Cannabis license fees help address budget shortfalls, but be ready to document and defend those fees from legal challenges.
The 2020 election results saw four more states legalize recreational cannabis (Arizona, Montana, New Jersey, and South Dakota) as well as medical use in Mississippi and South Dakota. Recreational use is now legal in 15 states and almost nationwide for medical uses. The trend has been clear for years, and now legalized cannabis helps states address critical needs in this Covid-19 era: the need for more money.
State and local revenues have plummeted this fiscal year and next fiscal year will lag behind as well, since revenues tied to income traditionally lag behind overall economic activity. Many states have released revenue forecasts for FY 2022, predicting declines, some in the high teens on a percentage basis. Reliance on various revenue sources impacts state and local governments differently. That said, governments are following the traditional steps in responding to these revenue shortfalls:
- Spending from fund balance reserves
- Raising fees and taxes
- Borrowing to pay operating expenses
- Deferring capital investments
- Refinancing long-term debt
- Pension contribution holidays
- Across the board budget cuts
With the legalization of cannabis, it presents an opportunity for state and local governments to tap a new revenue source. The demand for cannabis licenses signals the level of interest by the industry to enter markets in various states. That level of interest also invites legislatures to match that with high license fees.
Most states require that licenses and fees bear a relation to the services provided. When looking at these license fees, every government should ask the following questions:
- What are the services we’re providing?
- Will the services change over time as we move from initial to renewal licenses?
- What does it cost to provide the services?
- Can we document the costs if we’re challenged?
In the face of severe fiscal challenges when every government is looking at non-tax revenue sources to make up the difference, it’s tempting to take advantage of new revenue opportunities. But are you able to support the fees you’re charging? We can help!
In consultations with governments to make fiscal and operational decisions, we know how programs work. We have seen how your peers met the same challenges and learned of ideas you may not have tried to help your team make better budget decisions.
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