Washington, Oregon and other states that have legalized recreational marijuana should be careful about how they spend the tax money it generates.
That money may flow in quickly at first but can be unpredictable, according to a study by The Pew Charitable Trusts released Monday. With so little historical marijuana sales data, trying to estimate future revenue for budget forecasts can be difficult.
“Forecasting revenue from a product that was illegal just a few years ago, and remains so under federal law and in most states, presents a unique challenge for state budget planning,” according to the study.
States should consider putting it in “rainy day” funds or using it for one-time expenses, said Alex Zhang, an officer with Pew’s States’ Fiscal Health Project. “States should not assume revenue from recreational marijuana will be reliable in the long-term,” she said.
The limited records available show tax revenue grows at the quickest pace in the early years, but that growth slows significantly as markets mature, Zhang said.
Washington receives more tax money from marijuana than any of the other nine states where the drug is legal for recreational use. It collected an estimated $425 million in fiscal year 2018. The bulk of that money, $346 million, pays for several health-related programs, substance abuse prevention and research.
About $131.5 million went to the state’s general fund, which pays for the majority of state programs and salaries.
Oregon collected more than $82 million in the 2018 fiscal year, which ended June 30, 2018, and $102 million in the 2019 fiscal year, according to the Oregon Department of Revenue.
Some states impose sales and excise taxes, which is tax collected on the sale of pot from a grower or cultivator to a business that will sell it retail or use to make other products. Oregon does not. It levies a 17% state tax, and cities, such as Bend, La Pine and Madras in Central Oregon, may levy an additional 3% tax, according to the Department of Revenue.
Oregon dedicates the largest amount of pot taxes collected, 40%, to education; 20% goes to mental health related services; state law enforcement gets 15%; cities and counties each get 10%, based on population and other factors; and drug treatment and prevention gets 5%.
But to estimate how much in taxes cannabis will generate, budget writers need to know how it’s selling.
They can count on decades of data to forecast revenue from sales of alcohol and cigarettes, according to the Pew study. They don’t have similar data on marijuana sales. The first legalized sales of pot began in January 2014 in Colorado. Washington followed about six months later.
For Oregon, that lack of data became the biggest issue when trying to estimate marijuana tax revenue, Josh Lehner, senior economist with the Oregon Office of Economic Analysis, told Pew researchers. Oregon was one of the first states to attempt an official forecast of pot revenue, according to the Pew study.
“For standard forecasting models, it’s helpful to have more detail about demographics, consumption and product types. We’re not there, and other states I’ve talked to aren’t there yet either,” Lehner told Pew researchers.
Even Washington and Colorado, the pioneers in legalized recreational marijuana, “are trying to understand the market,” Zhang said. “It’s difficult to estimate demand and use.”
In Nevada, where legal recreational marijuana sales began in mid-2017, tax revenue was 40% higher than the state projected. In California, where legal sales began in 2018, revenue in the first six months was about 45% lower than the state projected.
Most states see high prices when recreational marijuana becomes legal, when demand is high but supply may be low because of the time needed to grow the first crop. Some states like Washington benefit from “cross-border sales” to residents from Idaho or Oregon. That can change when a nearby state legalizes recreational marijuana, as Oregon did in 2015.
Whether legal marijuana will reduce the black market sales in a state, or create demand among new consumers is another unknown. Legal stores carry a wider range of edibles and liquids — not usually so diverse and available on the black market — that may appeal to a different set of buyers than those who primarily smoke marijuana.
“There is evidence it plays out differently in each state,” Zhang said. Washington seems to have captured a portion of the black market more quickly than Colorado, she said, but like many things connected to legal marijuana, there is limited information and research.
— Tim Doran of The Bulletin contributed to this report.