Legal Marijuana Sales: A Tax Revenue Dream Come True?

Living & Spending, Taxes
on July 18, 2014

Legal Marijuana Sales

Washington state kicked open the door on recreational marijuana sales early this month—and found a stampede of weed money headed for the state’s revenue pipe.

In the first two days, 25 of the 334 licenses to operate a store and 93 of the unlimited number of licenses to grow and process cannabis were approved—with the mostly mom-and-pop businesses agreeing to pay a 25 percent excise tax for each of the three steps.

While poor planning—licensed growers haven’t had time to build up a supply to meet the demand—may leave buyers unable to stock up in the next few months, sales of cannabis over the next five years are predicted to reach billions of dollars in Washington alone.

The voters’ guide analysis of Initiative 502—approved in November 2012—estimated that tax proceeds for the next five years could add up to as much as $1.94 billion, between business and sales taxes.

Washington is the second state to allow sales of recreational cannabis. In January, Colorado became the first, with more than 225 stores on its registry, mostly in the Denver area. While the prices are similar to those in the more than a dozen states that allow medical marijuana, only Colorado and Washington are poised to collect megataxes from cannabis.

With its new launch of a Rocky Mountain high, Colorado scraped about $3.5 million off of sales and business taxes called “excise taxes” in January alone, and at the end of April found it had netted $10.5 million, according to Gov. John Hickenlooper—who opposed legalizing recreational use but recently estimated that tax revenue will be more than $40 million this year.

Other states are watching closely, says Karen O’Keefe of the Marijuana Policy Project, a pro-legalization think tank in Washington D.C.

“Many states are still struggling with budget shortfalls, and they are watching with increasing interest as Colorado reaps huge benefits from a relatively small number of shops,” she said. “Fiscal solvency isn’t the only reason to end this destructive prohibition, but it is a good one.”

The governor of Rhode Island, for example, mentioned in an interview with the Huffington Post in February that he was watching Colorado’s cannabis revenue stream. “Somebody was saying to me about the bad weather we’ve been having back home and all the potholes, we should have the revenue go to infrastructure—pot for potholes,” Gov. Lincoln Chafee said. “Certainly, the revenue is enticing for all governors.”

In Washington, much of the excise tax revenue goes into the new ‘dedicated marijuana fund.’ More than half is committed to health care, 25 percent to drug abuse treatment and education and one percent goes to cannabis research at state universities. The remainder goes into the state’s general fund, per the ballot initiative.

Cannabis growers will pay a 25 percent tax, while processors (businesses that trim and pack) pay a 25 percent tax, and sellers pay another 25 percent tax into the fund. These taxes are expected to generate more than $560 million in revenue in the first year, according to the state Office of Financial Management.

The sales tax, set at between 6.5 percent for the state (and up to 3.3 percent for local taxes) will go into the general fund. There’s also a .5 percent business and occupation tax that ends up in the general fund.

“The general fund pays for schools, social services, roads, maintenance and much more,” says a spokeswoman for the state’s Economic and Revenue Forecast Council.

Colorado imposes a 10 percent sales tax on top of the existing statewide 2.9 percent, for a neat 12.9 percent total, before local sales taxes even factor into the equation. In March alone, the state reaped $2.8 million in sales taxes alone.

The state also hits cannabis businesses for a 15 percent excise tax, with the first $40 million each year committed to public school construction.

But there’s even more tax revenue on the way, O’Keefe points out.

“Colorado has issued badges for 10,000 employees. You can’t work in marijuana without one,” she says. “That’s 10,000 new jobs, and the houses and cars and schools and income taxes that come with them.”

And she points out, there are ancillary businesses, everything from making and supplying equipment like the canisters and scales to real estate to employee benefits—all the professional services that this brand new industry will need.

“It’s obvious that they will need growers and trimmers and sales people,” O’Keefe says. “But they’ll also need accountants and marketers and landlords and cleaning services and transportation and analysts and so much more.”
Would you support legal sales of recreational marijuana in your state? Tell us what you think in the comment section below.

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