Substances Act, federally legalize its sale and use and permit interstate commerce.
New Framework For Cannabis Regulation
The States Act aims to remove marijuana prohibition from federal prohibition, allowing states to independently decide its status within their borders. This aligns with the reality that states have been making these decisions for some time now. However, existing legal markets are burdened by federal prohibition and punitive taxation, keeping prices substantially higher than those in illicit markets. This unintended consequence has bolstered black markets, even in states with legal cannabis.
The proposed legislation would shift regulatory responsibilities from the Drug Enforcement Administration (DEA) to the Food and Drug Administration (FDA) for product safety and the Alcohol and Tobacco Tax and Trade Bureau (TTB) for tracking and tax collection. This shift would allow federal and state law enforcement to focus on more dangerous substances and violent crimes.
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Economic And Public Safety Considerations
Allowing legitimate businesses to manufacture and sell cannabis products, as well as enabling banks to work with legal cannabis companies, could help undercut existing black markets dominated by cartels. The STATES 2.0 Act would also facilitate interstate commerce in cannabis between states where it is legal, even if passing through states where it is not.
One critical aspect of the bill is Fiscal design and the establishment of a national tracking and tracing system are critical aspects to be modified.. Similar systems already exist in states with legal recreational marijuana, tracking plants from seed to sale. Integrating these into a federal system could streamline operations and ensure consistent tax collection.
Tax Design And Market Stability
A significant benefit of federal legalization is the potential for excise tax revenue. However, the design and rate of these taxes are crucial to prevent consumers from reverting to illicit markets. Heavy taxation on legal markets drives consumers to dangerous, unregulated products. Therefore, a balanced approach is necessary.
The complexity of taxing cannabis products lies in their variety. A price-based tax does not target harm effectively and increases revenue volatility. A weight-based tax targets harm from smokable products but fails to account for potency. The ideal solution is taxing based on potency (THC content), although current technology to measure THC accurately in various products is still costly.
In the short term, a weight-based tax may be more feasible, transitioning to potency-based taxes as technology advances. The federal tax rate must be set low enough to keep legal markets competitive. Overtaxing would only benefit illicit operators.
Implications For The Cannabis Industry
Legal cannabis markets have been held back by federal prohibition, and allowing interstate commerce and bank participation would help them flourish. This could significantly reduce the individual and social harms caused by illegal markets.
The STATES Act 2.0 could be a fundamental step toward a safer, regulated, tax-generating cannabis market. A simple, low-rate tax could generate substantial revenue while shifting consumers to safer, legal alternatives.
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