A $1 billion marijuana windfall for New Jersey? Some say it's possible

New Jersey could reap as much as $1 billion a year from legal marijuana — the equivalent of more than a half-cent boost in the sales tax — if the state taxes the industry aggressively and imposes fees on growers, distributors, testing labs, retailers and delivery services, according to projections by a law firm.

The conclusion illustrates the stakes faced by Phil Murphy, who campaigned for legal recreational use in his bid for governor. The incoming governor is seeking a windfall to pay for big-ticket items like free community college for residents.

However, representatives of the nascent industry caution that a heavy-handed approach from Trenton could stifle business, keeping much of marijuana production and distribution underground and untaxed.

The $1 billion estimate came from the Roseland law firm of Brach Eichler, which has two lawyers on Murphy's healthcare transition committee.The estimate, which is based on money collected through taxes and license and franchise fees, exceeds the $300 million to $500 million a year that the state projects would be raised from a tax on marijuana sales.

The windfall could relieve pressure to raise property taxes on New Jerseyans, many of whom already will face higher federal taxes after a tax reform bill limited their ability to write off state and local taxes, said Charles Gormally, who chairs the litigation practice at Brach Eichler. 

"There are many ways to enhance revenues in the early years by engaging the marketplace in many ways," Gormally said, suggesting the idea of auctioning licenses. "It's not unreasonable that if you aggressively engage the market, that license fees in both the initial period and the following period can approach $1 billion."

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Colorado, the first state to permit no-questions-asked marijuana sales to adults, reported $193.6 million in tax and fee revenue on the drug in 2016. Colorado charged 27.9 percent in sales and excise taxes on recreational marijuana that year; the rate increased to 32.9 percent in 2017. New Jersey has 8.9 million residents compared to Colorado's 5.5 million.

Washington state, which followed Colorado in allowing adult recreational use, charges a 37 percent tax on retail marijuana sales. The state of 7.3 million people reported $315 million in marijuana tax revenue in the year ended June 30, 2017.

New Jersey state Sen. Nicholas Scutari (D-Union County), the author of the bill to legalize and tax recreational marijuana in the state, proposed an initial 7 percent sales tax rate that would escalate over five years to 25 percent.

Scutari's bill would establish a system of licensing growers, wholesalers, processors, transporters, retailers and delivery service, but it does not spell out how much they would have to pay.

Industry representatives said the proposed sales tax rate is reasonable, but they cautioned against the potential for license fees that, they said, could stifle the emerging sector, drive business underground, and limit the ability of less wealthy entrepreneurs to break into the marijuana business.

"Steep entry fees may produce some revenue for the state, but they also will limit access to the marketplace for people who may be lower-income or who haven't been in business before," said Bill Caruso, a lawyer and lobbyist who sits on the steering committee of New  Jersey United for Marijuana Reform. "New Jersey needs to make sure they don't tax this industry out of the state."

As a candidate, Murphy said allowing adult use of marijuana would allow police to focus on more serious crimes, while helping to address disparate treatment of drug crimes by white and non-white populations. He talked less about the revenue benefits to the state.

Murphy hasn't outlined a proposal for taxes and fees on marijuana in New Jersey, and spokesman Dan Bryan declined to offered details.

In August, the Democratic candidate outlined $1.3 billion in proposals for new revenue — including higher income taxes on top earners, eliminating some corporate deductions and taxing marijuana — that he said would help close a budget gap and fund his educational initiatives.

Dara Servis, who replaced Murphy's incoming chief of staff Pete Cammarano as the head of the New Jersey Cannabis Industry Association, said state leaders should resist the temptation to rely on marijuana to solve their budget woes. Servis said an overly high tax rate like Washington's would keep much of New Jersey's marijuana business in the black market.

"When you ramp up taxes too quickly or start them too high, you provide an opportunity for the illegal market to flourish," she said.

Some entrepreneurs like Ken VandeVrede, the New Jersey-based chief operating officer of Terra Tech Corp., a marijuana cultivating company headquartered in California, are awaiting the day when they can legally grow the plant in the Garden State.

VandeVrede's company grows basil, parsley and lettuce in greenhouses in Warren County, with plans to switch to marijuana once it becomes legal in the state.

He said a tax rate above 20 percent could stifle the growth of the industry in New Jersey, with negative consequences for both the state government and marijuana users.

"Every tax you put on it is going to drive the price up," VandeVrede said.