New Jersey May Be the First State Without an Excise Tax Levy on Recreational Marijuana

Last week, New Jersey’s legislature took the first step towards making recreational marijuana legal when Senator and Majority Whip Nicholas P. Scutari (D) and Senate President Stephen M. Sweeney (D) introduced Senate Bill 21 (S21), New Jersey Cannabis Regulatory, Enforcement Assistance, and Marketplace Modernization Act. If enacted, S21 would legalize and taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. recreational marijuana in accordance with Question 1 that was approved by voters on Election Day just a few days earlier. An identical bill (A21) was introduced in the State Assembly.

Question 1 was, unlike the other measures passed by voters, not very detailed, intentionally leaving many details of legalization up to the legislature. For instance, the measure did not impose excise taxes on sales of recreational marijuana. Instead, it stipulated that the general sales tax would apply and granted a local option of up to 2 percent of value.

S21 would establish a licensing system for recreational marijuana businesses and allocate tax revenue to certain programs—including cost of operating the new regulatory system, law enforcement training, and the state’s general fund—but it would not establish an excise taxAn excise tax is a tax imposed on a specific good or activity. Excise taxes are commonly levied on cigarettes, alcoholic beverages, soda, gasoline, insurance premiums, amusement activities, and betting, and typically make up a relatively small and volatile portion of state and local and, to a lesser extent, federal tax collections. on recreational marijuana. Moreover, the bill would not allow residents to grow marijuana for personal use at their homes. (The majority of states with legalized recreational marijuana allow home growing.)

Both S21 and A21 have passed their first committee votes (Senate Judiciary Committee and Assembly Oversight, Reform and Federal Relations Committee).

If S21 becomes law, New Jersey would be the first state to legalize recreational marijuana and not impose taxes above and beyond the general sales taxA sales tax is levied on retail sales of goods and services and, ideally, should apply to all final consumption with few exemptions. Many governments exempt goods like groceries; base broadening, such as including groceries, could keep rates lower. A sales tax should exempt business-to-business transactions which, when taxed, cause tax pyramiding. . The 14 other states that have legal marijuana all levy taxes in addition to or in lieu of the general sales tax. Furthermore, except for Alaska, all states levy a price-based excise tax at the retail level. While these price-based excise taxes may look like general sales taxes, there are important differences. Excise taxes target specific transactions due to some unique characteristic (often negative externalities), and general sales taxes fall on most consumer transactions. Only two states which levy a general statewide sales (Colorado and Maine) tax exempt recreational marijuana.

This introduces an interesting dynamic into a larger narrative around marijuana legalization—especially on the densely-populated East Coast. For instance, it is expected that New York Gov. Andrew Cuomo (D) will propose legalization in his upcoming budget, as he has previously, and he has made reference to budget shortfalls as one of the reasons for legalization. However, New Jersey’s apparent decision to forgo revenue from an excise tax could limit New York’s ability to generate substantial tax revenue should it decide to levy a much higher tax on its residents. New Jersey is, after all, right across the river, and we already know from cigarette tax data that large price discrepancies between states drive cross-border sales.

It should be noted that marijuana is unique given its federal Schedule 1 status. While marijuana may be legal in both New York and New Jersey, it would be a federal crime to transport the product over state lines. This would likely limit, but not eliminate, cross-border traffic.

New York is not alone in the region in contemplating legalization, moreover. Gov. Tom Wolf (D) in Pennsylvania and Gov. Ned Lamont (D) in Connecticut are proponents of legalization, and others may follow given the broad support legalization enjoys among voters.

New Jersey’s tax design adds another element to the ongoing experiment with legal recreational marijuana in the states, but there is still much we do not know. One thing is certain, though: general fund revenue should not be a short-term key priority when it comes to recreational marijuana legalization. However, in the long term, a successful legalization could yield meaningful revenue—beyond the general sales tax, legal marijuana businesses would also pay business taxes and employees would pay personal income taxes. Revenue from these broad-based taxes, combined with a potential saving as illicit operations decline, do represent a meaningful and sustainable form of revenue for the state.

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