Colorado and Washington Try to Figure Out How to Tax Marijuana

Cannabis hangs inside the “cure room” of a medical cannabis cultivation facility in Denver Photograph by Matthew Staver/For The Washington Post via Getty Images

It’s been nearly six months since voters in Colorado and Washington legalized marijuana for recreational use. The possibility that millions of dollars in tax revenue generated from pot sales could be used to do things like build schools was a big selling point in marijuana advocates’ campaigns.

But figuring out the actual tax benefits from marijuana sales isn’t simple, and estimates have ranged widely. In Washington, one state study projected that total state and local tax revenue could reach $2 billion over five years. In Colorado, annual state tax revenue has been estimated at $5 million to $60 million. But this week a Colorado think tank found that when the costs to enforce the new laws are taken into account, legalizing marijuana won’t even pay for itself.

In both states, marijuana is being overseen by the agencies that regulate alcohol—the Department of Revenue in Colorado, and the Liquor Control Board in Washington. Today, the Colorado legislature is weighing a 30 percent tax on pot, which would include a 15 percent sales tax and a 15 percent excise tax on growers. The first $40 million generated from the excise tax would be used to fund school construction. Revenue from the sales tax would pay for enforcement, with anything left over to be split between state and local coffers. Because Colorado’s Taxpayer Bill of Rights requires that any new taxes get voter approval, the public will make the final call when it’s put on the ballot this November. In Washington the effective tax rate for consumers will be 44 percent, while producers and retailers will each pay a 25 percent tax. Both states will also collect business license and insurance fees.

Projecting the economic impact of putting marijuana on the market involves a lot of guesswork. Researchers have had to ballpark the number of future customers, the quantities they will buy, and whether their buying patterns will change over time after what they call the “wow factor” wears off. Given that it’s never been legal before, it’s hard to know how people will behave. Officials have had to estimate how many entrepreneurs will be willing to brave legal and regulatory hassles to open up a pot business. Federally regulated banks have shunned giving credit to Colorado medical dispensaries since 2011, and since it’s basically impossible to get a bank loan, aspiring business owners have to put up a lot of cash to cover the upfront costs to grow plants. These businesses are primarily cash operations, which has presented its own tax complications for business owners—and given rise to a new accounting specialty in Colorado.

Some medical pot businesses have managed to be very profitable, while others have flopped. And marijuana sellers must be prepared for the possibility, though remote, that the feds will come shut them down, since the Department of Justice still considers selling marijuana a violation of federal drug laws even if it’s legal under state law.

Police departments in Colorado and Washington must train officers to recognize stoned drivers and perform sobriety tests. State agencies will hire inspectors to enforce scores of rules governing dispensaries, which cover everything from whether video cameras are placed in correct locations in retail stores to whether growers are keeping proper track of their inventory. This enforcement won’t be cheap, which means, oddly enough, that states looking for tax revenue to cover the costs of the new laws are counting on people to smoke—or at least buy—a whole lot of pot.

    Before it's here, it's on the Bloomberg Terminal.