New Jersey inched closer toward legalized recreational marijuana use on Nov. 26 when the senate budget and appropriations committee and assembly appropriations committee approved a new plan to regulate and tax it.
So what will be the economic impact of legal cannabis and what can we learn from other states that have legalized its recreational use?
To answer those questions, we turn to Michael Hayes, an assistant professor of public policy and administration at Rutgers University–Camden.
In your view, will the proposed marijuana legislation have a positive economic impact on New Jersey?
There will likely be both economic benefits and costs from legalizing marijuana. The obvious positive economic impact will be job creation and additional business investment in the local economy. Specifically, we should expect to see additional investment in the agriculture sector and an increase in the number of business establishments. It is also possible that the regional economy improves indirectly in the long run from legalizing marijuana, if the state government makes strategic investments using the additional revenue from marijuana taxes.
What about the costs, and is there anything that we can learn from other states that have legalized marijuana?
Lessons learned in Colorado and other states that have adopted this policy suggest there will also be both economic and social costs. The common lessons learned include an increase in the heavy use of marijuana and dependence, decline in academic outcomes for college students, and the increase in cannabis-related driving accidents. Policymakers will need to weigh these benefits and costs when moving forward with this proposal.
Is it possible to tell how much tax revenue that legalized, recreational marijuana would bring New Jersey? Forecasts vary widely, with reports estimating anywhere between 300 million to 1 billion a year.
It is not surprising that there is a large range in estimates because it is very difficult to predict the amount of tax revenue that would be generated from legalizing marijuana, especially in the early years. The amount of revenue will be affected by numerous factors, including the types of regulations placed on this new industry, the amount of taxes placed on producers and consumers, and how fast it takes for producers and consumers to switch from participating in the illegal to the legal market for marijuana.
For example, costly regulations and barriers to entry, such as restrictions on the number of licenses to manufacture or retail, could affect the number of businesses participating in this market. Fewer businesses would lead to fewer sales. Likewise, a large tax burden on either producers or customers could slow down the transition from the illegal to the legal market for many customers.
So then, is generating 1 billion dollars in new revenue out of the question?
New Jersey should not expect to generate over a billion dollars of revenue in the early years because other states that previously adopted these laws have not been able to raise that much in the early years. For example, Colorado only generated $800 million in the first three years following legalizing marijuana.
How is this new tax revenue going to be used?
As of today, there is no official plan for how the state government will use the additional tax revenue from legalizing marijuana. With that being said, New Jersey Governor Phil Murphy has suggested in the past that this revenue could be used to fund free community college in the state. However, there is no guarantee that this proposal would gain support in the state legislature. In a state with the highest property taxes in the United States, I would not be shocked if citizens pressure lawmakers to use the additional tax revenue to increase state aid to municipalities to help lower local property taxes.
What have other states done with the added revenue?
Interestingly, other states that have legalized marijuana, like Colorado, have allocated the additional revenue to schools. If this happens in New Jersey, it could diversify school budget revenue streams and also allow them to reduce property taxes. Other states have funded additional resources for public safety and social services programs.
How will the revenue generated from taxing marijuana compare with that of other state taxes?
I would caution policymakers and citizens to be prepared that the revenue from marijuana taxation will still be significantly lower than other state taxes, such as income and sales taxes. For example, in 2017, state revenue from marijuana sales in Colorado and Washington only represented 1.8 percent and 2.0 percent of all state tax revenues, respectively. This suggests that New Jersey residents should be prepared that major expenditure changes are unlikely because the revenue increases might not be significant.