Difficulties in Estimating Marijuana Tax Revenues

 

– By Steven Davenport.

Now that cannabis has been legalized in Washington and Colorado, residents are not just happy with getting a legal high: they also want it to bring in tax revenues. Just how much money cannabis can bring into state coffers has, until recently, been a matter of abstract forecasting.

Retail marijuana brought over $2 million into Colorado coffers in the month of January, according to a monthly report from the Colorado Department of Revenue. A simple annual pro-rating of these numbers suggests annual revenues of nearly $25 million. However the actual number at year’s end could be significantly higher, given that many stores have had insufficient inventory to meet demand; or it could be significantly higher or lower if the demand for cannabis in this past month is unrepresentative of what will occur throughout the year. Additional monthly data will be released by the Colorado Department of Revenue. Until then it is too soon to say whether annual revenues will meet the $67 million estimated for sales in 2014. (Accounting for accelerated sales, tax revenues of $98 million have been estimated by Colorado for FY 2015.)

Increasing tax revenue was one of the most widely touted goals of marijuana legalization, but these claims have remained grounded in estimates until recently. Sometimes these estimates have been noticeably wrong, as with an estimate by the Washington Office of Financial Management (OFM) while Initiative 502 was on the ballot in the State of Washington. That estimate was very rough in its methodology: it assumed that all marijuana consumed would be sold through legal commercial stores, and did not account for any activity through the medical market or the black market. Those unrealistic assumptions helped produce an impressive – yet unsound – figure between $0 and $2 billion over 5 years.

Demand uncertainty is another issue plaguing marijuana revenue estimates. Until recently, most marijuana consumption surveys have focused on use prevalence but neglected quantity consumed, making accurate demand estimates near impossible. A recent RAND study broke this trend with a comprehensive survey of Washington marijuana users – coupled with existing data – to find that marijuana consumption was double that used by OFM estimates. However, the high-end of the OFM estimate is likely still too high, given that the medical and black markets may continue to constitute the bulk of sales in Washington State over the coming years; that factor is near impossible to predict.

Post-legalization increases in demand for marijuana could also throw off current estimates about marijuana consumption and revenue. It remains to be seen how legalization affects the use and purchase habits of marijuana users or current non-users. Most likely, use will increase: marijuana will be easier to access, more socially acceptable, and perhaps drastically cheaper. Economic logic dictates that decline in prices will return an increase in demand. If marijuana does become cheaper, price-sensitive populations – such as juveniles and the poor – will be at special risk of intensifying their habit once it becomes more affordable. The extent of marijuana tourism remains another question mark.

Potential dramatic price decreases in coming years could also reduce tax revenues. A RAND study performed while Proposition 19 was on the ballot in California suggested that, in the absence of taxes, the price of legal commercial marijuana may fall to one-fifth of current black market prices. Since marijuana taxes and sales taxes have been linked to value of product sold, rather than product weight or chemical content, such a price drop could decrease revenues by the same amount.

One trade-off looms over this discussion: increases in marijuana consumption may bring in additional state revenue, but also constitute increases in drug use. As such, the best case (but unlikely) scenario for those hoping for high marijuana revenues is the shrinking of medical and black markets, but with little increases in total demand for the drug.

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Steven is a first-year M.S. Public Policy and Management student at Heinz, having enrolled just in time to prevent his net value from breaking into positive digits. Before Heinz, he spent two years as Managing Director of BOTEC Analysis Corporation, a crime-and-drugs think-tank infamous for advising Washington State on marijuana legalization. He graduated from UCLA in 2009 with a B.A. in International Development Studies and minor in Public Affairs. Some of his favorite policy writers include Mark Kleiman, Keith Humphreys, Reihan Salam, and Ta-Nehisi Coates.