Washington 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 being released today.
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. While some of that money is set aside for special uses, some goes into the state’s general fund for ongoing expenses.
The state taxes recreational marijuana two different ways, with an excise tax on the product that is grown, processed and delivered to a licensed retailer. It also has a sales tax on the value of all products sold by the retailers.
The state Liquor and Cannabis Board, which licenses and regulates legal marijuana businesses, collects the excise tax and licensing fees that are put in the Dedicated Marijuana Account.
In fiscal 2018, the excise taxes and fees totaled more than $360 million. After covering costs for the board and the state’s medical marijuana database, along with a biannual survey of youth drug and alcohol use, the bulk of that fund, $346 million, was divided among different state agencies.
More than $173 million was set aside for the Basic Health Plan trust account to help cover the cost of medical insurance for low-income residents. Another $17.6 million went to the state Health Care Authority to help with the cost of community health centers for medical and dental care. The Department of Health got about $9.8 million to develop and operate a marijuana education and public health program, with a hotline for referrals to drug abuse treatment providers. The Department of Social and Health Services got $27.8 million for programs that prevent or reduce substance abuse and services for pregnant women, children and youth. The University of Washington and Washington State University will get a total of $350,000 to research the effects of marijuana use.
That left an estimated $131.5 million from excise taxes and licensing fees for the state General Fund, and $15 million to be sent to cities and counties that have licensed marijuana stores.
Marijuana money was a popular target for lawmakers seeking money for a wide range of programs in the last two years, and the Legislature made some significant shifts in where the money goes. It increased the amount it expects to go to the Health Care Authority to more than $47 million for the current fiscal year, and the amount to the Basic Health Plan to $190 million.
Sales, tax growth likely slow
The Department of Revenue collects the sales tax. While it records how much it receives from marijuana stores, it can’t segregate that total between drug sales and sales of other store items, such as pipes and paraphernalia. In fiscal 2018, the last full year for which the department has numbers, the marijuana sales taxes totaled nearly $93.8 million, with $65.4 million going to the state and $28.4 to local governments where the stores are located.
Like other sales tax revenue, marijuana sales tax goes into the state’s General Fund, the source of money for a majority of the state’s programs and salaries.
Although states see rapid growth in the revenue they collect from recreational marijuana, the rate of that growth can be expected to slow after the first few years, the study says.
Figures from the state Office of Financial Management confirm that. The Dedicated Marijuana Account collected about $67.5 million in fiscal 2015, the first full year recreational marijuana was legal. That more than doubled to $168 million the next year, and almost doubled again to $300 million in fiscal 2017. Growth slowed to $361 million in fiscal 2018, is projected at $391 million in fiscal 2019 and $397 million in fiscal 2020. The state is projecting about 2% growth through fiscal 2023.
But the state’s fiscal analysts regularly report that marijuana tax revenue is running ahead of projections at quarterly economic forecast meetings.
States ‘trying to understand’
Even Washington and Colorado, which were the first states to legalize recreational marijuana in 2014, “are trying to understand the market,” Zhang said.
“It’s difficult to estimate demand and use,” she said.
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.
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