Numbers released by the Colorado Department of Revenue this week indicate that the marijuana industry added $3.5 million to state coffers in January. That includes about $1.3 million from the standard 2.9 percent sales tax, $1.4 million from a special 10 percent sales tax, and $200,000 from a 15 percent marijuana excise tax, plus about $600,000 in license and application fees. Of that total, about $2 million comes from the newly legal recreational segment; the rest comes from medical marijuana, which is subject to the standard sales tax (and the fees) but not the other levies. Recreational sales totaled $14 million in January, the first month in which it was legal to sell cannabis for general consumption.
That's not nearly enough, according to the anti-pot group Project SAM. "It appears that Colorado is falling well short of the state’s revenue projection from marijuana sales," say Patrick Kennedy, the group's chairman, and Kevin Sabet, its executive director, in a press release. A measly $2 million per month, they complain, is "far below estimates claimed by both the Governor and legalization advocates." Last month Gov. John Hickenlooper proposed a spending plan based on recreational marijuana revenue of $118 million next fiscal year, more than twice as high as projected before voters approved legalization in 2012. If revenue continues trickling in at a rate of just $2 million or so a month, it will fall far short of both projections. But how likely is that?
Before we consider that question, let us pause to savor the irony of pot prohibitionists complaining that people are not buying enough pot. If the first month's tax revenue were a lot higher, of course, Project SAM would still have complained, citing the number as evidence that legalization is transforming Colorado into a state of stoned zombies. Either way, the prohibitionists can't lose: No matter what happens in Colorado, it will show legalization is a disaster.
But is Project SAM right to suggest that annual tax revenue from the recreational marijuana business will be more like $24 million than $118 million next fiscal year? Probably not. Here are a few reasons to think Hickenlooper's projection is more accurate than Project SAM's:
1. A relative handful of recreational pot stores opened for business in January.
3. After the first harvests of marijuana from plants grown especially for the recreational market, legal cannabis will be more plentiful.
4. Current cannabis consumers who were repelled by lines, shortages, and high prices will start switching from black-market dealers to legal outlets as the supply expands and prices fall.
5. After the initial adjustment period, new consumers will start venturing into the state-licensed pot shops.
Let's try a (very) rough calculation. A RAND Corporation estimate put total marijuana consumption in Washington at something like 175 metric tons in 2013. Colorado's population is three-quarters the size of Washington's, so let's say Colorado's 2013 consumption was in the neighborhood of 130 metric tons. Assuming that the price of recreational marijuana drops toward the price currently charged for medical marijuana as supply exands, it might go for $10 per gram. To hit a target of $10 million in revenue per month, as projected by Hickenlooper, you'd need about $70 million in sales, or $840 million for the whole year. At $10 a gram, that's 84 million grams, or 84 metric tons, which is 65 percent of 130 metric tons, the total pre-legalization market. Since the market is apt to expand as a result of legalization, if state-licensed stores manage to attract half of it next fiscal year, Hickenlooper's projection looks pretty plausible. More plausible, anyway, than $24 million in annual revenue, which means $168 million in sales—in this scenario, about 17 metric tons, or 13 percent of the pre-legalization market.
I've never been a big fan of tax revenue as an argument for marijuana legalization. But it seems to me that prohibitionists cannot have it both ways. If legalization leads to a huge increase in consumption, as they predict, it will generate substantial tax revenue. Whether that counts as a benefit or a cost of legalization is another question.