The way states choose to tax cannabis plays a crucial role in how their cannabis markets will take shape, and will almost definitely have long-term effects on things like public health and criminal justice.
But the choices are complex. One way states can make better decisions about taxation (as well as other aspects of legalization) is to study what happened in other states.
That could soon get easier to do. Representatives Tulsi Gabbard, a Democrat from Hawaii, and Carlos Curbelo, a Republican from Florida, recently introduced the Marijuana Data Collection Act, which, if passed, will require the Department of Health and Human Services and the National Academy of Sciences to conduct a study every two years of the effects of state-level cannabis legalization across the country. One of the key areas that those studies will examine is tax revenue: Specifically, how much money each state raises, how they raise it, and what they do with it.
Already we know that just as tax laws governing alcohol and tobacco sales differ wildly between states, similar patterns are occurring with cannabis as more states legalize and begin to regulate recreational sales. Washington, for example, levies higher taxes and more taxes than Oregon, which, unlike its northern neighbor, has struggled with overproduction that has allowed its black market to survive after legalization. Other states, like Nevada, tax cannabis at the wholesale level, in addition to a retail tax. And in Vermont and Washington DC, recreational sales aren’t allowed, so there’s nothing to sell or tax.
The ways that these states approach taxation will have, and have already had, wide-ranging effects on the development of cannabis markets in each of those states. But it’s difficult to understand those patterns–and thus to create effective public policy–without centralized information, and the public data available from the nine states that have legalized each provide vastly different levels of detail.
So how much tax revenue is coming in, and more importantly, where does all of that money go? The answer to those questions vary from state to state, and already some common priorities stand out. For example:
- Every state except Alaska gives a portion of its tax revenue back to local governments in some way or another, in addition to taxes that some larger municipalities separately collect for their own use. There’s some evidence, as Cannabis Wire recently reported, that the promise of additional local money can sway voters when it comes to allowing regulated cannabis sales.
- Healthcare programs, especially those for drug treatment and prevention initiatives, have received large amounts of cash, and several states have also earmarked small amounts of money for research programs at their public universities.
- On the criminal justice front, California sets aside money every year for a community grants program to provide services to communities harmed by prior drug laws, and Massachusetts has a legal framework in place for a similar fund once legal recreational sales begin there.
Large sums of money also end up in most states’ general funds, a trend that, at least in Washington, has been the source of some controversy. A 2016 Seattle Times editorial blasted the state government for budgeting money into the general fund that I-502, the 2012 initiative that legalized recreational cannabis, promised for substance abuse prevention and reduction programs. Back then, the Washington State Economic Revenue and Forecast Council projected that in 2018, prevention, treatment, education, and research programs would receive $39.7 million, less than half of what I-502 promised, while the general fund would receive $104.7 million, nearly double what I-502 designated. Those numbers will likely be slightly off. The Liquor and Cannabis Board estimated in early 2018 that the general fund will receive about $120.5 million in cannabis tax revenue in 2018, while the various programs will get about $37.5 million. Money that Washington voters specifically earmarked for public health programs has been used to balance the state budget.
Health researchers are not happy about that. “We do have this unique opportunity to dedicate more funds for research, for answering questions that go from therapeutic purposes to the possibility to develop new medications that remain unanswered because we cannot do this research with the little money that is offered,” said Beatriz Carlini, a senior researcher at the University of Washington’s Alcohol and Drug Abuse Institute. The institute is set to receive $227,000 this year from cannabis tax revenue for research into the long- and short-term public health effects of legalization. “It looks like a lot—$200,000 for my personal budget is a lot of money—but for doing research that takes sometimes, two, three, four, five years to develop,” said Carlini, “it’s really not much money.”
In Alaska, the state constitution forbids the government from dedicating any tax revenue for a specific purpose—despite the fact that 75% of cannabis tax revenue there goes into special funds designated for specific purposes. Those special funds are part of the state’s general fund, and their designations aren’t binding. That means any future legislature could use tax revenue “designated” for recidivism reduction, cannabis education, or drug treatment programs on programs completely unrelated to cannabis, or to simply balance the budget.
While the lack of a cap on growers, a lax regulatory regime, and nonexistent taxes on cultivation have created a massive overproduction problems in Oregon that has allowed that state’s black market to endure, many Massachusetts politicians have opposed higher taxes out of fears that they would drive down demand for legal sales once they begin.
California’s community grants speak to a real desire to promote public health through responsible consumption and to make up for years of institutional racism. Meanwhile, Nevada’s public health spending almost seems like a afterthought.
Voters across the country have also had to balance promises of more money through local taxes against a desire to maintain a certain cannabis-free character in their communities, not unlike how many localities have chose to remain dry for decades after alcohol prohibition was repealed. Legal cannabis–and the money that comes with it–is forcing voters to make choices that, although not 100% clear right now, will have profound implications for the futures of their communities.
To better understand where cannabis tax dollars end up in your state, here is a breakdown of how each state that has legalized collects and handles its revenue:
Officially, Alaska’s constitution forbids the dedication of funds for “any specific purpose,” and according to Deputy Director Brandon Spanos of the Alaska Department of Revenue, when recreational cannabis was first legalized with the passage of Ballot Measure 2 in 2014, all of the tax revenue went to the General Fund. That changed in 2016, when SB 91, a major criminal reform bill, amended the existing law on cannabis taxation to designate 50% of all cannabis revenues for a Recidivism Reduction Fund that officially exists within the General Fund.
According to Spanos, money in special funds may be appropriated by the legislature for its intended use—which, for the Recidivism Reduction Fund, would be through the Department of Corrections, the Department of Health and Social Services, or the Department of Public Safety. But a future legislature could opt to spend it on something else entirely, since the money isn’t dedicated in a manner that’s in any way binding.
In October 2018, SB 104, an education bill signed by Gov. Bill Walker in July, will take effect, establishing a Marijuana Education and Treatment Fund. Like with SB 91, SB 104 amends the existing taxation law to designate 25% of revenues for treatment and education programs under the Department of Health and Social Services.
Alaska collects its cannabis taxes from cultivators when they sell to retailers or production facilities. The excise tax rate is $50 per ounce of flower or bud, and $15 per ounce of any other part of the plant.
In FY 2018, Alaska generated over $11 million in tax revenue from 116 unique cultivators, including a record $1.26 million in June 2018. That represents a sharp increase from FY 2017, when the state netted $1.7 million from forty-four cultivators. Collection of cultivation-based taxes began in Alaska in October 2016, which means that FY 2017 lasted just nine months, from that October through June 2017.
When Californians voted to legalize recreational cannabis in 2016, Prop 64 set specific allocations for where excise and cultivation taxes would end up. Sales taxes, meanwhile, go into the general fund, and amounted to about 45% of total revenue for the first quarter of 2018, California’s first with legal sales. Most interestingly, Prop 64 set aside $10 million annually, for a decade, for public university grants to research the implementation itself, and gave the state’s controller the ability to make proposals to the governor or the legislature to amend the law based on any research findings.
The law also earmarks $3 million for the California Highway Patrol to develop a methodology for determining whether a driver under the influence of cannabis; $2 million to University of California, San Diego for medical cannabis research; and $10 million for a community reinvestment grant program to provide mental health and substance abuse treatment, job placement, medical care, and legal services to communities disproportionately affected by prior drug laws. The state’s investment in that community grants program will increase by $10 million each year until it hits $50 million. As far as Cannabis Wire could find, California’s community grants program is unique in its scope and its mission, although Massachusetts has plans to fund restorative justice programs once sales begin there.
Beyond that, according to the California Department of Tax and Fee Administration, 60% of the remaining excise and cultivation tax revenue goes to youth drug prevention and education programs, 20% to the state’s environmental protection and restoration account, and the last 20% to state and local law enforcement.
All in all, during the first quarter of 2018, the state raised $60.9 million in tax revenue. Of that, $32 million came from the excise tax, $27.3 million came from the sales tax, and the cultivation tax yielded $1.6 million.
Colorado’s cannabis revenues go to five places: the Marijuana Tax Cash Fund (MTCF), a fund dedicated entirely to healthcare, cannabis education, drug abuse treatment/prevention, and law enforcement; the state’s general fund; the state’s public school fund; the Building Excellent Schools Today (BEST) fund; and to local governments. The state levies a 15% retail sales tax (which was raised from 10% in July 2017), of which 10% goes to local governments, and the remaining 90% goes to MTCF, the public school fund, and the general fund. There’s also a 2.9% “Sales Tax Transfer” which tops off the MTCF and medical cannabis has been exempt from since July 2017, as well as a 15% excise tax, of which the first $40 million goes to the BEST fund for capital construction for schools. Any excise revenue after that goes into the permanent public school fund. (A good breakdown can be found on this memorandum from the Colorado Legislative Council.)
According to tax revenue and revenue distribution reports, every county received an amount of money from the state roughly equal to what it generated in sales tax revenue.
For example, Denver received $498,347 in May 2018, or 33.92% of the statewide local allocation generated by the 15% sales tax. In that same month, Denver generated $4,978,591 of revenue through that tax, or 33.94% of the $14,669,134 generated statewide.
In some jurisdictions, that local revenue has been used to fund scholarship programs. In 2015, Pueblo County voters approved a measure that would send at least half of that county’s excise tax revenue into a college scholarship fund. An estimated $700,000 of cannabis tax revenue is expected to help fund as many as 600 scholarships in 2018.
In calendar year 2017, Colorado raised about $247 million in cannabis-related tax revenue from over $1.5 billion in medical and recreational sales, up from nearly $194 million the year before.
Nearly two years after Maine voters narrowly chose to legalize recreational cannabis, sales still haven’t started. The 2016 ballot initiative called for a 10% sales tax, but in 2017, lawmakers proposed a bill with two distinct retail and wholesale taxes, each one weighing in at 10%. From that, 5% would have gone to any locality with a retail or grow facility, and 1% to any municipality with any other kind of adult-use facility. Beyond that, almost all of the rest of Maine’s tax revenue would have gone to the state’s general fund, but with 6% set aside for law enforcement and another 6% for public awareness and youth prevention campaigns.
Governor Paul LePage, a staunch Trump ally who has stubbornly opposed any relaxation of cannabis laws, vetoed those proposals in October 2017. State legislators came close to overriding him, but were unsuccessful at the time. However, legislators were able to override LePage’s veto of a similar bill in May 2018, and another in July 2018 which significantly loosened Maine’s medical cannabis regulations.
Even though Massachusetts voters legalized recreational cannabis in 2016, the state’s first dispensaries still haven’t opened. The state’s legislature voted last year to delay the start of legal sales six months. However, the wheels are finally in motion and sales are expected to begin by late summer.
Meanwhile, tax regulations have been established in the Bay State, and the state’s Department of Revenue estimates that somewhere between $44 and $82 million in tax revenue will be generated during fiscal year 2019. Revenue from the 6.25% statewide sales tax will go to state’s general fund, while money from the 10.75% excise tax and other non-tax revenue (such as licensing fees for retailers) will go to a Marijuana Regulation Fund, which the legislature set up last summer.
Money in the Marijuana Regulation Fund will go toward a number of efforts, including public health and safety campaigns, police training, and a series of restorative justice programs for economically-disadvantaged communities that have been disproportionately affected by cannabis-related arrests and incarcerations.
Municipalities will also have the option to implement a 3% local tax on top of the state taxes. All three of those taxes, combined, add up to the 20% statewide sales tax that Governor Charlie Baker, an opponent of legalization, signed into law in July 2017. That rate was a compromise between the 12% maximum rate from the 2016 referendum and the 28% rate the Massachusetts House of Representatives wanted. Opponents of the increased rate, like state Sen. Patricia Jehlen of the legislature’s Joint Committee on Marijuana Policy, argued that high prices would allow Massachusetts’ black market to survive, while Baker defended the 20% compromise in 2017 as necessary for running the state’s cannabis program, while leaving the door open for future adjustments.
As Nevada’s first full year of legal recreational sales winds to a close, the state’s Department of Taxation announced in June that it generated 110% of the year’s estimated revenue in just ten months, or about $55.53 million. Roughly $34 million of that total was generated by a 10% retail tax, while a little over $21 million was generated by a 15% wholesale tax.
While the retail tax revenue simply goes straight into the state’s rainy day fund for contingency use, the wholesale tax ends up in a few different places. A flat $5 million automatically goes to local governments, with $1.5 million distributed equally between county governments, and $3.5 million going to municipalities with cannabis-related licenses, based on their populations. According to a Department of Taxation document from April 2018, every county from Esmeralda County (population 783) to Washoe County (where Reno is) received $88,235.29 in fiscal year 2018 (Clark County, where Las Vegas is, received exactly seven cents more than that.) In addition, several large cities received substantial amounts of money on top of that. Las Vegas’s city government received over $825,000, which, according to the city’s senior public information officer, went into the local general fund, while North Las Vegas and Reno each got roughly $315,000.
Much of the remainder of the wholesale tax revenue (which is over three times as much money as the $5 million local allotment) goes to the state’s Distributive School Account, which provides aid—a set amount per student, plus a few more dollars for such things as special education, transportation, etc—for Nevada’s public and charter K-12 schools. The Division of Public and Behavioral Health also receives $350,000 each year to distribute grants to local governments for substance abuse treatment and prevention programs, which comes from the wholesale tax and various penalties and fees.
In addition, the Nevada Department of Taxation has also spent $40,000 on public service announcements, and partnered with the Public and Behavioral Health department to put out information about cannabis for pregnant and breastfeeding women.
“Public outreach and education isn’t really specified as one of our mandates from the ballot initiative, which primarily directs us to license, regulate, and do enforcement of establishments,” said Stephanie Klapstein, a public information officer with the Department of Taxation, to Cannabis Wire. “However, we felt we needed to do something last summer, as legal sales were set to start and there wasn’t a lot of public information out there yet about safe and legal use.”
Oregon’s only cannabis tax is its 17% retail tax and, according to a spokesperson at the Oregon Liquor Control Commission, every municipality with a retailer has chosen to implement an optional 3% local tax on all sales, as allowed under state law. According to Oregon’s Department of Revenue, 80% of cannabis tax revenue goes to statewide programs: 40% to the state’s school fund, 20% to the Mental Health, Alcoholism, and Drug Services Account for mental health and drug and alcohol abuse treatment and prevention programs, 15% to the Oregon State Police, and 5% to the Oregon Health Authority for additional drug treatment and prevention programs. The remaining 20% goes to local governments.
The state distributed nearly $85 million in the third quarter of fiscal year 2017 (which actually encompassed twenty months between January 4, 2016 and August 31, 2017), and about $20 million in every quarter after that. In addition, somewhere between $2.5 and 3.5 million was distributed in local taxes in each of those quarters.
Unlike their neighbor to the south, Washington has both an excise tax and a sales tax, and that excise tax weighs in at a hefty 37%. As a result, some Washingtonians have travelled across state lines to buy cannabis products cheaper than they would at home, much as some New York state residents travel to Pennsylvania for roughly half-priced cigarettes.
Distribution of that excise tax falls into two tiers, with the first tier devoted to the highest priority spending. For tier 1 during fiscal year 2018, the state’s Liquor and Cannabis Board will likely receive $10.4 million for operating costs, the Department of Health and Social Services will receive $700,000, and the University of Washington’s Alcohol and Drug Abuse Institute will get $20,000 for its website.
The much larger tier 2 will see an estimated $350 million distributed for a number of programs in 2018, up from about $291 million the year before. According to the text of I-502, The Washington Healthcare Authority is set to receive to 55% of that money, with the bulk of it going to the basic health trust fund account, which subsidizes healthcare costs across the state. Meanwhile, 15% is designated for the Department of Social and Health Services for abuse prevention and treatment, 10% for the Department of Health for “marijuana education,” the University of Washington and Washington State University get a combined 1% for research, and 0.3% goes to the superintendent of public instruction to prevent school dropouts. The rest goes to the general fund.
The numbers provided above for the second tier are described in I-502 in language that suggests that they’re rigid percentages. However, a document provided to Cannabis Wire by Washington’s Liquor and Cannabis Board lists each of those percentages as an “amount up to” the I-502 numbers. For example, the Department of Health and Social Services is slated to receive 7.9% of this year’s total instead of 15%, while the general fund will receive 34.4% of the total, instead of the 18.7% that’s left over once you add all of the other percentages up. That means money that voters specifically set aside for healthcare and cannabis-related programs are ending up in the general fund, where it will either be spent on unrelated programs or used to balance the budget.