The Unexpected Beneficiaries Of Cannabis Taxes

By The Fresh Toast's Rudy Sanchez, provided exclusively to Benzinga Cannabis.

States that have had a legal marijuana marketplace framework in place the longest, such as Washington and Colorado, have fared better than their pot counterparts, such as Oregon.

For states grappling with balancing their budgets, legal and taxed marijuana has a certain appeal. Cannabis is popular, and the public, tokers and non-tokers alike are generally okay with some form of a marijuana tax.

In fact, as of this writing, nine U.S. states collect some form of pot tax, with Michigan joining Alaska, California, Colorado, Maine, Massachusetts, Nevada, Oregon, and Washington in taking a cut of the pot pie.

For some states, the promise of shored up budgets and funding of social programs has been realized. For others, it’s been a mixed bag, with lower than projected revenues. And in at least one state, it has created an unintended windfall for some cannapreneurs.

Every state taxes weed differently. California, Nevada, and Colorado impose taxes and levies on the wholesale and retail level. Additionally, weed is also subject to state sales tax and municipalities can also levy an additional local tax on sales within their jurisdiction. Most cannabis taxation programs are modeled after so-called “sin taxes,” revenue generated through the taxation of products or behavior deemed tolerable to some extent but still considered generally a negative on society (i.e. alcohol, tobacco, and gambling).

Marijuana trailblazers Colorado and Washington have been collecting revenue from cannabis sales the longest, since 2014, and their state capitols have generally been pleased with the results of legal and taxed pot sales. Through November of this year, Colorado has collected over $227 million in revenue from taxes levied on marijuana in 2019, although this figure only accounts for what goes into state coffers. In fact, investigations by the Denver Post estimate that in 2018, about $80 million were collected in local-level taxes, money that stayed in those communities and funded infrastructure projects and college scholarships for low-income students.

The picture is less rosy in other states such as Oregon, where the $111 million in taxes collected at the state and local level — 40% of which is legally allocated to schools — is a drop in the state revenue’s bucket, amounting to about 1% of the amount that personal income taxes bring in, according to the Oregon Center for Public Policy. While the revenue is certainly nothing to sneeze at, it also isn’t the windfall many perhaps hoped.

In California, where taxed recreational sales started in 2018, it appears so far that the real winners have been black-market players taking advantage of the early shortfalls in the legislated marketplace to undercut legitimate cannabis businesses. Factors such as a 77% surcharge in taxes on cannabis, local governments having the power to ban marijuana business, as well as a lack of enforcement, continue to cause headwinds for the Golden State’s legal market.

Analysts that track California marijuana sales project the legitimate market to grow to $7.2 billion by 2024, with the parallel black market growing to $6.4 billion. The thriving black market, allowed unchecked, not only deprives the state of anticipated revenue, it allows dangerous counterfeit cannabis to land in the hands of otherwise unsuspecting consumers, whether it be poorly made vape pens delivering heavy metals and other toxins, or pesticide-laced flower labeled with doctored lab results.

It is perhaps unsurprising that states that have had a legal marijuana marketplace framework in place the longest, such as Washington and Colorado, have fared better than their pot counterparts, such as Oregon. The bifurcated federal/state legal status of cannabis and constantly evolving attitudes towards recreational weed have complicated the task of reaping the most from what should be, on paper, a taxation slam dunk.

Some states, such as California, are learning that striking a balance between regulation, enforcement, and legislation, especially in such a large market, is tricky, and the consequences of getting it wrong include nurturing an illicit market that puts consumers at risk and legit players at a competitive disadvantage.

Featured Image by Sharon McCutcheon on Unsplash