“Marijuana growers are complaining that they can’t write off a single expense thanks to federal laws. Well, apparently someone tried to claim the Phish tour as his home office and that’s not going to happen.”

That joke, by Conan O’Brien, is funny. But it also highlights a serious problem for marijuana businesses that’s no laughing matter. Because pot is banned on the federal level, canna-businesses can’t take ordinary business deductions. I’ll get back to that in minute. But first, let’s look at the bonanza in state tax revenue that’s being generated by weed.

The marijuana boom has provided windfalls in state tax revenue, prompting revenue-hungry officials to impose a growing roster of marijuana taxes and fees. State governments are getting accustomed to marijuana money filling their coffers, which in turn facilitates pot’s social and political acceptance.

A new interactive and continually updated map from the U.S. Census Bureau, unveiled to the public on October 10, shows how heavily dependent many states have become on marijuana revenue.

Consider Oregon, where in recent fiscal quarters about $1 in every $20 the state generated in tax revenue came from cannabis. That makes pot a vital cash crop in the state, essential in supporting public services.

Among all marijuana-legal states over the past two years, Oregon exhibited the greatest reliance on marijuana for tax money. However, in several other states (e.g. Alaska, Colorado, Illinois, and Michigan) marijuana tax revenue consistently comprised at least 1% of state income.

The Census Bureau map data covers the third quarter of fiscal year 2021 through the second quarter of the 2023 fiscal year:

During the most recent quarter for which data is available, more than 3% of Oregon revenue came from legal cannabis. In Michigan and Illinois, the marijuana sector made up more than 2% of total revenue, while Alaska and Colorado made just over 1% of revenue from cannabis. Arizona and Missouri saw between 0.5% and 1% of tax money come from cannabis.

These revenue levels are ostensibly small in percentage terms, but keep in mind, they represent hundreds of millions of dollars from the sale of a single crop, to wit: marijuana.

In Illinois, revenue from the state’s legal marijuana industry was $451.9 million during the fiscal year that ended June 30. For perspective, that’s about one-and-a-half times the $316.3 million Illinois made in alcohol taxes during the same period.

In fiscal year 2022, both Colorado and Washington received more tax revenue from legal cannabis than from alcohol or cigarettes.

In the second quarter of fiscal year 2023, states such as Mississippi, Connecticut and New York saw cannabis tax revenue double from the previous quarter, while California, Missouri and Maine saw between 60% and 90% revenue growth.

Tax rates vary, of course, Alaska’s recreational marijuana taxes are the highest in the country, and New Jersey’s are the lowest.

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But here’s the paradox: State taxes on marijuana are going through the roof, which in turn is pushing up cannabis prices. This dynamic is proving a headwind for the marijuana industry, because it makes pot less affordable, dampens consumer demand, hurts company margins, and fuels a rising black market.

In the words of Al Capone: “They can’t collect legal taxes from illegal money.”

In their desperate search for revenue, state governments threaten to kill the ganja goose that’s been laying the golden eggs.

For example, California imposes high tax rates on marijuana, which has generated some of the most expensive prices on the legal market. California also has the world’s largest black market for marijuana, which has led to an uptick in arrests.

Efforts at reform…

Legalization at the state level has fostered banking and federal tax filing challenges for cannabis-related businesses. Marijuana is a prohibited drug on the federal level, which means cannabis businesses can’t use FDIC-insured banks and don’t have access to federal deductions that are available to most other businesses.

Pro-marijuana politicians are trying to take remedial action. Pending in the U.S. Senate is the Secure and Fair Enforcement Regulation (SAFER) Banking Act, an expanded version of the SAFE Act that has been languishing in Congress.

Like its previous incarnation called SAFE, the SAFER Banking Act would help solve the marijuana industry’s tax and banking woes, by allowing canna-businesses freer access to financial services and certain deductions.

Without access to banking, marijuana businesses lack the ability to get loans, process credit card payments, deposit cash, write checks to suppliers, and other functions they need to perform to remain viable businesses.

Meanwhile, many individual states (such as California) are taking steps to lower cannabis taxes.

Regardless, the overriding point remains the same: as politicians get accustomed to the tax dollars from marijuana, the substance gets further entrenched in the mainstream.

Editor’s Note: Marijuana’s slump so far this year means that a lot of inherently strong pot stocks are now on the bargain shelf. But you need to be selective. Some pot stocks will make investors rich; others will crash and burn.

That’s why I’ve launched an investment service called Marijuana Profit Alert.

My publication Marijuana Profit Alert provides specific, actionable advice on the best investments in the psychotropic revolution.

Remember, no one fires a starting gun to announce a new bull market. Don’t waste time; get aboard the marijuana megatrend ahead of the next big leg up. For details about the highest-quality pot stocks to buy for 2024, click here now.

John Persinos is the chief investment strategist of Marijuana Profit Alert.

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