Marijuana legalization has generated a lot of buzz over the past couple of years – pun intended. In the two states where pot growing, processing, and dispensing are permissible, analysis of tax revenue is clearing up the haze around pot’s tax potential. And it appears there’s more smoke than fire.
Colorado was the first state to open its doors to pot legalization with retail recreational sales beginning New Year’s Day of 2014. Amid the stories of customers being lined up in front of pot stores, there was an assumption that this would bring a big boost to revenue. That has not panned out.
Through October, the state collected about $45.4 million from sales and excise taxes on recreational pot sales, according to analysis by the Tax Foundation. However, voters were told sales would ramp up to $70 million a year when they approved a 10-percent sales tax and 15-percent excise tax on recreational mary-jane. Marijuana has a total effective tax rate of about 30 percent (depending on what other local added taxes are assessed.)
Pot legalization was supposed to bring in enough revenue to help fund school construction and other community improvements. Of the $70 million in excise taxes predicted, the first $40 million would’ve gone to building schools and so far, only $10 million has been produced for that purpose.
That must be leaving voters and advocates scratching their heads.
And The Denver rec center underscores how marijuana taxation has played throughout Colorado and Washington. The drug is bringing in tax money, but in the mix of multibillion budgets, the drug is a small boost, not a tsunami of cash.
Much of the drug's tax production has been used to pay for all the new regulation the drug requires — from a new state agency in Colorado to oversee the industry, to additional fire and building inspectors for local governments to make sure the new pot-growing facilities don't pose a safety risk.
In Washington, where recreational pot sales began in July, recreational weed is taxed on a three-tier system as the plant moves from growers to processors to retailers. The total effective tax rate is about 44 percent.
State tax officials are just getting a look at the first few months of pot taxes, and the money is coming in slowly because there aren't many stores there yet. State economists have predicted pot sales will bring in $25 million by next July.
There remain more questions than answers about pot's tax potential.
Opponents of legalization likely feel a little justified. Marijuana sales are not flooding the state with cash to spend and we don’t yet know the costs in terms of such areas as public safety and economic productivity of workers.
What is apparent is that it’s too early to draw conclusions. However, voters weighing the decisions to legalize pot in other states would be wise to wait and see how Colorado and Washington continue to play out.
And the future for sales in Colorado and Washington face some uncertainty. Apparently, Oregon and Alaska voters have both approved retail pot sales and California is expected to consider pot legalization in 2016. This could spell trouble for the two states which have so far enjoyed the advantage of being first to the market.
Pot legalization is really about taxing “sin.” Lawmakers like sin taxes because they can prey upon the addictive nature of substances to force consumers to pay more. They claim the goal with a sin tax (like taxes on cigarettes or even soda) is to discourage unhealthy behavior, but they know those who are hooked won’t give up their “vice” even as consumption becomes more expensive. So they brag that the taxes will pay for new school buildings and roads.
The joke may be on these states, however, because sales of legalized pot may not be the budget-booming enterprise they assumed it would be.