By The Numbers: A Survey Of Trends In Marijuana Tax Revenues

Cannabis is big business, not only for industry participants, but also for the states and local jurisdictions where marijuana has been legalized and regulated through the levy and collection of excise and other taxes. A report from New Frontier Data, a cannabis-neutral policy and business analytic and reporting organization, titled Cannabis In the U.S. Economy: Jobs, Growth and Tax Revenue (2018 Edition) recently examined tax-related “patchwork” data from states where cannabis programs are up and running and, based on this information, developed models predicting what federal tax revenues could be collected if the US government were to legalize cannabis on a federal level today.

The government will leave more than $75 billion on the table, and fail to create more than one million jobs, if it refuses to legalize marijuana in the next seven years, according to the report. Such a move would be a major miscalculation, at best, particularly for an administration that boasted that, if elected, it would run the United States like a (as we presumed at the time, successful) business.

    I.   Marijuana Tax Revenue in the States (Actual)

The numbers speak for themselves: California collected $60.9 million in tax revenue from the cannabis industry in the first quarter of 2018, comprising only the first few months of California’s legal recreational market, according to the state Department of Tax and Fee Administration. That figure does not include local tax revenue collected by cities and counties. Experts and industry insiders expect this number to rise steadily over the next decade, paralleling trends observed in other states that have legalized cannabis programs.

Liquor vs. Cannabis Sales

Liquor vs. Cannabis Sales

For example, the Washington State Liquor and Cannabis Board Annual Report for fiscal year 2017 reported that the state of Washington collected a total of $319 million in legal marijuana income and license fees in fiscal year 2017. Ninety-eight percent was derived from the state’s marijuana excise (sales) tax and the other 2% was collected through license fees and penalties. That was growth of nearly 69%, or $130 million, more than the previous year. Total sales in Washington climbed to $1.3 billion in fiscal year 2017, up from the $786 million collected in 2016, and the state imposed a 37% rate.

For the purposes of comparison, beer and wine taxes collected by Washington during the same period totaled a mere $55 million. Including spirit fees and liquor license fees as well as penalties, the state collected $206 million from alcohol sales in fiscal year 2017. The state collected $2 million less in taxes derived from beer sales, and experienced a modest increase in wine tax revenue, up less than half a million dollars from 2016.

In Colorado, where the excise tax rate imposed is less than half that imposed in Washington (because in Colorado, the state government has to obtain voter approval to raise taxes—which, not surprisingly, doesn’t happen as often as the government would like), the state still enjoyed nearly $248 million in total revenue derived from marijuana taxes, licenses, and fees. This number, like in Washington, grew nearly 28%, up from $194 million in 2016. Previously, Colorado experienced an even greater boom in the form of a more-than-57% increase in total marijuana taxes collected between 2015 and 2016. As compared with the alcohol industry, the state collected only a total of $38 million from spirits, beer, and wine during the same time period in 2016.

    II.  Federal Marijuana Tax Revenue (Potential)

A report from New Frontier Data, a cannabis-neutral policy and business analytic and reporting organization, titled Cannabis In the US Economy: Jobs, Growth and Tax Revenue (2018 Edition), examined this and other “patchwork” data from jurisdictions where cannabis programs had been instituted by the states, and generated models forecasting the federal tax revenues that could potentially be collected by the US government if the US were to legalize cannabis on a federal level.

If cannabis was legalized on a federal level today, the report predicted:

• EXCISE TAX: Assuming a sales tax at the federal level was implemented at 15%—the same rate as in Colorado since July 2017—the total tax revenues generated between now and year 2025 was predicted to total $46 billion.

JOBS: Full legalization would result in more legal businesses entering the market, more consumers participating in the legal market, and more employees. If cannabis were to be legalized on a federal level today, it would immediately create an excess of 654,000 jobs—a number that would increase to 1,000,000 by year 2025.

PAYROLL TAX: More employees means more employees on official payrolls, resulting in an immediate increase in $3.3 billion in payroll taxes. By 2025, payroll deductions were predicted to increase to $5.3 billion.

TOTAL: The difference between the US government’s current tax structure and the theoretical models created by New Frontier Data amount to a more than $75 billion increase in federal tax revenues. Under full legalization—including 15% retail tax, payroll tax deductions, and a standard 35% business tax—the cannabis industry has the potential to create cumulatively more than $130 billion in federal tax revenue by year 2025.

While public opinion is on cannabis’ side, the current federal administration is fraught with marijuana opponents. There is no doubt that public support of cannabis is at an all-time high. In 1969—two years before Nixon declared “drug abuse” to be public enemy number one; when now-Attorney General Jeff Sessions was 23 years old; and arguably the height of the hippie movement—only 12% of Americans supported the legalization of marijuana. In the late 70s, support rose, but began to retreat in the 80s due to now-considered disastrous “Just Say No“ campaigns. Support remained steady throughout the 90s, increased in the early 2000s, and has continued climbing since—reaching a majority for the first time in 2013 after Washington and Colorado legalized recreational use. And young people are not the only ones driving change: while 77% of adults age 18 to 34 support cannabis, support was up a whopping 16 points among adults aged 55 and older (45%) as of late 2017.

However, it is no secret the cannabis industry currently faces staunch federal opponents. While cannabis programs are up and running in many states, marijuana is still considered a Schedule I controlled substance under federal law, and thus the US government does not directly levy or collect taxes on the industry. And change seems unlikely—at least for the foreseeable future. Despite 70% of voters opposing the enforcement of federal laws in states that have made marijuana legal, Sessions has not only recently rescinded Obama-era rules deprioritizing enforcement of federal laws regarding marijuana-related crime in such states, but the Ninth Circuit also recently decided against cannabis industry attorneys in an appeal regarding the classification—and arguably criminalization—of cannabinoids under federal law.

      III.   Impacts of Marijuana Tax Revenue Across the US

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Tax revenues allow governments to provide services to their citizens, including research, community programs, environmental restoration, and law enforcement. The federal government has already called for deep cuts to essential and other programs in the states, putting financial pressure on individual states to legalize marijuana and realize tax revenues generated by industry activity. As governors and other state officials continue to watch neighbor states realize concrete benefits from marijuana-generating tax dollars, they’ll likely become more and more resistant to refusing that money.

This is particularly likely if the federal government continues to choke off federal support of programs important to the states—as Trump proposes to do through the budget cuts for 2019 he set forth earlier this year. That proposal seeks to cut, primarily, resources to the state department, environmental protection, agriculture, small businesses, transportation, housing and urban development, education, the treasury, and the justice department, as well as eliminate more than 60 agencies and programs altogether—services essential to a healthy, functioning society. Additionally, the budget seeks to completely ax a variety of arguably non-essential, but culturally critical programs including the National Endowment for the Arts, and the Corporation for Public Broadcasting.

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The US government would be well advised to implement a federal cannabis program, thereby creating more than one million jobs and generating an additional $75 billion in tax revenue, particularly if it continues to pursue its proposed budget cuts for 2019 and essentially force states to legalize, regulate, and tax marijuana simply to stay afloat and be able to provide citizens with basic, essential services previously supported by the federal government.

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Heidi Urness, Strategic Legal Counsel at Cultiva Law in Seattle, is a Chicago-born-and-raised litigator. With a background in corporate environmental compliance and clean-up litigation, Urness is thrilled to meld these passions to cultivate effective legal solutions across all stages of corporate development, operation, and litigation. She is a member of the WSBA Cannabis Law Section, manages the Cultiva Law Blog. She is personally and professionally passionate about advancing the interests of a legitimate and integrous cannabis industry, supporting and promoting decriminalization efforts, and coffee.