Pubdate: Thu, 09 Apr 2015
Source: New York Times (NY)
Copyright: 2015 The New York Times Company
Contact: http://www.nytimes.com/ref/membercenter/help/lettertoeditor.html
Website: http://www.nytimes.com/
Details: http://www.mapinc.org/media/298
Author: Josh Barro

Revenue Disappointment

WHY MARIJUANA TAXES WON'T SAVE STATE BUDGETS

Colorado's marijuana tax collections are not as high as expected.

In February 2014, Gov. John Hickenlooper's office projected Colorado 
would take in $118 million in taxes on recreational marijuana in its 
first full year after legalization. With seven months of revenue data 
in, his office has cut that projection and believes it will collect 
just $69 million through the end of the fiscal year in June, a miss 
of 42 percent.

That figure is consequential in two ways. First, it's a wide miss. 
Second, compared with Colorado's all-funds budget of $27 billion, 
neither $69 million nor $118 million is a large number.

"It's a distraction," Andrew Freedman, Colorado's director of 
marijuana coordination, says of the tax issue. And despite the 
marijuana tax miss, overall state revenues are exceeding projections, 
which may force the state to rebate some marijuana tax receipts to taxpayers.

In the political debate over marijuana policy, fiscal benefits - 
bringing marijuana into the legal economy and taxing it - have loomed 
large. The summary of the marijuana legalization question put before 
voters in 2012 stipulated the first $40 million raised by one of the 
three taxes on recreational marijuana would be put toward school 
construction each year. In practice, Colorado is likely to receive 
just $20 million from that tax this year.

But it's not just Colorado. When Scott Pattison, the executive 
director of the National Association of State Budget Officers, 
appeared on C-Span's Washington Journal call-in show to discuss state 
finances in December, callers repeatedly suggested that legal 
marijuana could fix budget gaps in other states. One asserted, 
incorrectly, that legal marijuana had increased Colorado's tax 
revenues by a billion dollars.

Colorado's marijuana taxes are part of a broader trend in recent 
years: States, looking for ways to close budget shortfalls without 
raising broad-based taxes, have leaned on "sin" revenues: higher 
taxes on cigarettes, higher fees and fines and higher revenue from 
gambling. And as they have sought to squeeze more revenue from these 
sources, they have often been disappointed.

Gambling revenue has stagnated as markets have become saturated. 
Nearly every state has legal gambling, including 37 states with 
casinos. Expansions of gambling do more to siphon revenue from 
existing gambling outlets than to generate new tax and lottery revenue.

High cigarette taxes have led to counterfeiting of tax stamps and 
cross-border smuggling of cigarettes from low-tax jurisdictions to 
high-tax ones. Because the taxes have also succeeded in the policy 
goal of reducing smoking, the other policy goal of raising revenue is 
less of a success.

In the case of marijuana, Colorado's revenue has disappointed because 
legal recreational marijuana sales have been lower than expected. 
State officials thought many customers of medical marijuana 
dispensaries would migrate to the recreational market. But this 
process has been slow, in part because there is a financial 
disincentive to switch: Medical marijuana is subject only to general 
sales tax, while a 15 percent tax is imposed on recreational 
marijuana at wholesale and a further 10 percent at retail, in 
additional to the general sales tax.

But Mr. Freedman says the biggest drag on revenue is that so much of 
Colorado's marijuana market remains unregulated. A 2014 report 
commissioned by the state's Department of Revenue estimated 130 
metric tons of marijuana was consumed in the state that year, while 
just 77 metric tons was sold through medical dispensaries and 
recreational marijuana retailers. The rest was untaxed: a combination 
of home growing, production by untaxed medical "caregivers" whose 
lightly regulated status is protected in the state constitution and 
plain old black-market production and trafficking.

The state is trying to get its marijuana market in order. It has 
imposed new rules to limit the number of plants that caregivers may 
possess, aiming to ensure their operations are truly aimed at 
providing for a small number of patients, not diverting some of the 
supply into the recreational market. And it is tightening oversight 
of doctors to ensure medical marijuana recommendations are written 
only for bona fide debilitating medical conditions. In time, these 
moves may draw more users into the recreational market where they belong.

On the other hand, falling market prices could cut into future tax 
revenues. Retail prices in Colorado were generally more than $10 a 
gram as of last fall. In some cases, that was more than marijuana in 
the illegal market. But illegal production is costly and inefficient. 
As legal producers scale up and compete, they are likely to cut 
prices sharply, according to Mark Kleiman, a drug policy expert at 
the University of California, Los Angeles, who has played a major 
role in establishing Washington State's legal marijuana market. 
According to Samantha Chin, the director of marketing at Colorado Pot 
Guide, retail prices have fallen between 16 and 30 percent in the 
Denver area since November.

"If commercial cannabis is $2 per gram at retail, I doubt people will 
bother getting a medical card," Mr. Kleiman says. Because the state's 
marijuana tax is levied per dollar, not per gram, a sharp drop in 
prices would mean even less tax revenue.

There are lessons here for other states. Because of low public 
support for marijuana prohibition, many jurisdictions have 
intentionally lax enforcement around illegal marijuana markets. This 
often shows up as a wink-wink culture around medical access. (See, 
for example, "Medical Kush Doctor" signs that once adorned 
storefronts in Venice, Calif.) After legalization, that culture of 
lax enforcement can be a barrier to tax collection.

Another lesson is that marijuana taxes should be "specific excise" 
taxes per unit of intoxicant. In most states, cigarettes are taxed by 
the pack and alcohol by the liter. Marijuana could similarly be taxed 
by the gram (either of plant or of T.H.C.), which would protect 
states from revenue declines if pretax prices fall.

Taxes on intoxicants are meant to offset the negative social effects 
of intoxicant use; the size of those effects should not be expected 
to vary with market price.

But even if Colorado got all this right, improved revenues would not 
be among the most important effects that marijuana legalization has 
on the state.

"Tax revenue is nice to have, but in most states is not going to be 
enough to change the budget picture significantly," Mr. Kleiman says. 
"The stakes in reducing criminal activity and incarceration and 
protecting public health are way higher than the stakes in generating revenue."

Mr. Kleiman has advocated an alternative legalization model, 
currently being introduced in Washington, D.C., in which cultivation, 
possession and use are permitted but sales are not. One goal of this 
model is to avoid the creation of a commercial marijuana sector that 
markets its products aggressively. A downside of the model is that 
there are no legal sales on which to collect taxes - but as Colorado 
shows, Washington, D.C., may not be giving up that much, fiscally.

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MAP posted-by: Jay Bergstrom