Have we reached peak pot?
Since legalization, retail sales of marijuana have gone nothing but up, and dramatically so. In fiscal year 2015, sales reached $260 million. In FY 2016, that jumped to $786 million. In FY 2017, they exceeded $1.3 billion.
Tax receipts and license fees into state coffers followed a similar trajectory.
In 2019, the number crunchers are foreseeing something new for this market: a plateau.
“The rapid growth in cannabis revenue,” reads one slide in a state economic forecast presented earlier this week in Olympia, “is likely over.”
Forecasters still predict increases in tax revenue in the near future, but very modest ones. The total state take on retail pot, in excise taxes and license fees, is expected to rise from $749 million in the two-year budget from July 2017 through June 2019 to $847 million in 2021-23 – a much slower pace of growth than we’ve seen so far.
“Nothing is going to grow at that rate forever – even home prices in Seattle,” said Steve Lerch, executive director of the Economic and Revenue Forecast Council.
Lerch said there are two primary reasons to expect a slowdown. The first is that most state licenses have been purchased, and the remaining ones tend to be in small, rural places.
“Most of the stores that are going to open have opened,” he said.
The other reason is that the migration of pot users onto the legal market is closer to complete all the time, with the relative ease and affordability of the retail stores.
“Our assumption is a lot of the growth we saw was people moving from the black market to the legal market,” he said.
The forecast was presented this week at a meeting of the Economic and Revenue Forecast Council as part of a broad look at the expectations for the state economy – and thus the state budget. It was largely a compendium of positive, and improving, economic news for the state; it included a revenue forecast of $45.6 billion for the current two-year budget, slightly improved from its last prediction in June.
In short, the forecast said the upside of the current economic situation is elevated consumer and business confidence, which could translate to stronger growth and a strong labor market in the state.
The downside is significant international trade uncertainty with our major trading partners, the effect of rising interest rates and a “maturing” economic expansion.
Some of the highlights:
Washington’s overall employment growth from August 2017 to August 2018 was 3 percent, roughly double the national rate.
Adjusted for inflation, national “wage growth remains weak.”
A gradual rise in interest rates is expected with mortgage rates eventually reaching 5.2 percent in 2020.
Federal tax cuts passed last year are “likely” contributing to strong overall revenue growth – but state revenue has been growing steadily at a very similar pace since 2010.
Continued growth in state revenues is forecast, but at a slower pace than in recent years. Between fiscal years 2011 and 2018, state revenues rose by an average of 6.2 percent a year. In the five fiscal years to come, revenue is predicted to rise an average of 4.2 percent each year.
In the big picture, marijuana revenue is small. Though tax and license revenues to the state have skyrocketed, those revenues remain less than 2 percent of the overall state budget, Lerch said.
The overall state budget, though, may follow a similar if less dramatic pattern in the years to come, Lerch said.
“We do have growth slowing as we go out further (in the future), both for the U.S. economy and the Washington economy,” he said.
And as for the legal weed economy, it’s still a lot – hundreds of millions of dollars a year in retail sales. But it’s probably time to adjust our expectations for how fast it grows.