Illinois’ half-baked marijuana legalization costs state $600M

Illinois’ half-baked marijuana legalization costs state $600M

A complex system of high taxes and restrictive licensing undermines the goals of marijuana legalization proponents – leaving $600 million in potential revenue uncollected while helping the illegal drug trade.

Two years into Illinois’ experiment with legalized recreational marijuana, high taxes and restrictive licensing have let $600 million in potential revenue go up in smoke, as well as failed to snuff out the illegal market as proponents had hoped.

A study commissioned by Illinois lawmakers pushing marijuana legalization in 2019 estimated it could produce $440 million to $676 million in annual tax revenue.  Despite a surge of demand for cannabis during the COVID-19 pandemic, Illinois fell far short of the bottom end of that range in 2021, bringing in just $317 million from cannabis taxes and fees.

Illinois Gov. J.B. Pritzker signed legislation in 2019 to legalize recreational marijuana, with sales beginning Jan. 1, 2020. As 4/20 hits – marijuana’s high holy day – a look at Illinois’ record is filled with missed opportunities and disappointments. Bummer.

A key reason for failing to meet expectations from before legalization is that Illinois has a much more restrictive licensing regime than other states that have legalized cannabis for recreational use. Illinois has the lowest number of marijuana-related business licenses per capita of any legal state. Additionally, Illinois’ cannabis taxes are the third highest on average and because of complex multi-layer taxation can be the highest for some products.

Illinois is also the only state to impose higher taxes based on the potency of the product, which adds complexity to administering the taxes and imposes a penalty on consumer preferences despite no clear link to consumer safety. It is one of three states to apply taxes at the wholesale level as well as at the point of sale. Businesses generally pass on the cost of production taxes to the consumer, increasing the base cost of the product.

While Illinois strictly limits the number of licenses available, several states do not. Colorado and California have no cap on the number of licenses.

High taxes and restrictive licensing together raise the price and reduce supply, meaning fewer sales on the legal market.

Compared to other states with legal cannabis, Illinois’ cannabis revenues are the second lowest in the nation proportional to the size of its economy. Only Massachusetts ranks lower.

Illinois also brings in the second-lowest amount of revenue on a per capita basis, with only Michigan faring worse. If Illinois’ cannabis revenue collections matched Colorado or Washington, proportional to the size of their economies and population, it could bring an additional $600 million annually.

Besides failing to bring in as much revenue as it could, Illinois’ restrictive legal cannabis market could also be helping to grow the illegal market – and the crime associated with it.

A 2019 study in the Ecological Economics journal found legalization reduced illegal market growing of marijuana. On the other hand, higher taxes were associated with more illegal growing.

Lawmakers have recognized this relationship in some states. A bill proposed in California in 2019 would have slashed cannabis taxes for legal businesses, temporarily, to help them compete with the underground market. Colorado followed a policy of lower taxes in the first years of legalization, raising the excise tax to 15% from 10% in 2017, which could have helped legal businesses compete when they were just entering the market.

While the size of the illegal market is nearly impossible to measure accurately, the average price of marijuana can serve as a useful proxy. When legal cannabis is more expensive, consumers may be more likely to pursue cheaper alternatives from non-legal sources. The average price per ounce of high-quality marijuana in Illinois, pre-tax, is higher than in any other state with legal recreational use.

Pritzker signed legislation in July 2021 to expand marijuana licenses to 175, but this would still leave Illinois with fewer licenses per capita than any other legal state.

In April 2022, a lawsuit filed by True Social Equity in Cannabis alleged a “Chicago cartel” of businesses linked to Pritzker have monopolized the industry and are keeping prices high.

Joe Caltabian, a CEO in the cannabis industry who helped co-found Illinois’ largest marijuana business, pointed out problems with Illinois’ restrictive legal market to Forbes magazine.

“The truth is that cannabis is a wellness product, and high taxes prevent people from accessing cannabis,” he said. “Conversely, if state governments taxed cannabis less, the industry would see increased sales, people would be able to transition from pharmaceuticals to utilize the nontoxic cannabis plant, and sales would move to the regulated market from the illicit market.”

If Illinois wants to reap the benefits of legal cannabis by maximizing its tax revenue and reducing illegal sales, it should lower and simplify its cannabis taxes as well as remove the cap on licenses.

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