September 23, 2020

Tax expert says there could be significant revenues in cannabis legalization, some lawmakers still skeptical

Comments and questions raised on Tuesday during an interim legislative tax policy committee point towards lengthy debates on recreational cannabis legalization in the upcoming legislative session in January. 

Richard Anklam, the president and executive director of the New Mexico Tax Research Institute, told lawmakers that states that were early in legalizing recreational-use cannabis like Colorado, Washington, Oregon and California have seen significant tax revenue increases in the past several years. Anklam, using a study from the Tax Foundation, a national think tank, said New Mexico could see roughly $70 million in excise taxes, before factoring in gross receipts taxes, if the state legalizes cannabis for recreational use. 

While not as common, Anklam said some states who have recently legalized recreational-use cannabis have developed tax models based on potency instead of by volume of what is sold. He said, the potential increase in tax revenue may not become the state’s saving grace, but that it would make a significant impact. 

“What’s the marijuana market worth? It’s worth a lot,” Anklam said. “Most states can’t fund highly significant portions of their government with it, but every little bit helps.”

Duke Rodriguez, the president and CEO of Ultra Health, a New Mexico medical cannabis production company, told lawmakers that despite the large amounts of possible tax money going to the state, current restrictions on cannabis production would not be conducive to a cannabis boom. 

Rodriguez has long been a vocal critic of the state’s Department of Health’s restrictions on how many plants producers can grow. In 2019, the state increased the number of plant capacity from 450 to the current 1,750 after Rodriguez took the state to court over the issue. Rodriguez has maintained, even after the 2019 increase, that the current limits hinder the program’s growth. On Tuesday, Rodriguez said it is unlikely that the state would be able to quickly implement a prosperous program without significantly increasing the number of plants in the state. 

“I don’t think it’s a simple ask, I think it’s a heavy lift,” Rodriguez said. “But if you address those major components to get to that heavy lift, I think it becomes very realistic right out of the gate. 

Both Rodriguez and Anklam cited studies that showed the ideal tax rate for cannabis sales ranges from 15 to 20 percent. Rodriguez said that range will ensure ample state revenue, while also keeping the prices low enough to keep consumers out of the black market. 

“You must have enough product produced, you must allow consumers to buy what they want and you must have a tax rate that kind of discourages the existence of the elicit [market].”

Several Democratic committee members had questions and concerns about legalization and any potential unintended consequences, but the majority of concerns came from Republicans. 

Rep. Rod Montoya, R-Farmington, implied that any push to legalize would actually be decriminalization, although the state has already decriminalized cannabis possession, making the possession of small amounts a misdemeanor offense. 

But Montoya expressed concerns about black market sales and said there needs to be a deep look at legalization beyond potential profits.   

“I think there are more things than just dollars and cents that we’re going to have to be concerned with,” Montoya said. 

Rep. Larry Scott, R-Hobbs, raised concerns about where that tax revenue would come from, considering the large number of New Mexicans living in poverty. 

“It looks to me like the discretionary income is insufficient to justify this added expenditure,” Scott said.

Anklam said it is likely that consumers, even those in a lower income bracket, might purchase cannabis instead of going to a movie or buying alcohol. Further, he said, many illicit users are already spending their money on cannabis, but in a post-legalization world, they would also be paying taxes on it. 

Sen. Gay Kernan, R-Hobbs, said she is worried about how much water mass cannabis crops might use, especially given Rodriguez’s insistence that the state would need to boost plant numbers to meet demand. In response, Rodriguez said some cannabis plants can thrive with significantly less water than some of New Mexico’s staple crops like pecans and alfalfa. But Kernan also expressed concern that cannabis and those traditional crops cannot both thrive with the state’s limited water supply. 

“I am concerned if we are attempting to increase, substantially, the cultivation, that something’s going to have to give,” Kernan said. “I don’t think that you can do it without shifting from pecan growing or cotton, whatever is out there. That’s going to have to just shift from one to the other which really, in my view, is also a little bit concerning.”

Rep. Christine Chandler, D-Los Alamos, also had concerns about water. She said she’s had to intervene in disputes between cannabis producers and northern New Mexico water providers over water rights. Chandler said with the help of the state engineer’s office she found that some producers may not have been properly leasing water rights to grow their cannabis. 

The committee chair, Rep. Javier Martínez, D-Albuquerque, has been involved with attempts at legalizing cannabis for several years. During the 2020 session, he sponsored one of the two attempts at legalization. Martínez said many of the key provisions he included in his last attempt, like restorative justice and a subsidy program for medical patients, will be included in his bill next year.  

“I think it’ll be a model for the rest of the country not only in terms of protections for the medical program, not only in terms of equity, but also in terms of some smart tax policies,” Martínez said. 

There has been an ongoing concern among many cannabis patients in New Mexico that a recreational-use program would hurt the current medical program. 

Currently, the only tax on medical cannabis is gross receipts, which is actually billed to producers, although some businesses pass it along to consumers. In other states, particularly Colorado, legalization ultimately resulted in shortages of medical cannabis, albeit temporarily.