Taxing wacky tobacky and magic mushrooms – Wacky Tax Wednesday

It’s getting easier to reach an altered state, legally, in the United States. The sale and use of recreational marijuana is currently legal in 15 states and Washington, D.C., and as of this writing, legalization measures are under consideration in Connecticut, Florida, Hawaii, Iowa, New Jersey, New York, Pennsylvania, and elsewhere. On February 27, 2021, the Virginia Legislature became the first Southern state to vote in favor of legalization.

Arguments for the authorized use and sale of any forbidden substance often refer to their tax revenue potential. Most people who use marijuana or other drugs purchase them somewhere, after all. When they buy legally at stores and dispensaries, state and local governments get to tax those sales and use the revenue to fund schools, treatment programs, and more. Untaxed illegal sales line the pockets of dealers and suppliers.

Given how the COVID-19 pandemic has strained state budgets and resources, the need for more revenue is real. According to the Tax Foundation, several states are now “contemplating whether recreational marijuana legalization and taxation may be one avenue to raise new revenue.” (Imagine the public service announcements: “Do your part for the state and partake.”)

Tax design is “a crucial element of legalizing recreational marijuana.” Most states where sales are legal levy both an excise tax and a sales tax on weed, and collections can be impressive. In fiscal year 2020, California generated approximately $474,100,000, from marijuana sales, and Washington wasn’t far behind at $469,200,000. By contrast, Michigan generated a mere $9,692,684. See the Tax Foundation chart for state-specific details (actual and potential revenue).

In addition to sales tax and excise tax revenue, legal marijuana sellers and their employees pay applicable business taxes.

The legalization — and taxation — of magic mushrooms, those containing the hallucinogenic substance psilocybin, could be next.

Denver, Colorado, and Oakland, California, decriminalized psilocybin in 2019. Santa Cruz, California, followed suit in 2020, as did Somerville and Cambridge, Massachusetts at the start of 2021. The first state-level action occurred in Oregon in November 2020: Measure 109 allows therapists to use psilocybin to treat chronic mental health issues such as depression; Measure 110 decriminalized the use and possession of small amounts of psilocybin and other controlled substances.

Hawaii, Iowa, and Missouri could be the next states to relax restrictions regarding the possession or sale of psilocybin.

Iowa’s proposed Psilocybin Services Act would allow for the manufacture, cultivation, harvesting, production, distribution, possession, etc., of psilocybin. It would also authorize the creation of psilocybin service centers, where clients could purchase, consume, and experience the effects of a psilocybin product under the supervision of a psilocybin service facilitator. Home use of psilocybin (i.e., in a “primary residence”) wouldn’t be permitted.

Proponents believe psilocybin could help “reduce the prevalence of mental illness among adults.” Thus, the measure calls for educating the public “about the safe and effective use of psilocybin in treating mental health conditions” and the development of “a long-term strategic plan for ensuring that psilocybin services will become and remain a safe, accessible, and affordable therapeutic option for” persons aged 21 or older, “for whom psilocybin may be appropriate.”

Beginning January 1, 2023, after the program development period, the Department of Public Health would regulate the possession, manufacture, transportation, delivery, sale, and purchase of psilocybin products or the provision of psilocybin services.

Sales tax would apply to psilocybin transactions. Psilocybin product manufacturers would collect it at the point of sale of a psilocybin product. Alternatively, it would be collected by a psilocybin service center when a psilocybin product is sold. Additional details can be found in the text of House File 636.

The Hawaii and Missouri measures are more cautious.

Hawaii would “establish designated treatment centers for the therapeutic administration of psilocybin and psilocyn,” another psychoactive substance found in certain fungi. It would also establish a committee to review and assess their effects. Presumably if all progresses without problems, there would be subsequent action. Missouri would modify the offense of possession of small quantities of certain controlled substances, including psilocybin, for certain eligible patients (e.g., those with a debilitating, life-threatening, or terminal illness).

According to the Tax Foundation, expecting a large and sustained revenue boost from marijuana-specific taxes “is shortsighted and represents poor tax policy,” and I suspect it would say the same about taxing psilocybin products. Will that stop states from trying? Probably not.