Illinois Lawmakers Eye Revenue Bonanza from Recreational Pot

May 6, 2019, 7:13 PM

Illinois could become the first state in the nation to legalize recreational marijuana via statute under legislation introduced in the General Assembly May 6.

Legislative leaders in the Senate unveiled S.B. 7, the Cannabis Regulation and Tax Act, which would by Jan. 1, 2020 establish a strategy for decriminalizing the sale and use of recreational marijuana for adults 21 and older. The bill would also set a comprehensive regulatory framework for licensing growers and dispensaries, and taxing marijuana products.

While 10 states and the District of Columbia have legalized recreational marijuana in the last seven years, Illinois would be the first to make this change without hosting some type of referendum vote by the public.

Gov. J.B. Pritzker (D), who touted recreational pot as a foundational element of his campaign for governor last fall, said lawmakers had come up with a thoughtful proposal to regulate cannabis after studying the successes and failures experienced by other states.

“Starting with equity as our north star, this framework reflects some of our most deeply held priorities for legalization,” Pritzker said during an event previewing the bill May 4. “Equity guided the conversation on every component of this process, from licensing and revenue to sentencing laws, and expungement. In hindsight, a lot of states got it wrong.”

The Senate’s chief sponsor Heather Steans (D) said the bill balances the goals of “social justice, safety for our kids, and revenue for our state.”

“I think we’ve done a good job of balancing these three goals,” she said.

The legislation appears to have good prospects in the Democrat-controlled Senate, which has already passed legislation smoothing out potential problems for budding pot entrepreneurs with state banking regulators. On April 4, the Senate passed S.B. 2023, which bars the state from issuing orders against a financial institution for unsafe banking practices because the entity provides financial services to a cannabis business.

Revenue Bonanza

Pritzker’s enthusiasm for pot relates in part to the drug’s potential as a revenue bonanza for his cash-strapped state. Illinois faces a fiscal crisis featuring a $3.2 billion structural deficit, a $15 billion backlog of unpaid debts, and unfunded pension liabilities estimated at $133 billion.

A spokesperson for Pritzker said the full revenue implications of the program remain unclear but noted the Department of Revenue is working on a comprehensive fiscal estimate. Pritzker’s FY 2020 budget, however, pointed to revenue of $170 million from the licensing process alone. Millions more would come into state coffers from excise and sales taxes.

The Marijuana Policy Project estimated in 2015 that a regulated recreational marijuana program in Illinois, imposing both sales and excise taxes, could annually realize as much as $699 million.

Tax Levels Linked to Potency

S.B. 7 would lay out a series of new taxes on marijuana benefiting both the state and local units of government. According to a bill analysis released by Pritzker, S.B. 7 would impose a 7 percent privilege tax on the gross receipts of cannabis cultivators, growers, and processors selling product to dispensaries.

In addition to sales tax, consumers would pay various excise taxes on cannabis products based on their levels of THC, the principal psychoactive constituent of marijuana. Specifically, a 10 percent excise tax would be imposed on purchases of cannabis products with THC levels at or below 35 percent, and 25 percent on products with THC levels above that threshold. A 20 percent excise tax would be imposed on all cannabis-infused products.

In addition, units of local government would be permitted to impose their own taxes. Municipalities could impose purchaser excise taxes of up to 3 percent, and counties could impose an excise tax of up to 0.5 percent. Unincorporated areas would be permitted to impose excise taxes of up to 3.5 percent.

Sen. Toi Hutchinson (D) said the legislative drafters struck the right balance regarding taxation after noticing some high-tax states invigorated the illegal market for marijuana.

“The unintended consequence of that is that you don’t tamp down on the illicit market,” Hutchinson said. “So you want a fair, stable, transparent tax system across the board to make sure people know that it’s actually better to do this in regulated safe environments and not in the shadows.”

To contact the reporter on this story: Michael J. Bologna in Chicago at mbologna@bloomberglaw.com

To contact the editors responsible for this story: Jeff Harrington at jharrington@bloombergtax.com; Megan Pannone at mpannone@bloombergtax.com

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