States should be conservative when budgeting marijuana tax revenues, researchers say.
In a Pew Charitable Trusts report released Monday, researchers warned that marijuana revenues are uncertain and that if tax collections come in below forecast amounts, programs funded by those dollars could suffer.
“Forecasting revenue from a product that was illegal just a few years ago, and remains so under federal law and in most states, presents a unique challenge for state budget planning,” Pew said in its report.
States tax legalized recreational marijuana with a general retail sales tax, a marijuana-specific excise tax, or both. Some states also allow local governments to add an additional tax on recreational marijuana to fund their needs.
States then use that revenue by directing it into general funds, educational funds and healthcare programs, said Alexandria Zhang, a Pew research officer. Zhang urged states to use caution, saying that marijuana revenues may not be well suited as a funding source for ongoing programs.
States would be better served to use the money to shore up savings, as some states have done, according to the Pew report.
States need to get a bit of experience before they can have better certainty about the revenue stream, said John Hicks, executive director at the National Association of State Budget Officers.
“It is at the beginning, just as it is anywhere,” Hicks said. “I’m sure when states came out of Prohibition they had the same challenge on alcohol, wine and spirits. Experience will be our teacher.”
States face challenges when it comes to changes in consumer demand, and analysts have little available data to gauge trends, according to Pew. States also don’t know how quickly consumers will transition from the black market to the legal one.
Due to taxes, prices for marijuana are usually higher in the legal market, which could cause consumers to go to the black market.
In California’s first six months of legalization, marijuana tax revenue was 45% below projections, while in Nevada revenue came in 40% higher than expected.
“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,” Pew said in its report.
States are sometimes overly aggressive in their approach to taxes.
California started out with a fairly high tax rate, and it is still high across the industry, said Dustin McDonald, vice president of government relations for WeedMaps. The state and local governments can impose taxes on cultivators, manufacturers, distributors, laboratory testing and retail.
As the state organized its policies, local governments were permitted to allow for local retail licenses, which were then needed for marijuana dispensaries to get their retail state licenses. About 76% of California’s municipalities do not have organized retail licensing, McDonald said.
“What they’re basically doing is they’re setting up the supply side of the market to fail,” McDonald said.
Banking also becomes an issue for marijuana dispensaries due to cannabis remaining illegal under federal law.
California State Treasurer Fiona Ma said that providing banking for the cannabis industry would make it easier to collect tax revenues, because there would be a paper trail.
Ma became a fervent supporter of providing banking for the industry during her time on the Board of Equalization, she said, because it was the board’s job to collect taxes from cannabis businesses.
The significance of making it easier for these business to “come into the light,” as Ma says, became a more heightened issue this week as a report came out that estimates the amount of illegal cannabis sold in the state will be double that of legal sales.
California’s legal cannabis market is on track to grow 23% to $3.1 billion in 2019 over last year, making it the largest legal market in the world, according to a study released Thursday by sales-tracking firms Arcview Market Research and BDS Analytics. An estimated $8.7 billion is expected to be spent in the state’s illegal cannabis market in 2019, according to the report.
The report pointed to high taxes and a refusal by many cities to allow licensed shops for the difference.
Ma acknowledged that some cannabis businesses are paying taxes as high as 40%.
“We are working on legislation to lower the tax structure,” she said.
Also, since marijuana is still federally illegal, it becomes another challenge for states forecasting their tax revenue, Zhang said.
“All of the states we’ve spoken with have definitely cited federal policy shifts as a consideration when they forecast their revenue, as another factor that introduces uncertainty into how much revenue a state might collect,” Zhang said.
Pew found that tax collections from marijuana are booming in the five states with available data. In Washington marijuana counted for $420 million, more revenue than liquor or tobacco in fiscal year 2018. In Alaska, revenue spiked to $11 million from $2 million in one year.
Forecasters, however, expect the growth to slow.
In Washington, for example, marijuana tax revenue grew 277% from 2015 to 2016, but leveled out to just 17% from 2017 to 2018.
