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Why California is studying marijuana tax

Buried by deficits amid the crisis, U.S. states are getting increasingly creative in dealing with budget challenges

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Barrie McKenna

Washington — Globe and Mail UpdatePublished on Wednesday, Oct. 28, 2009 6:16PM EDTLast updated on Thursday, Oct. 29, 2009 6:20AM EDT

The Golden State is searching for economic salvation in California Gold.

Living up to its long track record of legislative firsts, California lawmakers are looking at legalizing and heavily taxing marijuana as they struggle to close a gaping budget hole.

Radical, yes. But California isn't alone. Across the country, states are getting increasingly creative – and in some cases desperate – as they deal with unprecedented budget challenges.

Tumbling sales and income tax receipts have left once-bursting state coffers badly depleted.

And with many states legally bound to balance their budgets, the choices are never easy.

Hawaii has declared regular “furlough Fridays” in its public schools, Delaware has grounded its state aircraft and closed museums and Virginia has shuttered its highway rest stops.

States have already chopped their work forces by 2 per cent in the past year, throwing more than 100,000 teachers, health care workers, nursing home employees, cops and firefighters out of work. Many states have also slashed the pay of government employees, while raising various user fees and levies. Some school boards, for example, are charging high school students hundreds of dollars a year to park their cars on school grounds.

“Unfortunately for states, an emerging economic recovery does not spell instant budget relief,” said Donald Boyd, senior fellow at the Nelson A. Rockefeller Institute of Government at the State University of New York.

State tax revenues plunged a record 16.6 per cent nationwide in the second quarter, compared to a year earlier, according to a recent study by the Rockefeller Institute. Thirty-six states experienced double-digit declines, as the recession bit into sales and income tax revenues.

The study's authors predicted it could be several years before revenues return to their peaks of 2008, leaving many services badly under-financed.

Under the Obama administration stimulus package, the federal government is giving states $150-billion (U.S.) to help deal with budget problems, easing some of the short-term pain.

But as that runs out, at least 32 states are predicting budget shortfalls for fiscal 2011, with combined deficit of more that $60-billion, according to the national Conference of State Legislatures.

Nowhere is the situation more dire than in California, the most populous U.S. state. Since February, California has chopped $32-billion from spending, raised taxes by $12.5-billion and covered $6-billion more with accounting maneuvres to close a budget deficit that threatened the state with insolvency. Among the more extreme measures, the state recently began paroling hundreds of “low-risk” prison inmates.

California still facing $38-billion in deficits over the next three fiscal years.

And so hard times are giving the high times movement surprising new momentum in the left-leaning state.

Governor Arnold Schwarzenegger says he welcomes the debate about legalizing marijuana as the state struggles to avoid insolvency. A recent poll shows 56 per cent of Californians want pot legalized. A major push is on to put the issue to statewide referendum next year. And yesterday, state lawmakers held an initial hearing into a proposed law to end California's 96-year-old pot ban.

“I think it's time for a debate,” acknowledged Mr. Schwarzenegger, who as an actor portrayed a drug fighting undercover police officer in Kindergarten Cop.

A spokesman for the governor insists Mr. Schwarzenegger is opposed to legalization.

The move could generate as much as $1.4-billion (U.S.) in new tax revenue and save the state “tens of millions of dollars” in prison and police costs, state officials told the California Assembly's Public Safety Committee. They based their estimates on a $50-per-ounce levy.

“It is time to take our heads out of the sand and start to regulate this $14-billion industry,” said committee chairman Tom Ammiano, who is sponsoring the legalization bill. “By doing so, we can enact smart public policy that will bring much-needed revenue into the state and improve public safety by utilizing our limited law enforcement resources more wisely. The move toward regulation is simply common sense.”

California could use the cash by taxing pot, just as it does cigarettes and alcohol. But legal experts, economists and law enforcement officials who testified Wednesday before a state committee warned that the proposal is fraught with unknowns.

And chief among them is how the U.S. government would react.

Possession, distribution and sale of marijuana remains a federal crime. And while California can eliminate state penalties and charges, it can't fully legalize.

“We don't know how the federal government would respond,” Paul Golaszewski, an official of the California Legislative Analysts' Office, told the hearing. “It creates a great deal of uncertainty.”

Curt Hagman, the committee's Republican vice-chair, wondered how California could collect any taxes unless the federal government legalizes marijuana.

Several court rulings have upheld the right of federal authorities to enforce its ban, even in cases involving medical use.

California was the first state to legalize marijuana for medical use in 1996.

Earlier this month, the Obama administration announced that it would not prosecute users and sellers of medical marijuana. But Justice department officials made it clear that leniency doesn't apply to recreational use.

See also:

• Official end of U.S. recession near
• Recession over in several countries
• Nouriel Roubini warns of bubble