It’s Time to End the Ambiguity of Cannabis Legalization

Geoffrey Lawrence

Imagine operating a business that suffers all the downsides of being both legal and illegal, but none of the upsides of either.

You pay taxes, are subject to copious amounts of costly regulation and licensing fees, and face insurance coverage mandates, among other issues. In exchange, you get no benefit from being able to participate in the financial system, remain a constant target of crime and need to compete directly with parties working on the black market who face no such burdens.

That’s the scenario facing state-licensed cannabis companies. Although these businesses may make every effort to operate in the open, remain compliant and ensure the safety of their products, they are still considered criminal enterprises by the federal government. That means they can’t easily access financial services and face punitive treatment on federal income taxes.

Employees may even be denied home or auto loans because their income is derived from a federally illegal activity. Yet, those employees remit payroll taxes like everyone else trying to earn an honest living.

Nevada and 18 other states have asserted their rights to regulate adult-use cannabis commerce within their own borders, and 37 states in total have created medical cannabis programs. The businesses that operate in this industry are subject to extensive regulation, including state monitoring of every piece of inventory using a combination of security cameras and radio frequency identification tags.

State regulators typically administer an inventory-tracing software capable of running forensic bots that can search for possible deviations in declared crop yields or transfers between licensees. Individuals are also subject to both an FBI and financial background investigation prior to being issued a license.

Further, these businesses pay all taxes to which other businesses are subject, plus special excise taxes at the state and local levels. In Nevada, cannabis companies are taxed 15 percent at the wholesale level and 10 percent at retail, and local jurisdictions may tax these companies’ gross receipts at every stage of production.

Further, cannabis companies pay far more in federal corporate income taxes than the typical business because their expenses are not deductible, and they are not eligible for tax credits. As a result, these companies are federally taxed based on their gross receipts rather than net income.

Americans for Tax Reform estimates that the typical cannabis company may face a 90 percent federal tax rate, meaning that federal coffers benefit hugely from state-licensed cannabis companies even as federal agencies treat these companies like criminals.

Perhaps in recognition of this budgetary arrangement, Congress has held these state-legal businesses in limbo by retaining their federal illegality while also including riders in the federal budget to prevent the Justice Department from prosecuting these entities.

This pretextual scenario has inspired Clarence Thomas – perhaps the U.S. Supreme Court’s most conservative member – to decry, “[T]he Federal Government’s current approach is a half-in, half-out regime that simultaneously tolerates and forbids local use of marijuana.”

Thomas concluded that the federal government’s incoherent approach is not amenable to the rule of law and that “A prohibition on interstate use or cultivation of marijuana may no longer be necessary or proper.”

Enter the States Reform Act. The SRA is a congressional proposal put forward by a cadre of House Republicans seeking to ensure the rule of law is practiced coherently. It would remove cannabis from the federal Controlled Substances Act and allow states to determine how to regulate cannabis within their own borders.

States like Nevada could continue to operate an adult-use or medical market without suffering the downsides of federal prohibition. At the same time, states like Idaho could maintain their own strict prohibitions on cannabis.

The bill would impose a modest 3 percent federal excise tax on cannabis transactions to cover the cost of regulation but would allow cannabis businesses to pay federal income tax on the same basis as similarly situated companies in other industries.

It would allow states to opt into an interstate market regulated by the Treasury Department if they choose to do so, creating an avenue for the best Nevada producers to sell into a larger market. It would ensure the nation’s veterans face no discrimination for choosing to medicate with cannabis, and it would create new pathways for legitimate entrepreneurship and job creation.

In short, it is the type of proposal that should attract the attention of congressional delegations from both legal and illegal states, but which would hold particular significance for legal states like Nevada.

Geoffrey Lawrence

Geoffrey Lawrence

Director of Research

Geoffrey Lawrence is director of research at Nevada Policy.

Lawrence has broad experience as a financial executive in the public and private sectors and as a think tank analyst. Lawrence has been Chief Financial Officer of several growth-stage and publicly traded manufacturing companies and managed all financial reporting, internal control, and external compliance efforts with regulatory agencies including the U.S. Securities and Exchange Commission.  Lawrence has also served as the senior appointee to the Nevada State Controller’s Office, where he oversaw the state’s external financial reporting, covering nearly $10 billion in annual transactions. During each year of Lawrence’s tenure, the state received the Certificate of Achievement for Excellence in Financial Reporting Award from the Government Finance Officers’ Association.

From 2008 to 2014, Lawrence was director of research and legislative affairs at Nevada Policy and helped the institute develop its platform of ideas to advance and defend a free society.  Lawrence has also written for the Cato Institute and the Heritage Foundation, with particular expertise in state budgets and labor economics.  He was delighted at the opportunity to return to Nevada Policy in 2022 while concurrently serving as research director at the Reason Foundation.

Lawrence holds an M.A. in international economics from American University in Washington, D.C., an M.S. and a B.S. in accounting from Western Governors University, and a B.A. in international relations from the University of North Carolina at Pembroke.  He lives in Las Vegas with his beautiful wife, Jenna, and their two kids, Carson Hayek and Sage Aynne.