Tax High

State lawmakers heard from a national tax expert who says New Mexico is getting cannabis tax policy right

According to a national expert, New Mexico is at least one state that got its cannabis tax structure right.

Richard Auxier, a senior policy associate with the Urban-Brookings Tax Policy Center, presented some best tax practices to the Legislature’s interim Revenue Stabilization and Tax Policy Committee that covered cigarette, alcohol and cannabis. But findings from the cannabis portion showed that New Mexico’s cannabis tax structure could work well for the state’s finances, assuming the retail price drops in the coming years.

Auxier told committee members that there’s “no perfect math equation,” but that lawmakers shouldn’t “craft taxes so high that it harms your legal market,” or “pushes consumers back to the illegal market.”

Part of that balancing act for cannabis, but also tobacco and alcohol, Auxier told lawmakers, is determining whether the goal is to curb use or increase tax revenue. Nearly all questions from legislators to Auxier had to do with alcohol, likely in response to a recent series from New Mexico In Depth.

And while Auxier was clear that he was not in a position to give a “thumbs up or thumbs down” on cannabis tax policy, he said “New Mexico should be held up as a model” of a state that thought through policy with the future in mind. Part of his praise came from the Cannabis Regulation Act, which prescribes a gradual increase of the state’s cannabis excise tax from the current 12% rate to 18% by 2030.

“If the price [of retail cannabis] goes down, your tax revenue can go down unless you increase the tax,” Auxier told the panel. “And having this automatic rate increase in place is probably going to do a really good job of mitigating any of those negative effects while other positive things are going on with your marijuana market.”

The Cannabis Regulation Act, passed and signed into law earlier this year, is silent about where cannabis tax revenue goes, which Auxier sees as another positive. Until the Legislature decides otherwise, the state’s portion of the cannabis excise tax goes to its general fund. Those who helped craft the legalization statute repeatedly defended the decision to hold off on appropriating cannabis tax proceeds, arguing it was too early to apply those funds to anything recurring.

According to Auxier, that was the right move.

Auxier told the committee it was a “pretty smart decision” to hold off doling out cannabis tax proceeds before getting a feel for how much money can be made.

“You don’t want to make any programs solely dependent on those revenues,” he told legislators.

Like state lawmakers, Santa Fe leaders appear to be holding off on earmarking the city’s cut of cannabis excise taxes. While the Cannabis Regulation Act does not appropriate cannabis tax money, it does require that counties and municipalities get a share of the taxes produced from local sales.

Santa Fe City Manager John Blair tells SFR it’s too early to earmark any of the city’s share of cannabis tax money. Prior to his current position at the city, Blair worked as deputy superintendent of the state’s Regulation and Licensing Department and played a role in setting up the Cannabis Control Division. Blair says during that time he heard from officials in states that had already legalized, where officials told him the market in New Mexico would be initially “volatile.” Blair says that’s part of the reason Santa Fe is holding that money in its general fund for now.

“At this point, now that we’re a little over six months into the industry being legal, you know, we’re grateful for the excise tax distributions that have been coming in, but we’re not at a place that we want to have that be designated to one particular program or another,” Blair says.

Blair adds that city officials may take another look at parking tax money somewhere specific in another six months

According to data from the state Taxation and Revenue Department and analyzed by SFR, the City of Santa Fe has seen, or is due, more than $200,000 in cannabis tax revenue. Santa Fe County’s cut so far is slightly more than $30,000.

A report Auxier co-authored and used as a guide for his presentation notes that other states, particularly Arizona, failed to account for plummeting cannabis prices, leading to a decrease in tax revenue. His report also suggests state lawmakers can “tie a state’s tax rate to the average cannabis market price at a regular interval and thus create an automatic rate increase (or decrease) as prices change.”

The day before Auxier’s presentation, the same committee heard from two cannabis company principals on opposite ends of the business spectrum who have different opinions about the state’s cannabis market, too.

Duke Rodriguez, president and CEO of prominent cannabis producer Ultra Health, and Matt Muñoz, chief innovation officer with cannabis microbusiness Carver Family Farm on Thursday aired their grievances and concerns with the committee.

Muñoz, at one point, argued for keeping a limit on how many plants producers can grow to ensure a healthy market. Rodriguez on the other hand has long advocated for a more free-market approach that would not restrict production at all.

Rodriguez said the current restrictions on growing, which vary depending on the business type, are keeping prices higher in New Mexico compared to Arizona, which legalized adult-use cannabis several months before New Mexico. While Arizona has a higher effective tax rate on recreational-use cannabis, prices per gram are lower.

“I want you to understand that New Mexico cannabis consumers pay the highest cannabis taxes in the region and not by a little, by a lot,” Rodriguez told the committee on Thursday.

If Rodriguez’s prediction that a limit on cannabis production will keep prices higher, consumers might regret the state’s graduated cannabis tax structure.

When the cannabis excise tax is combined with the state’s gross receipts tax, the current effective tax rate for adult-use cannabis sales is roughly 20%, which is often touted nationally as the sweet spot that keeps consumers away from the illicit market, but also raises revenue. Unless the Cannabis Regulation Act is amended in the coming years, the effective rate for cannabis taxes will come close to 30% by 2030.

Muñoz told the committee that the “more stability” the Legislature can provide regarding cannabis taxes “the better off the state of New Mexico is going to be.”

“This is an infant when it comes to a market and so we need time to actually have this market progress forward before making major changes,” Muñoz said.

The next legislative session is still months away and the body’s makeup and priorities are contingent on next month’s election. But there have only been hints and speculation on what, if any, cannabis bills might be introduced.

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