The Cost of a Pot Crackdown: $28 Billion

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In May of last year the non-partisan Tax Foundation released a report on the federal revenue impact of marijuana legalization and taxes. The report concluded that a “mature” marijuana industry could generate up to $28 billion annually in tax revenues for federal, state and local governments. That’s real money.

Thursday’s comments by White House press secretary Sean Spicer have raised doubts about the future, particularly, of legal recreational marijuana sales

If marijuana were legal in all 50 states, tax collections at the state level could total between $5 billion and $18 billion annually. At the federal level the calculation is more complicated, but a federal excise tax of $23 a pound (the existing excise tax on tobacco) and a 10% sales surtax could raise about $5.8 billion a year.

A total of $7 billion in federal and state business income tax and another $2.5 billion in individual federal and state income taxes adds another $9.5 billion to the total. State tax revenues, based on the current examples of Colorado and Washington, could rise by a yearly total for the 50 states of $13 billion, along with a $5 billion increase in normal sales tax collections.

Last year legal marijuana sales reached $1.3 billion in Colorado, which resulted in about $199 million in tax and fee revenues for the state. Recreational sales accounted for about $875 million Colorado’s annual sales, and medical marijuana accounted for nearly $438 million in total sales. The state’s marijuana tax revenue includes a 2.9% retail and medical marijuana sales tax, a 10% retail marijuana special sales tax, a 15% marijuana excise tax and various retail/medical marijuana application and license fees.

If the Trump administration does in fact crack down on legal recreational pot sales, Colorado stands to lose about two-thirds of its tax collections. Making an example of even a handful of legal retailers would chill, if not kill, sales.

Revenue losses in other states where recreational use is legal will vary depending on tax levels and fees. Massachusetts expects to raise about $100 million annually from a 3.75% sales tax on sales of both medical and recreational marijuana. Nevada imposes a 15% sales tax on weed, while Maine’s tax is 10%. Californians will pay a 15% tax on sales of pot, and the state expects to raise $1 billion in new revenues annually now that voters have approved legal recreational pot use in the state.

Who benefits from a federal crackdown? Illegal pot dealers for one. According to a recent study by the Arcview Group, of an estimated $53 billion in total marijuana sales last year, just over $7 billion came from legal sales. Arcview reckons that legal sales in Colorado have cut the illicit market in the state in half, from $1 billion to $500 million, just 28% of total legal and illegal sales valued at $1.8 billion last year.

Pot users got by before legal sales were enacted, and they will certainly be able to get by again. The losers are state and local governments that have been developing a new revenue stream as well as thousands of jobs in the legal cannabis industry.