In many states, including Colorado, marijuana tax revenues are falling wanting forecasts

Nearly half of Americans Live in a state that permits legal access to recreational marijuana. There are eleven other states, including Wisconsin and Florida is considering legalization in 2024.

One of essentially the most common reasons for legalizing marijuana is Increase in state tax revenue. The amount of revenue depends upon states' decisions about regulating the marijuana industry, including the way it is taxed.

I’m an economist He focuses on predicting how different tax systems will affect markets. My expertise includes industries corresponding to legal recreational marijuana, alcohol and tobacco. I examined various taxes on marijuana in states like Colorado and Washington to know how much revenue was generated and what role state tax policies played.

Marijuana is taxed similarly to alcohol and tobacco

Taxes on recreational marijuana are generally based on price, quantity, weight or potency – just like other “sin goods” corresponding to tobacco and alcohol products.

Taxation of sin goods is assumed shape public health policy and reduce the harmful effects of those products on the general public. These taxes, also called excise taxes, are typically higher on sin goods than taxes on other products.

The aggressive taxation of those goods is about greater than just government greed. It is common knowledge that consuming alcohol and tobacco creates burdens for society corresponding to increased violence and health care costs. Economists like me check with these impacts on innocent people as “negative social externalities.”

Studies have shown that marijuana can have effects harmful health risksto – especially amongst young people. Therefore, governments often impose taxes on marijuana to limit its use.

Most states where marijuana is legal impose a marijuana sales tax. Other use a mix Sales tax and a quantity or weight-dependent tax. For example, a half-dozen marijuana brownies that weigh one pound could possibly be taxed as a “six,” or by their weight.

Potency taxes, a standard practice in taxing liquor in most states, also aim to cut back consumption. Taxes on liquor are often significantly higher than the taxes on wine and beer. Marijuana potency could be taxed based on the product's THC content, the most important psychoactive compound in cannabis.

Why state tax revenue was so low

In 2012, Colorado And Washington were the primary two states to legalize recreational marijuana, and sales began in 2014. These states aggressively tax marijuana in comparison with other states.

For example, Colorado imposes a 15% sales tax on marijuanapaid by consumers, and an additional 15% by weight paid by retailers – in comparison with New Mexico, which only has a 12% sales tax. Washington's tax is even higher at 37%.

Because taxes were high, Colorado and Washington expected their latest marijuana industries to generate significant tax revenue. These predictions relied on surveys of illegal marijuana use and certain overestimated the usage of legal marijuana, which tends to be costlier than street drugs.

In 2014, then-Gov. John Hickenlooper predicted it Colorado would collect greater than $130 million of marijuana tax revenue in the primary fiscal yr of sales. Actual tax revenue was roughly $88 million.

Washington experienced an analogous deficit. The State Office for Financial Management It was projected to gross $434 million Tax revenue in fiscal yr 2015, greater than double realized revenue.

Additionally, each states' tax revenues from alcohol and tobacco have been eroded by marijuana. Research I published with economist Keaton Miller found that folks were using marijuana as an alternative of alcohol and tobacco, resulting in a decline in income from these other sin goods.

According to our research, from July 2014 to June 2015, Washington skimmed 40%, or $56 million, from alcohol, wine and cigarette tax revenues. Although each states collected more taxes overall than before legalization, the general increase shouldn’t be as large as politicians had predicted.

Apart from the undeniable fact that the expected tax revenues weren’t collected, States like California, Oregon and Colorado experienced a slowdown and even a decline in marijuana sales and tax revenue. One reason is because as These markets are maturing, the typical price of marijuana is falling. Lower prices result in declining sales tax revenue.

For example, Marijuana prices in Colorado fell 60% from 2014 to 2023. Colorado has lost tax revenue since then, and WashingtonThe case shouldn’t be much different.

Taxing THC potency as an answer

One tax system that seems secure from falling prices – so long as the identical amount of marijuana is sold – is a potency tax, which taxes marijuana based on its THC content. So far only three states – New York, Illinois and Connecticut – Control THC potency.

New York taxes Marijuana flowers at 0.5 cents per milligram; concentrates at 0.8 cents per milligram of THC; and food for 3 cents per milligram. This is along with the 9% state sales tax and 4% local tax.

Based on potency Control the trail to creation a stable stream of tax revenue? The answer is not any.

An effectiveness-based tax will only be effective if consumers have a strict preference for products with higher effectiveness and refuse to modify to products with lower effectiveness to avoid taxes. But research I conducted with Keaton Miller, Benjamin Hansen and Caroline Weber found this Consumers don't place much value on the potency of marijuana.

Our research also shows that growers and processors can do that with ease Reduce THC potency of their products without excessive costs. They achieve this by shortening the expansion time, changing the product mix or providing low-potency products as test samples. As a result, potency taxes could have the unintended consequence of encouraging suppliers to sell low-THC products because they might likely still make similar profits.

So, is there a perfect tax structure that may generate a sturdy stream of marijuana tax revenue? Not really. Although tax policy has an impact available on the market, it may possibly do little to beat weak demand. From this angle, a decline or stagnation in state tax revenues from marijuana is inevitable. As the market matures and more states legalize marijuana, consumers can have more purchasing options and competition will intensify.

This implies that each the value of marijuana and the tax revenue related to its sales will likely proceed to say no in the longer term.