States Are Missing Out on Billions in Legal Marijuana Revenues

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A new report shows that marijuana prohibition comes with a cost.

By Jared Keller

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(Photo: Christopher Furlong/Getty Images)

In the few years since Colorado and Washington state legalized recreational marijuana, an overwhelming body of research has refuted the idea that legal pot comes at the expense of our civil society. In fact, a new study suggests quite the opposite: that marijuana prohibition comes with a cost to state coffers.

According to a new analysis from the Tax Foundation, federal, state, and local governments are missing out on some $28 billion in annual tax revenues by not making weed legal. While some $7 billion would flow to the federal government, most of this revenue would go to states through direct sales of marijuana products (think Amsterdam’s famous coffee shops or Colorado’s nascent pot dispensaries), as well as income and payroll taxes levied on workers in a “mature” marijuana industry.

As the Washington Postpoints out, the Tax Foundation’s estimates are based on a few assumptions — a “mature” marijuana market that generates $45 billion in annual sales, as well as the federal government choosing between a 10 percent sales surtax and a per-pound tax similar to that levied on tobacco. But the brief experience of states with legal pot bears out this thesis: According to the Tax Foundation, Colorado — which raised $70 million last fiscal year, nearly double that collected from alcohol taxes, perTime) — is on track to rake in more than $140 million from marijuana sales in 2016. Similarly, Washington is now averaging around $2 million a day, with an anticipated revenue of $270 million annually.

Federal, state, and local governments are missing out on some $28 billion in annual tax revenues by not making weed legal.

Of course, this doesn’t mean that Colorado and Washington have stumbled onto a green bullet to state revenue woes; Colorado faced $57.3 billion in state and local public debt in 2015, and Washington fared even worse, with $82.2 billion. But the states could use marijuana revenues toward worthwhile projects. Colorado voters levied a 15 percent excise tax on wholesale marijuana sales that will funnel revenue into school construction projects. (The tax brought in $13.6 million for schools in the first few months of 2015, the Cannabist reports.) Aurora, Colorado, is using $1.5 million in marijuana revenues to fund services for the homeless, according to the Huffington Post (an idea that’s caught on in states like California, which will vote on a recreational marijuana ballot measure in November).

Unfortunately, there are state-level obstacles to funneling pot revenues into public works projects. Consider the case of Colorado, where a stringent 1992 measure turned a potential reefer fund into a massive tax refund rather than a boost to state projects. Here’s how the New York Timesdescribed the issue in 2015, one year after Colorado became the first state to permit recreational marijuana sales:

The problem is a strict anti-spending provision in the state Constitution that touches every corner of public life, like school funding, state health care, local libraries and road repairs. Technical tripwires in that voter-approved provision, known as the Taxpayer’s Bill of Rights, may require Colorado to refund nearly $60 million in marijuana taxes because the state’s overall revenue estimates ended up being too low when the marijuana tax question was put to voters. Lawmakers are scrambling to figure out a way to keep that money, and they are hoping Colorado voters — usually stingy when it comes to taxes and spending — will let them.

While Colorado is a special case, there’s no telling what impact future TABOR movements could have on marijuana revenues: In the last 10 years, anti-tax advocacy groups have pushed for similar measures in Arizona and Maine, two of the many states considering legalization in 2016.

But as the Washington Post points out, it’s not just revenues that are a potential boon for cash-strapped state governments; it’s also the opportunity cost of prohibition. “Marijuana prohibition carries a whole host of costs of its own, roughly a half-billion dollars a year to arrest people for simple marijuana possession,” explains the Post’s Christopher Ingraham. “Billions more to arrest and prosecute people who sell and traffic the drug. And the difficult-to-quantify cost of restricting the ability of millions of people who would prefer to use a drug that, byanyreasonablemetric, is considerably less harmful than alcohol.”

While research has proven that legalizing marijuana is no longer a moral or social issue, studies like the one conducted by the Tax Foundation are an important reminder that ending America’s pot prohibition may be a smart business decision as well. Even if state lawmakers don’t ideologically support legalization to the degree that the general public does, there’s another sea of green which may capture their attention.

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