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Marijuana Could Be the New Sin-Tax Gusher

Paula Dwyer writes editorials on economics, finance and politics for Bloomberg View. She was London bureau chief for Businessweek and Washington economics editor for the New York Times, and is a co-author of “Take on the Street: How to Fight for Your Financial Future.”
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Is marijuana the new sin-tax gusher for the states? It sure looks that way.

In November, voters in five states will decide on whether to allow recreational use of the drug, while citizens in four other states have the option of legalizing medical marijuana.  

Unlike the fierce battles of the past over decriminalization, resistance by governors, law-enforcement groups and state medical associations is down (though not entirely gone). The ability to collect mountains of new taxes could be a reason, judging from the experience of Colorado, where voters approved medical marijuana in 2000 and legalized its recreational use in 2012.

For the fiscal year ending June 30, Colorado collected $157 million in marijuana taxes, licenses and fees, up 53 percent from a year earlier and almost four times what it has collected in alcohol excise taxes this year. Thanks to marijuana smokers, Colorado's public schools will receive $42 million, and local governments will get $10 million of the amount collected.  

QuickTake Marijuana Legalization

There's no denying that marijuana opens a tax spigot and also lets cities and states reduce spending on drug enforcement. California, Arizona, Maine, Massachusetts and Nevada will decide in November if they want to legalize marijuana outright, while Arkansas, Florida, Montana and North Dakota will determine whether to allow medical use only. 

Colorado's 27.9 percent marijuana taxes are steep. Yet they don't appear to have weakened demand. The state charges a 15 percent excise tax (paid by retail outlets, which embed the tax in the retail price, similar to liquor sales); a 10 percent special marijuana retail sales tax; and the regular 2.9 percent state sales tax. And that's not counting local levies, such as Denver's 7.15 percent.

So if you buy weed in Denver, you'll pay combined taxes of 35 percent. Despite that, Colorado's marijuana retail sales keep booming: Sales almost hit $1 billion in calendar 2015, up from $700 million in 2014.

California is the big kahuna in seeking to legalize recreational use: In 1996, it became the first state to allow medical marijuana, which is now a $2.7 billion market. If voters say yes, recreational pot would be legal up and down the West Coast, since Alaska, Washington and Oregon already allow it. Twenty-five states now permit one form of marijuana use or another, and polls show that national support for some kind of legalization is strong.

California voters may have regretted saying no in 2010 to legalizing the drug for recreational use. This time, if the initiative passes -- and polls indicate it will overwhelmingly -- California would impose a 15 percent tax on retail sales. 

That's lower than in Colorado, possibly because studies show that stiff tax rates encourage a black market, which states are trying hard to stamp out. Recognizing this, Colorado's 10 percent special marijuana tax will drop to 8 percent in 2017.

Marijuana is already on track to become a $6.6 billion market in California by 2020, according to a report by ArcView and New Frontier, marijuana market-research and data companies. The state accounts for nearly half of all pot sales, both legal (medical) and illegal, in the U.S. It's also the world's largest grower of cannabis, creating a new source of revenue when taxes of $9.25 per ounce of flowers are imposed on growers (and presumably passed on to consumers).

If every state legalized pot, charged taxes similar to Colorado's and captured most of the black market, they'd collect a total of $18 billion a year, the Tax Foundation projects.

How does that compare to tobacco? The Tax Policy Center calculates that state and local tobacco taxes brought in $18 billion in 2013, but with fewer people smoking, cigarette tax revenue is declining. So it isn't far-fetched to imagine that pot could one day soon overtake tobacco as the better cash cow.

  1. It could be a side benefit to legalization that Colorado's ski resorts and summer tourist attractions saw record-breaking seasons in 2014 and 2015. But the first-mover advantage could wear off if California and other states follow suit.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the author of this story:
Paula Dwyer at pdwyer11@bloomberg.net

To contact the editor responsible for this story:
Katy Roberts at kroberts29@bloomberg.net