Hey Government Officials: Cannabis Municipal Bonds Could Be A Great Source Of Revenue
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As the growth in COVID-19 cases accelerates quickly in the U.S., the pandemic will gravely impact public health across the world and cause a significant slowdown in the world economy. Businesses and households will feel the financial impacts of widespread “stay at home” orders immediately. The impact on governments will lag by several months to a year, as sales taxes and then income taxes decline.
As governments and financial institutions begin to consider creative means to aid in recovery efforts, they should take a serious look at Cannabis Municipal Bonds (CMBs).
Nationwide, growth has been tied to both the opening and maturing of cannabis markets, with U.S. legal sales estimated to reach $23B by 2022. If implemented correctly, regulated adult-use markets should experience rapid growth in the first four to six years as the illicit market is absorbed into the regulated market.
That is why we developed a report with an analysis of how CMBs could work and why they are just the idea we need to make up for lost revenue in this health crisis.
Here are three reasons:
1. Similar initiatives are already in place
There are already special tax bonds that are typically backed by taxes on certain activities or assets. For example, most states have excise or special sales taxes on tobacco, alcohol, and gaming, or so-called “sin taxes”. Revenue derived from these activities can be used to fund future investment initiatives such as improvements to infrastructure. Iowa, for example, allocates $55 million per year in gaming taxes to service debt on revenue bonds issued in 2009 and 2010. Those bonds are used to fund community revitalization, flood mitigation, and bridge improvement efforts.
2. Colorado’s cannabis-funded BEST Program is a success
The flagship cannabis-funded social program in Colorado is the Building Excellent Schools Today (BEST) program, which focuses on helping public schools with a multitude of capital construction needs. The goal of the program is to provide Colorado students with first-class, high performing, school facilities and to help alleviate facility health and safety concerns throughout Colorado. The BEST program has four revenue sources—one of which is Cannabis Excise Taxes which currently contributes 90 percent of annual revenue or $40 million (whichever is greater) to the BEST program with the remainder going to the Public School “Permanent” Fund. In 2017-18, $90.3 million (the most recent available figure) in cannabis tax revenue was allocated to the Colorado Department of Education (CDE), a substantial increase from the 2016-17 period which was $48.5M in Cannabis Tax Funds. I see this program as a shining example of how governments in adult-use states can invest cannabis tax revenue back into their cities and municipalities.
3. Banking shouldn't be an issue
While policy changes are critical for the continued growth and maturity of the industry as a whole, they are not really preventing the usage of Cannabis-Based Municipal Bonds, in our opinion. When state and local governments collect cannabis tax revenue, the funds are commingled in the general fund with revenue from other sources. The funds then enter the Federal Reserve System. Capital raised from CMBs would be no different than any other tax revenue and therefore, in our opinion, would not require any sort of special regulation. However, convincing banks and underwriters to offer CMBs to the market could be a separate challenge, given the difficult posture financial institutions have taken towards the industry.
What to do
We urge cannabis entrepreneurs to speak with their local and state representatives to consider using CMBs to pay for strategic local initiatives that will lose funding as a result of COVID’s negative impact on tax revenue. We feel confident that CMBs will further cement our industry’s place as essential, viable and deserving of fair access to banking and normalized tax regulations.