As more and more states legalize marijuana, pressure has been growing for Congress to take some action. This week, the House passed legislation that would end the federal ban on marijuana.

The Marijuana Opportunity Reinvestment and Expungement Act (MORE Act) garnered support from both sides of the aisle, passing with a 228-164 vote in the House. Under the terms of the bill, marijuana would be removed from the Controlled Substances Act.

History Of the Criminalization Of Marijuana

In the early part of the 20th century, booze was illegal during Prohibition, but marijuana was not. Under the 1937 Marihuana Tax Act, there was a two-part tax on the sale of marijuana, one which functioned like a sales tax and another which was more akin to an occupational tax for licensed dealers. Violations of the Act resulted in severe consequences.

In 1969, Timothy Leary challenged his arrest for possession of marijuana under the Act; the case of Leary v. United States made it to the Supreme Court. The Court invalidated part of the Act as a violation of the Fifth Amendment (against self-incrimination). The result was a new law, the Controlled Substances Act, passed in 1970, which criminalized the possession or sale of marijuana. It has remained so to this day.

While still prohibited by federal law (possession can lead to fines and jail time), today, forty-four states and the District of Columbia currently have laws legalizing marijuana for either medical or recreational use. States which allow marijuana for medical use include Alaska, Arizona, Arkansas, California, Colorado, Connecticut, Delaware, Florida, Hawaii, Illinois, Louisiana, Maine, Maryland, Massachusetts, Michigan, Minnesota, Mississippi, Missouri, Montana, Nevada, New Hampshire, New Jersey, New Mexico, New York, North Dakota, Ohio, Oklahoma, Oregon, Pennsylvania, Rhode Island, South Dakota, Texas, Utah, Vermont, Washington, and West Virginia – as well as the District of Columbia (some states allow CBD oil use only, including Georgia, Indiana, Iowa, Kentucky, Texas, Virginia, and Wisconsin). And, one in three Americans lives in a state that allows for recreational use.

According to a 2019 Pew poll, a whopping 91% support making medical marijuana legal, and 67% of Americans think marijuana should be legal, full stop. Despite the trend, possession of marijuana remains a federal crime. Under federal law, marijuana is still classed as a Schedule I drug – on par with heroin, LSD, and ecstasy – which means that it is not legal in any form. It is against federal law to grow, sell, or use marijuana for any purpose, including medical purposes. 

The MORE Act

The MORE Act would change that.

The Act would also, among other things, impose a 5% tax on marijuana to fund community and small business grant programs, make Small Business Administration (SBA) loans and services available to cannabis-related legitimate businesses, and prohibit the denial of federal public benefits based on certain cannabis-related conduct or convictions.

Economic Considerations

Currently, taxpayers and the government bear the burden of costs (but do not enjoy the revenue) to investigate and prosecute marijuana crimes. The federal government spends approximately $33 billion a year on drug control, while state and local governments spend nearly the same on criminal justice expenditures related to drug crimes. According to the National Drug Intelligence Service, the war on drugs costs the United States almost $200 billion a year in indirect costs (downloads as a PDF).

Current drug laws target users, peddlers, and hardcore dealers. In 2018, there were 1.65 million arrests for drug violations in the U.S. Of those related to marijuana, more than nine-in-ten arrests were for possessing marijuana (92%), rather than selling or manufacturing (8%). 

What does that mean to you? Tax dollars. In 2015, the total state expenditure – not including federal costs – on prisons among 45 reporting states was around $43 billion.

In 2012, it was estimated that the legalization of marijuana (not just for medical purposes) could take $10 billion away from the cartels and dealers. A 2018 presentation before the Joint Economic Committee in Congress reported that the marijuana economy totaled more than $8 billion in sales in 2017, with sales estimated to reach $11 billion in 2018 and $23 billion by 2022.

While marijuana sales are reportable – even if not legal – the Internal Revenue Service (IRS) has not always been successful in collecting the related revenue. As marijuana is increasingly legal in various states – while still illegal at the federal level – the IRS is taking steps to educate taxpayers about the tax consequences. The agency has even released a new marijuana business webpage to help business owners understand and meet their tax responsibilities.

However, since marijuana remains illegal for federal purposes, the IRS still takes the position that some related expenses are disallowed under Section 280E of the Tax Code:

§280E. Expenditures in connection with the illegal sale of drugs. No deduction or credit shall be allowed for any amount paid or incurred during the taxable year in carrying on any trade or business if such trade or business (or the activities which comprise such trade or business) consists of trafficking in controlled substances (within the meaning of schedule I and II of the Controlled Substances Act) which is prohibited by Federal law or the law of any State in which such trade or business is conducted.

Today, only the cost of goods sold is deductible for marijuana businesses. Traditional business costs, like employee payroll and marketing, remain non-deductible. The result is that marijuana businesses can be left with an effective tax rate between 40 and 70 percent.

Of course, this would change if marijuana is made legal for federal tax purposes. And even though the MORE Act passed the House, there’s no a guarantee that it will pass the Senate where it’s expected to face some opposition.

You can read the text of the bill here.

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