Dr. Miles Light — Revenue Realities

My friend Miles Light supplied this guest posting, aimed primarily at a Canadian readership;   Miles is a Ph.D. economist at the University of Colorado, and is a founding partner at the Marijuana Policy Group, a Denver-based economics consultancy.  I’m delighted to post this.  It cheers me up to see smart, hard-working, public-spirited, and young (compared to me) people like Miles studying the issues.

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Revenue Realities
Miles Light

In the unknown ether of potential marijuana sales and taxes, wild estimates abound. These days, more accurate and realistic estimates are possible. Canadians can ignore them at their peril.

When it comes to legalizing marijuana, the term “anything goes” seems appropriate. In a pattern that follows what happened in other jurisdictions, the economic and political pundits seem to be mystified regarding what would happen when marijuana is legalized in Canada. By far, the most common unknowable unknown is the estimate of tax revenues from pot. Speculation abounds now in Canada, where estimates taken “from the hip” seem to receive equal press and equal legitimacy as quarterly GDP estimates from Statistics Canada. One recent example is a January 28 report by CIBC World Markets, where the author estimates marijuana tax revenues could be “near $5.0 billion”. Unless there is a pot-infused revolution in the Northern Commonwealth, that’s not happening.

One could be forgiven for believing whatever flies across their news screen these days. After all, marijuana sale and possession has been illegal in Canada since 1908. In fact, most Canadians aren’t users anyway. So, just like in the olden-days before prohibition, when rules and regulations didn’t exist, it was the snake-oil salesmen or touts who got the attention.

But there is no reason that marijuana markets wouldn’t work like any other market, where buyers will shop to find the best price. The fact that consumers shop for the best price is obvious when buying fuel for a car, or when buying cold-cereal. But somehow, when the product is marijuana – economics 101 is forgotten. I’ve heard otherwise intelligent non-marijuana users claim that a) everyone will begin buying it; or that b) users will pay any price for it, once it’s legal. In reality, the heaviest marijuana users are also the most price-sensitive. This is not surprising, since they spend a large share of their income on the stuff.

So then, what can be reasonably expected from a legal marijuana market? It depends crucially upon the government’s legalization choices. Fortunately, Canadians have the benefit of (sometimes hard) lessons learned from four US states, where each one took a different path to legalization. Three of these are mentioned here.

Colorado, at the forefront of legalization, has had the most success in terms of tax (plus fee) revenues per capita, collecting US$24.95 per resident in 2015. Colorado has also convinced the most users to purchase from legal stores: more than 70% of estimated demand was sold through legal storefronts in 2015. While a number of factors led to this success, one of them was a mix of moderate tax rates for recreational products: a 15% excise rate and a 10% addition to the state’s base rate (which is 2.9%). Medical marijuana only pays the base tax rate of 2.9%, which may explain why medical marijuana remains the largest segment of Colorado’s legal sales.

In contrast to Colorado, Washington State regulators were initially convinced to apply high tax rates: 25% at 3 different points. As a result, store prices hovered near US$25 per gram, while the pre-existing street rate was $8. This, among other blunders, led to a failed market in 2014, where less than 18% of estimated demand ended up being sold through legal stores, and most weed transactions continued on the black market. Washington State pot revenues were just $6.20 per resident in 2014.

Since then, the state has repented, and made some excellent reforms. They shifted to a flat, 37% tax on sales, leading to a surge in legal purchases and subsequent tax revenues. In 2015 sales and excise revenues were $18.2 per resident – triple the old rate. Also, they eliminated the notion of “medical” marijuana, and unified the entire market, which has significantly reduced compliance and regulatory costs. Moving beyond 2016, Washington State may surpass Colorado as a “best-practice” example of legalization.

Finally, there’s Oregon. A state where zero taxes were collected the first six months of legal sales. In the summer of 2015, marijuana lobbyists convinced Oregon’s legislators to allow recreational sales through pre-existing medical stores, despite a lack of safety testing, product tracking, or sales tax mechanisms. Beginning January 2016, a 25% sales tax has been imposed, but according to the State’s Legislative Review Office, approximately $5 million, or just $1.27 per resident, is expected in revenues for all of 2016.

So? How about that C$5 Billion estimate for Canada? Such collections would equal C$142.85 per resident, a magical revenue target indeed. To achieve this figure, either Canadians will smoke 4 times as much marijuana per capita as Colorado, or Canada must apply taxes that are four times higher than elsewhere, while still competing with untaxed black market sellers. Sure, it’s possible that “anything can happen” in the psychedelic world of pre-legalization, but when past experience and basic economics are both available for policymakers and reporters – why don’t they use them?

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References:

Oregon Legislative Review: https://www.oregonlegislature.gov/lro/Documents/RMP%202015%20FINAL.pdf

Canada prohibition of Cannabis: https://en.wikipedia.org/wiki/Legal_history_of_cannabis_in_Canada#History_of_drug_prohibition_in_Canada

Washington State Revenues: http://www.502data.com/

Colorado State Revenues:  http://www.huffingtonpost.com/entry/colorado-marijuana-tax-revenue-2015_us_560053c4e4b00310edf806d3

 

 

 

 

 

 

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Author: patoglesby

From 1982 to 1990, I worked in tax policy for Committees of the United States Congress. In recent years, I was Adjunct Lecturer at UNC-Chapel Hill's Business School and then Adjunct Professor at its Law School.

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