Trump order easing cannabis controls may boost state revenue

President Donald Trump Thursday signed an order to fast-track the reclassification of cannabis, a major regulatory change that could increase tax revenue for states where the drug is legal.

The executive order asks Attorney General Pam Bondi to accelerate the reclassification of cannabis as a Schedule III substance, "with a moderate to low potential for physical and psychological dependence," from its current Schedule I category with substances like heroin and LSD. The move does not decriminalize marijuana but would ease regulation, decrease taxes on cannabis producers and could boost state and local tax revenue from the industry.

"We have people begging for me to do this," Trump said at the White House when signing the order.

Since 2014, when Colorado and Washington legalized the drug, states have generated a combined total of more than $24.7 billion in tax revenue, according to a May report from the Marijuana Policy Project.

In 2024, legalization states collectively generated a record-setting $4.4 billion in cannabis tax revenue from adult-use sales, which is the most revenue generated by cannabis sales in a single year, the report said. Seven states collected more than $200 million.

The public finance industry has long eyed cannabis as a pledge for a new type of revenue bond, and rating analysts have tracked it as a sometimes-significant tax stream for state and local tax revenues. A 2020 report by MPG Consulting, formerly the Marijuana Policy Group, advocated for state and local governments to begin issuing cannabis municipal bonds, which would "most likely take the form of general obligation or revenue bonds and will be repaid using tax and fee revenue from adult use retail cannabis sales."

Trump's move could translate into higher state and local revenues by expanding the industry in legalized states, allowing for interstate commerce, easing banking regulations and changing IRS rules in a way that would significantly decrease taxes for producers.

On the con side, the move may reduce tax revenue to states and the federal government if marijuana businesses are allow to deduct standard business expenses, said Fennemore law firm in a Dec. 18 blog.

Barclays PLC (BCS), in a Dec. 19 client note, said the move may also increase job growth and reduce compliance costs.

"Annual revenue potential is quite sizable for a number of states, led by California and New York," the bank said. The states that could see the largest job growth include New York, Florida, Pennsylvania and Missouri, while "mature markets" in California and Colorado "would see an increase in interstate commerce and banking access," the firm said.

States currently allocate cannabis dollars into various buckets, with the most popular being state regulation and oversight of the cannabis market, according to the National Council of State Legislatures. The second most common allocation is state general funds; 11 states and the U.S. Virgin Islands dedicate at least a portion of the revenue to their general funds, the group said. New Mexico allocates all of its cannabis taxes to its general fund.

Other common allocations include substance misuse treatment programs, education and public safety, the NCSL said.

While it remains illegal under federal law, as of June, 40 states plus Washington, D.C., and three U.S. territories have approved the use of cannabis for medical purposes, and 24 states have legalized it for adult recreational use, according to the NCSL. As of 2023, 11 states allowed local governments to levy standalone excise taxes that apply narrowly to cannabis purchases.

Next year, voters in six states may decide on marijuana and psychedelic-related measures next year, according to Ballotpedia, including Idaho, Alaska, Idaho, Massachusetts, Missouri, Nebraska, and Washington.