DENVER – Marijuana makes money. But legalizing it doesn’t eliminate the black market or solve a state’s budget problems.
Those are the lessons from Colorado’s first full year of tax collections on recreational pot. The year-end report, released Tuesday, tallied about $44 million in new sales taxes and excise taxes from recreational pot.
Add fees and pre-existing taxes from medical pot, which has been legal since 2000, and Colorado’s total 2014 pot haul was about $76 million.
Colorado was the first government anywhere in the world to regulate marijuana production and sales, so other governments are watching closely. Estimates varied widely for how much money Colorado would make, and the final hard numbers have important lessons for other states considering legal weed markets.
Money flow
Colorado began selling recreational weed Jan. 1, 2014. But its first month of sales resulted in only $1.6 million for the state. By December, that figure was $5.4 million.
The reason for the increase? Regulatory delays. Red tape meant stores opened slowly, with many municipalities waiting months before allowing pot shops to open.
In Washington state, delays were even more pronounced.
Washington voters legalized pot at the same time Colorado did, in 2012. But retail sales in Washington didn’t start until June 2014, with stores slowly opening and sales increasing each month.
Taxation
Washington and Colorado set vastly different tax rates, both based on a percentage of the pot’s value.
The states then had to immediately set a value for a product with no legal sales history. What’s the right price?
Colorado’s pot regulators have struggled to establish a wholesale pot price to collect excise taxes.
“Taxing a percentage of price may simply not work,” said Pat Oglesby, a former congressional tax staffer who now studies marijuana’s tax potential at the Chapel Hill, North Carolina, Center for New Revenue.
He pointed out the two latest legal weed states – Alaska and Oregon, both still working on retail regulations – will tax marijuana by weight, similar to how tobacco is taxed.
Black market
Every state in the union, liberal to conservative, has a market for marijuana. And making pot legal doesn’t guarantee those consumers will leave the black market and happily sign up to start paying taxes.
In Washington state, medical marijuana isn’t taxed. It is in Colorado, but all adults are allowed to grow up to six plants on their own.
That means the states’ new marijuana markets had legal competition from Day One. And that doesn’t account for the black market, which, of course, is completely free of taxes and regulations.
Lawmakers in Colorado and Washington are looking for ways to drive pot smokers out of the lower-taxed medical pot market and into the recreational one.
Changes
The marijuana market is far from settled.
Colorado benefited from first-in-the-nation curiosity and marijuana tourism. As more states legalize, Colorado and Washington will face competition.
“Colorado is probably kind of a best-case scenario” for pot-tax collections, said Jeffrey Miron, a Harvard University economist who studies the drug market.
“If a number of other states legalize – and two of them already have – then bit by bit, Colorado revenue is likely to decline.”
There’s an even bigger uncertainty looming for states considering legal weed – a new president in 2016.
“The huge unknown is still federal policy,” Miron said. “A new president can radically change state policies toward legalization.”
On the Net
Colorado pot tax data: http://1.usa.gov/1syhgui
