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In four states (Alaska, Colorado, Oregon, and Washington State), retail sales of marijuana are both legal and taxable. Of these states, Colorado was the first to implement sales and excise taxes on legal marijuana and now has over two years’ experience collecting those taxes. The state is collecting roughly $90 million in marijuana excise taxes alone each year—an amount short of the $162 million it collects from cigarette taxes, but that far exceeds the $42 million it receives from taxes on alcohol. When state-level sales taxes, license fees, and application fees are added to the picture, Colorado’s haul from marijuana taxes rises to roughly $130 million per year, with millions more flowing directly to local governments via their own sales taxes on marijuana.
As the chart below shows, marijuana tax revenues have risen rapidly in Colorado throughout most of the last two years. The same is true in Washington State—the only other jurisdiction where legal, taxable sales of retail marijuana have been taking place for a sustained period of time (Oregon implemented its retail marijuana taxes in January 2016, and Alaska will do the same later this year). As I recently noted in testimony before Vermont’s Senate Finance Committee, monthly marijuana tax revenues are up 64 percent in Colorado compared to a year earlier, and are up by a staggering 246 percent in Washington State.
Nobody knows for certain how marijuana tax revenues in these two states, and elsewhere, will perform in the years ahead. But it is clear that this kind of rapid growth cannot continue forever.
Much of the growth seen so far is related to the fact that new retail marijuana outlets were opened gradually in each of these states, and that many marijuana consumers did not immediately shift their purchases from the black market to the legal market following the start of legal sales. Once the legal marijuana market becomes more established, the rapid growth in tax collections observed thus far should begin to slow.
More interesting, however, is speculation surrounding what may happen to the legal marijuana market in the long-term. As I discussed in Vermont, one place to look for clues about the long-run trajectory of legal marijuana is the gambling industry. Today, legal marijuana is relatively rare—much like legal casino gambling was decades ago. With gambling, early adopters such as Atlantic City reaped an enormous economic and tax revenue windfall as gamblers flocked to the city’s casinos. But eventually that windfall faded when casino gambling became more commonplace. While it is unlikely that any state would ever become as economically reliant on marijuana as Atlantic City has been on gambling, early adopters of legal marijuana are likely to be more effective at luring out-of-state customers, and tax dollars, in the short-term than they will be in a future where other states are likely to have legalized marijuana as well.
Changes in the price of marijuana will also have enormous effects on the long-run yield of marijuana taxes. Three of the four states that collect taxes on retail marijuana sales (Colorado, Oregon, and Washington State) tax the product based on its price with just one state (Alaska) taxing marijuana at a flat rate per ounce.
The RAND Corporation, among others, expect that the price of marijuana will fall significantly in the years ahead as growers become more experienced at cutting costs and as federal and state laws related to marijuana are loosened. If prices fall, those states with price-based taxes could see a dramatic decline in marijuana tax revenues—much like the decline in many states’ gasoline taxes that has resulted from the falling price of fuel.
To help avoid this outcome, states with legal marijuana could establish a “tax floor” that would prevent the tax charged per ounce from dropping below some predetermined level even if marijuana prices plummet. In the context of gasoline taxes, “floors” are an increasingly popular policy option used in states such as Kentucky, North Carolina, Pennsylvania, Utah, Vermont, Virginia, and West Virginia.
Ultimately, however, tax floors are no panacea for potential long-run challenges to the yield of marijuana taxes. Lawmakers in states where marijuana is legal—or where legalization is being considered—should be aware that marijuana taxes may not be a particularly sustainable source of revenue in the long-run. More generally, lawmakers should accept that the future of marijuana taxes is highly uncertain. While they should strive to tax marijuana in the most sensible fashion possible, any marijuana tax established today will almost certainly need to be revisited in the future as changes occur in the price of marijuana, the structure of the industry, and the product’s legal status at the federal level and in other states.
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