States must be careful with marijuana revenue — or see money go up in smoke, report finds

“Sin tax” revenue is notoriously unpredictable, and cannabis — now legal in California, Washington and eight other states — is no exception to the rule, according to a newly released report from Pew Charitable Trust.

The report, titled “Forecasts hazy for state marijuana revenue,” was published Monday.

It warns that states should be cautious with how they spend cannabis revenue until the market has enough time to stabilize.

“The biggest hurdle for states has been a lack of reliable data,” said Pew’s Alex Zhang, in a press conference explaining the report’s findings. “Neither price nor demand has stabilized yet ... only time will tell when markets have matured to full capacity.”

Zhang was part of the team that compiled data and interviewed officials in each state that has legalized recreational marijuana.

“In the interviews, officials reported lacking much of the information they typically depend on when making revenue forecasts,” the report says. “But they said they are applying available resources, learning from each other, and pioneering new approaches.

Stage budget forecasters have decades of data to pull from when they project revenue from alcohol and cigarette taxes. By contrast, states have at most five years of data on recreational marijuana sales.

“For standard forecasting models, it’s helpful to have more detail about demographics, consumption, and product types. We’re not there, and other states I’ve talked to aren’t there yet either,” Oregon state economist Josh Lehner said in the report.

While the report found that early adopting states saw a spike in revenue — Washington alone collected $420 million in its 2018 budget year, more than either alcohol or cigarettes brought in — the Pew report showed forecasters expect that growth to slow.

“Growth is high at the start and then declines steeply,” the report found when it looked at the first two adopting states, Colorado and Washington.

Revenue from cannabis taxes and fees climbed 277 percent in Washington from 2015 to 2016, according to the report. From 2017 to 2018, revenue climbed just 17 percent.

Colorado recorded a somewhat less dramatic, but still notable, drop in revenue growth — 53 percent growth from 2015 to 2016 down to 18 percent growth from 2017 to 2018.

Pew also found that revenue could be affected by having a neighboring state where recreational marijuana also is legal, such as Oregon and Washington.

“Oregon and Washington likely have competing markets, especially because Washington’s retail operations were up and running first,” the report found.

Because revenue growth is so hard to predict, the team at Pew cautioned states on spending that cannabis tax money.

“States should exercise caution in budget planning to ensure that the money strengthens, rather than weakens, their long-term fiscal position,” the Pew report said.

California was noted as a good example of how revenue should be spent — the state puts the money in a separate fund, which isn’t spent until the following year in order to prevent budget shortfalls.

That method showed its merit when California experienced a shortfall in the first six months of collecting taxes. The state fell short of projected cannabis revenue by 45 percent in the first half of 2018, according to the Pew report.

To illustrate just how unpredictable cannabis revenue can be, Pew showed that neighboring Nevada collected 40 percent more revenue than originally forecast.

“Forecasting revenue from a product that was illegal just a few years ago, and remains so under federal law and in most states, presents a unique challenge for state budget planning,” the report found.

The Pew report found that cannabis revenue can be used to fill immediate budget needs and one-time projects, the money can be less reliable for ongoing spending demands.

“Policymakers should look to other, more familiar sin taxes for lessons on how to manage marijuana tax revenue most effectively,” the report concluded.

California cannabis facts

California legalized recreational marijuana in 2016, alongside Massachusetts and Nevada. Recreational sales began in January 2018.

In California, there are three kinds of taxes on recreational cannabis.

Flowers are taxed $9.25 per ounce, $2.75 per ounce for leaves and $1.29 per ounce for a fresh cannabis plant. The state also levies a 15 percent retail excise tax, as well as a 7.25 percent general sales tax, on all cannabis product sales.

Here’s how California spends its cannabis revenue:

  • $10 million to $50 million to the Community Reinvestment Grant Program

  • $10 million to public universities to evaluate effects of the ballot measure and $2 million to study medical cannabis

  • $3 million to the California Highway Patrol

The remaining revenue is allocated 60 percent to the state’s Youth Education, Prevention, Early Intervention and Treatment Account, 20 percent to the Environmental Restoration and Protection Account and 20 percent to the State and Local Government Law Enforcement Account.

Washington cannabis facts

Washington legalized recreational marijuana in 2012, making it the first state in the nation, alongside Colorado, to do so. Recreational sales began July 2014.

In Washington, cannabis flowers are not taxed. Instead, the state levies a 37 percent retail excise tax and a 6.5 percent sales tax on all cannabis product sales.

A majority of Washington’s cannabis revenue goes to fund health-related programs, including at the Department of Health, the Basic Health Plan Trust Account and the State Health Care Authority. The remainder is split between the state general fund and local governments.

Related stories from Tacoma News Tribune

Andrew Sheeler covers California’s unique political climate for the Sacramento Bee. He has covered crime and politics from Interior Alaska to North Dakota’s oil patch to the rugged coast of southern Oregon. He attended the University of Alaska Fairbanks.