Marijuana tax revenues see uneven growth across nation
State governments across the country are pulling in millions of dollars from taxes on legalized marijuana, but the revenue they receive has fluctuated wildly as new markets for a once-illegal product struggle to become established.
As more states begin to consider whether to legalize marijuana for recreational use, supporters say the tax revenue can be used to plug budget gaps, fund schools or health care or even fight the opioid crisis. But sin taxes in general make for volatile revenue streams, and revenue on a new product like marijuana is difficult to predict.{mosads}
Though budget analysts now have several states to use as models that might guide revenue projections, differing variables by state make accurate projections nearly impossible.
“The market is new, and there is little data that forecasters can rely on,” said Alexandra Zhang, one of the co-authors of a new Pew Charitable Trusts report on marijuana tax revenues.
Among the unknowns: How many people actually use marijuana, how many of those people will migrate from the black market to the legitimate market, how quickly businesses can spring up to feed that legitimate market and whether the legitimate market, which is subject to taxes and regulation, can compete with the black market’s lower price points.
“For standard forecasting models, it’s helpful to have more detail about demographics, consumption and product types. We’re not there, and other states I’ve talked to aren’t there either,” Josh Lehner, a senior economist in Oregon’s Office of Economic Analysis, told Pew researchers.
Ten states and the District of Columbia have legalized marijuana for recreational purposes in the last decade. An 11th state, Illinois, will begin selling legal marijuana at the new year.
The way those states tax marijuana is vastly different in each case. In Colorado, marijuana products are subject to a cultivator excise tax, paid by the producer, and a retail excise tax, paid by the consumer. In Washington, the cultivator pays no tax, but the products are subject to a higher retail excise tax and an added general sales tax.
In Maine, where voters approved a legalized marijuana system in 2016, cultivators are subject to four different taxes depending on the type of product they sell. A flower or mature plant is taxed at $335 per pound, while trim is taxed at $94 per pound. Immature plants and seedlings are taxed at $1.50 each, and seeds are taxed at 30 cents apiece. The state also collects a general sales tax on marijuana.
In some cases, the marijuana marketplace is booming. Colorado and Washington, the first two states to adopt legal marijuana regimes, have seen their revenue collections more than quadruple in the last four years. Washington now collects more than $35 million per month in marijuana tax receipts, and yearly marijuana taxes eclipse taxes collected on liquor and tobacco products.
Some states have set up their legal regimes faster and more efficiently than others. In Nevada, the market began recreational sales just two months after voters passed a legalization ballot measure; in the first six months of the legal market, tax revenue came in 40 percent over expectations.
But in California, the market has had more trouble getting established. Supply did not meet demand, and the black market easily kept the legal market on its heels. In the six months after California’s legal regime took effect, tax revenues were 45 percent below projections.
Once the money rolls in, some legalization states are treating marijuana revenue like an unexpected windfall. The expected volatility of marijuana revenues has made states leery of committing to ongoing projects, and more likely to either save the money in a rainy day fund or use it for one-time expenses.
In Nevada, marijuana revenue has been diverted to a rainy day fund. Colorado and California save their money in a separate fund, to be spent the following year.
“Many of these new revenue streams are highly unpredictable and they can lead to more problems down the road if states aren’t careful,” Zhang said.
—Updated at 12:40 p.m.
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