Colorful Commentary

Half a leaf: Pot tax revenue will not solve state’s budget problems

Posted February 3, 2016 by Alex Meyer
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By Alex Meyer

CFI Research Fellow

 

When voters passed Amendment 64 in 2012 legalizing recreational marijuana, a lucrative industry opened in the state, and Colorado gained a new stream of revenue. But how much revenue does the state actually collect from recreational marijuana sales, and what kind of impact does it really have?

The answer is, “relatively little,” compared to revenue from income and sales taxes. While marijuana taxes are certainly helpful for funding some school construction and a few other programs, marijuana tax revenue is far from the silver bullet to Colorado’s budget problems. In reality, the marijuana revenues comprise just a drop in the bucket when compared to the overall size of Colorado’s budget and cannot solve the looming fiscal problems Colorado’s legislators will face in the coming years.

And while much has been made of the fact that more tax revenue is now collected from the sale of marijuana in Colorado than the sale of alcoholic beverages, that overlooks the fact that marijuana taxes are relatively high compared to other “sin tax” goods while taxes on alcohol in Colorado are among the very lowest in the country.

Taxes on Marijuana

Recreational marijuana is subject to the state’s regular 2.9 percent sales tax as well as a 15 percent excise tax levied on the wholesaler and a special 10 percent sales tax. In addition, cities and counties can collect their regular local sales tax on recreational marijuana and have the option to apply their own special sales tax on marijuana.

pot revenue

Marijuana’s Budget Contribution

The revenue from marijuana taxes was $77.9 million in FY 2014-2015, with $66.1 million approved as part of Proposition AA. Eighty-five percent of the recreational marijuana taxes generated each year from the special sales tax goes into the Marijuana Tax Cash Fund. The remaining 15 percent goes to local governments.

Meanwhile, the first $40 million generated by the 15 percent excise tax on recreational marijuana each year goes to the Building Excellent Schools Today (BEST) Program, which is a dedicated fund that helps pay for capital construction for schools. In FY 2014-2015, marijuana taxes provided just under $24 million for BEST, making up about 18.5 percent of the program’s approximately $130 million total. The BEST program awarded about $68 million in capital construction grants to 25 schools, but there is still a lot of unmet capital construction need.

For instance, there were 23 other schools in 2014 that were not approved for grants. It’s important to note that the marijuana revenue for schools is used for capital construction (new buildings and repairs and renovations to existing ones); none of the dollars are used for operating costs. But to give the marijuana revenue some further context, the state’s share of funding for K-12 education in FY 2014-15 (which is for operating) was $4.1 billion.

Any marijuana tax revenue not allocated to the BEST program that is sent to the Marijuana Tax Cash Fund, and distributed to marijuana-related enforcement, education, prevention and treatment programs. Additionally, $11.8 million was raised as part of the regular state sales tax collected on recreational marijuana sales. Contextually, Colorado’s Gross General Fund Revenue in FY 2014-2015 was $9.7 billion. Thus, the $77.9 million in marijuana revenue represents less than 1 percent of the state’s general fund collections. While the revenue helps, it does not begin to approach the level of funding necessary to support the essential services the state provides.

 

Marijuana Pie Chart

Marijuana Taxation in Other States

Colorado is one of four states to have legalized recreational marijuana, each of which has a different system for taxation. Colorado’s marijuana tax revenue is comparable to Washington’s, but is higher than the states with more recent implementation of marijuana regulatory systems.

Alaska has an excise tax on Marijuana levied at $50 an ounce, but does not have a special sales tax on pot. The excise tax is estimated to bring in between 5.1 and $19.2 million in 2016.[1]

Washington levies a 37 percent excise tax at the point of sale, effectively operating as a sales tax. This is a change from Washington’s original three-tier tax structure that included a 25 percent tax on the producer, a 25 percent tax on the processor and a 25 percent tax on the retailer. This excise tax brought in $70 million in revenue in its first year.[2]

 

Ranking “Sin” Taxes FY 2014-15

The $77.9 million in revenue from marijuana sales is actually relatively closer to the revenue contributions of alcohol and tobacco. But again, this belies the fact that taxes on recreational marijuana are relatively high in Colorado, while the state imposes relatively low taxes on alcohol and tobacco. (Medical marijuana is subject only to regular state and local sales tax.)

The sale of all alcoholic beverages brought in about $42.1 million in tax revenue in 2014-15, while tobacco products generated $197 million. Recreational marijuana has a high excise tax (at 15 percent of wholesale price) and a special 10 percent sales tax (in addition to recreational pot being subject to regular state and local taxes and any special local taxes). Colorado’s taxes on alcohol have not been raised in decades, and while voters approved a tax increase on cigarettes in 2004, the state’s rates on cigarettes are still among the lowest in the country.

sin tax table

 

From a fiscal standpoint, the lesson to draw from the state’s marijuana experiment is that it is not a cure-all for the state’s budget woes, not even close to one. The revenue is helping some schools repair roofs, build new additions and replace boilers, and it’s helping to regulate marijuana itself.

But there is no substitute for a thoughtful, balanced revenue system that has the flexibility to adapt over time to changing economic circumstances.

 

[1] http://www.adn.com/article/20150707/state-weighs-how-much-money-will-marijuana-bring-alaska

[2] http://www.cnn.com/2015/07/10/us/washington-marijuana-70-million-tax-dollars/

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