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High on Pot Taxes

Is there a revenue jackpot for states that legalize marijuana?

Visit the online menu of marijuana producer <rØØ7>, and you’ll glimpse the blossoming world of artisanal pot—a burgeoning industry made possible by states’ momentum toward legalization. Strains like Sweet and Sour Cindy offer “an earthy mix of grape, apricot and chocolate undertones,” while Millennium Kush consists of “tropical notes” and a “citrus aroma.” “We’re really about trying to promote wellness, whether it’s a straight medical use or de-stressing or whatever else,” says President Kris Krane of 4Front Ventures, <rØØ7>’s parent company.

Krane’s business is booming. He’ll be operating at least 15 stores in seven states by years’ end. Meanwhile, states are hoping his good fortune benefits their coffers as well. Legalization advocates have promised big potential tax revenues from pot sales. In Illinois, which legalized marijuana in June, a study predicted yearly revenues as high as $676 million. Early legalizer Colorado has reaped a windfall of more than $1 billion in total collections since 2014.

Nevertheless, states shouldn’t assume a guaranteed jackpot for their budgets. California collected $82 million in its first six months of sales, falling far short of projected revenues of $185 million. In Massachusetts, revenue officials projecting $63 million in taxes by June 2018 had collected a paltry $5.9 million as of that March. Even in Colorado, revenues may have plateaued, according to a market analysis commissioned by the Colorado Department of Revenue. 

Why these disappointments? In California and Massachusetts, regulatory snafus delayed the licensing of stores and, consequently, tax collections. Massachusetts, for instance, had just nine licensed stores three months after legalization, while California had only 620 licensed stores statewide as of April 2019 (a tiny number considering the state’s estimated annual pot production of 14 million pounds). 

While smarter regulation could help boost revenues, it can’t change pot’s shifting economics. Most of the nine states where recreational sales are currently legal impose excise taxes based on price, along with general sales taxes. (One exception is Alaska, which taxes retail sales by the ounce.) Sales and excise taxes work well when pot is relatively expensive, but as marijuana cultivation moves out of the shadows and into industrial-scale production, “you’re going to see the price come down and your taxes going down with it,” says marijuana tax policy expert Pat Oglesby. 

In Colorado, for instance, the state’s market analysis reports that retail prices for cannabis fell 62 percent from 2014 to 2017. In Oregon, marijuana can now be had for as little as $60 an ounce, compared to $350 on the illegal market, according to Karen O’Keefe of the Marijuana Policy Project. 

One way to grow revenues is to increase demand, but encouraging more pot consumption is hardly good public policy. As more states legalize, counting on out-of-state sales is also less viable. Colorado’s “cannabis tourism” accounts for less than 10 percent of sales. States could raise the tax rate or shift to taxing by weight—but face bitter industry opposition. “You can only wring so much out of this industry before you choke it,” says National Cannabis Industry Association spokesman Morgan Fox. 

State-owned pot shops are still another option. They’re a long shot, but tax lawyer Oglesby favors them. “It’s like the government liquor store,” he says. “They can adjust the price immediately, they’re very good about keeping kids away, and they can keep the price where they want it.” 

Cannabis Corner, in Stevenson, Wash., is so far the nation’s only city-owned pot store. Launched in 2015, the store expects sales of about $1.1 million this year.

But even with maximized revenue, pot taxes will likely only account for about 1 percent of overall state budgets, according to the Institute on Taxation and Economic Policy. The $266 million Colorado collected in 2018, for instance, pales next to the state’s $15 billion in total revenues and $32 billion budget. 

The bottom line: States should legalize for public health and safety, not the money. Plugging budget holes with pot? It’s, well, a pipe dream.

Vice President of Domestic Policy at the Progressive Policy Institute
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