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Colorado made $1B in marijuana tax revenue: What could this mean for federal legalization?

by Communication @ Dispensary Permits June 18, 2019

Colorado's marijuana industry has generated more than $1 billion in tax revenue for the state during the five years since legalizing the commercial sale of cannabis.

According to a release from the state's department of revenue, Colorado has raised roughly $1.02 billion from taxes, licenses and fees since 2014 with total sales exceeding $6.56 billion.

For a state with an annual budget of $30 billion, the contribution from legalized marijuana, about $21 million per month, cannot be ignored.

Democratic Governor Jared Polis said in a press release that Colorado is reaping the benefits of its "thriving" cannabis economy. "This industry is helping grow our economy by creating jobs and generating valuable revenue that is going towards preventing youth consumption, protecting public health and safety and investing in public school construction," he noted.

Marijuana has created more than 41,000 jobs in the state. Last year, it was responsible for contributing $125 million to the state's public school funds and $17.2 million to local governments.

The windfall Colorado has seen from legalizing commercial sales of pot has raised the obvious questions about what legalization could mean for the federal government.

Tax experts explained that government revenue from cannabis is not a panacea for solving the country's budget issues, but it could certainly help.

According to a study by Carl Davis, the research director at the Institute on Taxation and Economic Policy, a federal push to legalize marijuana and regulate commercial sales could potentially generate nearly $12 billion per year in state and local revenue.

"It's a meaningful amount of revenue," he said Thursday. "But you can't balance the budget based on cannabis taxes alone."

The potential revenue from a pot tax would likely absorb less than 1.5% of the projected federal deficit.

In Colorado, marijuana sales generated $263.7 million in state revenue last year, just shy of 1% of the total budget.

A recent study by New Frontier Data estimated the government could generate $86 billion in federal tax revenue between 2019 and 2025 by legalizing cannabis in all 50 states for medical and adult use. With the deficit expected to balloon to $1 trillion by 2020, taxes on marijuana could reduce that figure by about 1.4%.

"It's impractical to believe that cannabis tax revenue can be a silver bullet to address our nation's federal deficit," explained Justin Strekal the political director NORML, an advocacy group for reforming marijuana laws. "But the sheer prospect of ending the federal prohibition of cannabis will result in increased revenues, simply as a result of taking existing economic activity and putting it in a legal framework."

In spite of federal marijuana prohibition, the government is already benefiting from the states that allow commercial cannabis.

In the eight states that regulate the sale and production of marijuana, companies and dispensaries must pay federal business taxes, payroll taxes and sales taxes. WVBlogImage

According to Strekal, those companies pay an effective tax rate that is twice what other legal businesses pay. Partly, that is because cannabis companies cannot legally write off business expenses on their federal taxes, like transportation, rent and employee benefits. Because their business is still prohibited under federal law, they are also cut off from the banking system, which means no loans plus the inconvenience and security risks of an entirely cash-based business.

The cash cannabis could generate for the federal government would likely be comparable to revenue from alcohol and tobacco, about $10 billion and $14 billion, respectively.

Unlike alcohol and tobacco, there is no established consensus on how marijuana should be regulated.

Each state that regulates the cannabis economy has a slightly different approach and with the industry in its early stages, there's still a lot of room for experimentation.

"We're all settled on how to regulate tobacco and alcohol," said Richard Auxier, a research associate at the Tax Policy Center. "There's no one single marijuana tax."

The federal government's excise tax on tobacco is by the pound or per 1,000 cigars or cigarettes. For alcohol, the tax is per gallon, with a higher price for a higher proof. States similarly tax those products by weight and volume.

States are still exploring different ways of calculating the right tax for marijuana.

The majority of states charge a special excise tax on the price of the product, which some experts warn could be detrimental as the marijuana industry grows.

For example, Colorado taxes cultivators 15% on the price of their contract and customers pay a 15% tax on the retail price of the product. The state also collects the standard sales tax.

Alaska adopted a tax based on weight and charges cultivators $50 per ounce of cannabis flower produced. The state allows localities to levy an excise tax at the point of sale.

California's tax rates are based both on weight and price, with cultivators paying $9.25 per ounce of flowers and customer paying 15% on the retail sale.

"Colorado has definitely figured out a way that's working for them. But it doesn't mean it's the right way or the right way for every state," Auxier noted. "There may be more than one good way to do this" and states and the federal government will have to think through the pros and cons of a variety of possibilities.

According to Davis, taxing marijuana by weight "is going to hold up a lot better over the long-run" compared with taxing the price. "We know that prices are already falling for cannabis and they're going to continue to fall significantly," he said. Prices in Colorado have already dropped from $1,874 per pound of cannabis flower in 2014 to $781 per pound in 2019.

Basing the tax on a price they know is going to decline "means revenues will suffer," he advised, particularly as production increases. If laws change to allow marijuana to be sold across state lines, it will also put pressure on states to stay competitive.

Competing across state lines is a distant problem for state governments and tax writers. The more immediate issue for regulators is how to compete with black market prices.

"The most critical component is to have a reasonable tax rate that can keep legal marijuana competitive with the underground market prices," said Strekal. "That will urge more consumers to participate in the regulated marketplace where they're getting safe quality products."

NORML supports a cannabis tax but believes it should be balanced against an "overzealous" desire to bring in revenue, which has been shown to depress legal marijuana businesses and favor the illicit drug market.

Davis acknowledged that stamping out the illicit market has proven to be a difficult issue for states that have legalized the sale of cannabis. "It's important to be patient," he said, noting that as the industry matures and prices come down, as they have in Colorado, the legal market will look more attractive than the underground market.

States also have the option of phasing in taxes and gradually moving to a higher rate as consumers come out of the shadows. Davis described that as a "good compromise between making sure states can raise meaningful revenue and giving the legal market a competitive edge."

Legal marijuana is already proving to be a lucrative industry, generating jobs, revenue and reducing some of the costs of law enforcement. There are still unanswered questions about regulation and legalization that states and the federal government must consider.

Colorado has reported an increase in traffic fatalities involving cannabis and incidents of drugged driving. Overall court filings related to marijuana use and possession have decreased the state has nearly quadrupled the number of cases involving organized crime and marijuana. The public health consequences are also a source of debate, as emergency room visits related to marijuana consumption skyrocketed, with no reported fatalities.

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