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Warning to States: Marijuana Tax ‘Windfalls’ May Just Be Blowing Smoke

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Photo by Cannabis Culture via Flickr

Advocates of marijuana legalization have long argued that cannabis sales and commercial production represent a potential windfall for hard-hit state treasuries, but a new study warns policymakers against raising their hopes too high.

Revenue from “sin taxes” – on items like cigarettes, liquor, or gambling – has always been difficult to predict, and the marijuana “market” presents special difficulties for policymakers who are hoping to match the cash bonanza already reaped in some states that have approved recreational marijuana, according to a new study from Pew Charitable Trusts.

“In Washington, marijuana accounted for more revenue ($361 million) than liquor ($314 million) or cigarettes ($357 million) in fiscal year 2018,” notes the report, entitled Forecasts Hazy for State Marijuana Revenue.

“In Alaska, revenue spiked from $2 million to $11 million in a single year.”

But similar bounties may not be forthcoming for all 11 states and Washington, DC where voters have approved legalization so far. Forecasters expect the rapid growth in existing high-volume states to slow, and no one is quite sure how to measure the potential revenues over time.

The challenges of revenue forecasting create a unique obstacle for the effected states’ budget planning. If forecasting isn’t done correctly, there are heavy consequences, the study said.

“If tax collections come in below forecasted amounts…programs that are funded by these dollars could suffer,” said Pew.

For example, in Nevada’s first six months of collecting marijuana taxes, revenue came in 40 percent higher than budget officials expected; but in California revenue was 45 percent below projections in the first six months of collecting marijuana taxes.

Programs funded by the money collected from marijuana taxes differ from state to state.

However, many states have released ambitious plans to funnel marijuana revenue toward education programs, drug prevention and treatment facilities, public transportation, and even environmental restoration funds.

Oregon, which legalized non-medical use and cultivation of marijuana in 2014, is already displaying caution, reports Josh Lehner, a senior economist with Oregon’s Office of Economic Analysis.

The biggest challenge analysts face when calculating marijuana tax revenue is the “lack of data, lack of history,” Lehner told Pew researchers.

“For standard forecasting models, it’s helpful to have more detail about demographics, consumption, and product types,” Lehner added.

“We’re not there, and other states I’ve talked to aren’t there yet either.”

When looking at data for marijuana use to predict future consumption, and therefor tax revenue, Larson Silbaugh, a principal economist with Colorado’s Legislative Council, told Pew that his office used data from two surveys: the annual federal National Survey on Drug Use and Health, which breaks down substance use (including alcohol, tobacco, and illegal drugs) in each state; and a survey of marijuana consumption commissioned by Washington State.

Colorado’s estimate of $67 million turned out to be close to the $66.1 million the state collected for the 2015 fiscal year.

But changes in cannabis pricing, competition from the black market, and fluctuating tourist purchases, make future consumption and pricing hard to predict.

“Not knowing how to account for the competition with the black market may be one reason why California’s legal market hasn’t met revenue expectations,” said Pew.

Accordingly, Pew advised state officials to be “prudent” in their spending plans in order to avoid budget shortfalls.

Noting that the marijuana market is “unpredictable,” the study suggested using revenue from marijuana taxes to shore up a state’s financial reserves.

Moreover, states need to be careful not to lean on marijuana’s revenue for too long.

“While these new dollars can fill immediate budget needs, they may prove unreliable for ongoing spending demands,” Pew concluded.

“Policymakers should look to other, more familiar sin taxes for lessons on how to manage marijuana tax revenue most effectively.”

The authors of the study were Jeff Chapman, Adam Levin, Mary Murphy, and Alexandria Zhang.

The full study can be accessed here.

Andrea Cipriano is a contributing writer to The Crime Report.