State Watch

Marijuana taxes grow but only small part of state revenue

Sales of recreational marijuana are generating hundreds of millions of tax dollars in states where pot is legal, but that money is unlikely to make up a significant portion of state budgets, according to a leading Wall Street analyst.

A new report from Moody’s Investors Services found excise taxes from marijuana and related products made up just 2 percent of Colorado’s total revenue in 2017, and only 1.2 percent of total revenue in Washington state.

{mosads}Those two states were the first to legalize marijuana for recreational use, in ballot measures in 2012.

The new money generated for both states does represent a serious and measurable boost in income. Colorado generated $223 million in revenues in 2017 — ten times the amount it generated in the first year of legal sales. In Washington, pot sales have grown about fivefold, to $314 million in 2017.

But that growth is almost certain to slow, because the industries in both states are far more mature and thus have less room for growth in the future. Competition from neighboring states is also likely to encroach on tax revenues, as young industries in Oregon and Alaska mature and new states like California and Nevada bring their legal regimes online.

In an analyst note, Moody’s Vice President Grayson Nichols called the marijuana-related tax revenue “marginally credit positive.”

But he said the industry is not likely to generate sufficient revenue to plug future budget holes.

“Even for states with mature industries, such as Colorado, and large states like California, expected revenue will remain only a small share of annual general fund revenue, given the limited opportunities for significant market expansion,” Nichols said.

Opponents and even some supporters of pot legalization say states should not lean on marijuana sales to boost their coffers, because doing so would give a state incentives to increase the number of marijuana users.

Much of the money that legalization states do pull in is already spoken for. When Colorado voters agreed to legalize pot, they allocated about half of tax revenue to regulating and enforcing industry rules. Just about a third of the revenue Washington collects goes into the state’s general fund. Only 5 percent of the revenue Colorado generates goes into the general fund; the rest is earmarked for local governments and public education.

Every state that has legalized marijuana has imposed heavy excise taxes that go well beyond just a sales tax, like those on tobacco or alcohol.

Still, the legal pot industry is expected to boom in coming years, as new states allow recreational use. The market research firm Arcview has estimated the worldwide legal market will reach $57 billion annually in the next decade, with $47 billion of that spending taking place in North America.

In California alone, legal and medical sales are projected to hit $3.7 billion this year and $5 billion by 2019.

Another economic research firm, BDS Analytics, says the marijuana industry employed 121,000 people in 2017, a figure that is likely to more than double by the end of the decade.

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