$1 Billion In Marijuana Taxes Is Addictive To State Governors

Debra Borchardt ,   Contributor
I write about retail and cannabis.
Opinions expressed by Forbes Contributors are their own.

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California believes it will get $1 billion in tax revenue from legalized marijuana.

States are addicted to cannabis tax revenues. According to a new report from New Frontier Data, states with legalized marijuana are on track to generate approximately $655 million in state taxes on retail sales in 2017. Within that tax figure, $559 million will come just from cannabis taxes, much more than from alcohol taxes.
The report also forecasts that tax revenues in states with legalized marijuana will reach $1.8 billion, of which $1.4 billion will be from cannabis specific taxes. This money isn’t easily replaceable if the Department of Justice reviews its current approach to marijuana. Plus, the Trump administration is calling for deep cuts in many programs with its proposed budget and this puts further pressure on state governors to continue providing services its residents have come to expect.
“In an era of dwindling state resources, when we are looking to smaller governments, and an administration at the federal level that is looking to end funding to states in numerous ways, the discovered revenue from regulated legal cannabis markets can be a lifesaver to local law enforcement, substance abuse counseling and other social services,” said Leslie Bocskor of Electrum Partners. According to Bocskor, states are fighting the Justice Department’s new war on drugs for purely fiscal reasons because the overall economic impact has been much higher than anyone expected.

“That the states’ economies are feeling the effects on real estate, the effects on the job market, the effects on travel and hospitality and the effects from a reduction in taxpayer burden from the criminal justice system,” Bocskor explained. The direct cannabis taxes combined with the indirect taxes such as income tax on newly created jobs and retail taxes on consumer spending from these new jobs has created a tax boom.
Bocskor is right about the unexpectedly large amounts of tax revenue. In Colorado, the state saw a 57.2% increase in the total marijuana taxes collected from FY 2015-16 to FY 2016-17 year-to-date as of January. The retail sales tax alone increased 51.4% for the same period. The state collected $119 million in taxes as of January for its year-to-date fiscal year. Compare this to only $38 million collected on alcohol of at least 11 months in 2016. The money is being put to good use by the state. For example, Colorado was able to put $16 million towards Affordable Housing Grants and Loans in 2016 from cannabis tax collections.

Many states view the cannabis industry as a vice and tax it at a high rate and the industry accepts it as a cost of doing business. It has paid off handsomely for the states that have legalized marijuana. Washington state’s cannabis retail tax rate is 37%. The state’s total tax obligation for fiscal year 2016 is $185 million and that is expected to increase 25% to $233 million for fiscal year 2017. California will be charging 15% and the state believes it will generate $1 billion and up to $100 million in savings annually. Some of the areas the money will go to include the California Highway Patrol, research, community programs, environmental restoration and law enforcement.
“This tax revenue is very important to them. It’s three times as much as alcohol tax and it has quickly become entrenched in the budget,” said Brian Vicente of Vicente Sederberg Law Firm, a firm that specializes in marijuana law. “These governors are fighting the federal government over marijuana laws for two reasons. The first is economic, meaning tax revenue and jobs. The second reason is that it’s a better use of law enforcement’s time.” He is referring to law enforcement being able to put more time towards violent crime as opposed to low-level marijuana possession arrests.
With virtually every poll showing most Americans approve legalization and governors becoming dependent on the tax revenue to balance the budget and provide more state services, it will be hard to convince these states that rolling back legalization is a good thing.
Vicente said that in places like Colorado, it’s very difficult to raise taxes. That state has to go to the voters to raise taxes and most people won’t vote for that. The marijuana tax has been a great way to get more revenue and not have to raise taxes elsewhere. “The impact is really felt at the local level. Some counties have done 20 years of infrastructure work in just one year’s time,” he said. “They’ve provided lunch for kids who need it. These are powerful things.”
With cigarette smoking on the decline and gas prices remaining steadily lower, states aren’t able to tap traditional areas of easy tax gains. The reality is that consumers don’t want higher sales or income taxes, but they still want extra services. Communities that are seeing concrete benefits from these tax dollars are going to be resistant to losing that money. Governors on the front lines of balancing budgets also see what they can do with this money and will fight to keep it.

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