Researchers Warn About Unpredictability of Marijuana Tax Revenue
As marijuana legalization advocates, one talking point we like to put forward is the potential tax revenue generated from cannabis sales. However, many politicians and everyday proponents took that argument and placed grandiose expectations – specifically that the tax revenue will rake in a fortune for state coffers.
In a perfect world, legalization marijuana would lead every illicit buyer to the open market, flooding it with revenue for the state. However, as The Detroit News points out, the situation is much more complicated and unpredictable.
Too Many Variables
The fragmented nature of legalization in the U.S. has its own set of “what ifs” that affect the accuracy of marijuana tax predictions. Unlike Canada, for instance, who legalized cannabis nationally all at once, legal states stand on their own, peppered throughout the U.S.
This means they are surrounded on all sides by both legal and illegal competition. According to The Detroit News:
“The variability of marijuana tax rates from state to state…Competition from neighboring states and black market influence could also play roles in sales and ultimately tax revenue.”
As more states mull over full legalization, their locations on the U.S. map could make things a logistical nightmare. For instance, a state sharing borders with at least one non-legal state will have to deal with the black market next door.
Those near legal states will have to match or reduce marijuana sales taxes in order to avoid people buying externally. Consequently, this could effectively lead to a price war, with states constantly forcing themselves to outdo each other in marijuana affordability. Ultimately, this would erode the amount of money taken in by states.
We saw in Canada how a slow start and regulatory obstacles can hamper cannabis sales. The Detroit News points out how this will be the same case for states who overregulate or fail to mobilize quickly:
“…the extent of local control over commercial marijuana regulations, and the speed with which the industry becomes licensed and productive all can sink or float a state’s predictions for marijuana tax revenue.”
Past Revenue Predictions
The interesting thing about making predictions is that they can often be wrong – dead wrong. With the exception of Colorado, every other legal state’s marijuana revenue fell short.
A reason for this is that predicting something requires some level of stability. Although it might be possible to work around some variables and create an approximate range or estimate, the cannabis industry is just too random to pinpoint.
The Detroit News quotes a Pew financial report:
“‘Supporters of legalizing recreational marijuana expected a new revenue source for states, but market uncertainties continue to challenge revenue forecasters and policymakers.’”
To illustrate the difficulty, let us look at how some states fared in their predictions. Again, Colorado was the most accurate – almost unnaturally so.
According to The Detroit News, Colorado used marijuana consumption statistics from Washington state to determine a $67 million revenue from excise taxes. The final amount was $66.1 million. This is just under a 1% margin of error.
This is not to say that inaccuracy means a shortfall. The pendulum can swing in either direction. For instance, Nevada’s revenue exceeded predictions by 40%. California, on the other hand, fell short by 45%.
Michigan took the hardest hit. They predicted in 2017 would bring $18 million in cannabis revenue, but only received $560,000. However, one reason might be the fact that the tax was phased out after a short period.
Also, some of the issues mentioned above, such as “licensing and implementation delays,” had a role to play.
WeedAdvisor’s Optimism for Cannabis Revenue
As much as we wish it were true, simply legalizing cannabis is not a guarantee that the measure will rake in a fortune for the state. The stark comparisons between states like Colorado, Nevada, California and Michigan are more than enough proof that lawmakers need to be cautious. Implementation must be efficient and prices have to remain competitive.
Most importantly, however, no state – no matter how hopeful – should make assumptions about potential revenue without solid, verifiable and consistent evidence. Sadly, such proof is scarce at best.
Nonetheless, we have faith in our American counterparts and (regardless of the initial revenue expectations) look forward to helping the market gain momentum through our business solutions for retailers, licensed producers and governments.
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