Tax revenue estimates from legal marijuana may not materialize

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HOW MUCH WILL IT COST?

An ounce of recreational marijuana is projected to cost, with all taxes added:

$133 in Colorado

$336 in Washington

Source: Colorado Center on Law and Policy, Washington State Liquor Control Board.

WASHINGTON — When Colorado and Washington voted to legalize marijuana for recreational use, supporters sold the idea partially based on new tax revenue estimates that ranged as high as $2 billion over five years.

But recent reports and analyses offer some advice: Don't spend that money yet.

"Nobody has any idea (about revenue)," said Jeffrey Miron, a Harvard economist and analyst at the libertarian Cato Institute. "There's only one good way to find out what the revenue would be, and that would be for all levels of government to legalize it and then we see what happens."

While many states have legalized marijuana for medical use, nationwide recreational legalization is not likely anytime soon. Meantime, economic studies in both Colorado and Washington — the first two states to legalize marijuana for purely recreational use — have ventured predictions that played into the successful efforts to legalize the drug.

In a widely cited study of the Colorado law, the Colorado Center on Law and Policy predicted that marijuana legalization would produce $60 million annually in new revenue and savings for the state each year until 2017.

The taxes on marijuana sales include a 15 percent excise tax (dedicated to school construction) and a 10 percent sales tax, for a total of 25 percent. According to the study, those levies would bring in $32 million for the state budget, $14 million for local governments and would result in a savings of more than $12 million in state and local law enforcement spending.

The first $40 million of the excise tax revenue is dedicated to school construction. Extrapolating from there, the study projected economic development based on anticipated tax revenue — counting on 372 new construction jobs to build schools.

Last week, Colorado lawmakers approved the taxes and set other regulations. Gov. John Hickenlooper, a Democrat, is expected to sign the bill. The taxes then go before the voters in a November referendum. If approved, the regulations would take effect in January.

The $60 million estimate is still being discussed, but a more recent study tempered expectations. The Colorado Futures Center at Colorado State University concluded that while revenue will be raised, it may not meet the state's expectations, particularly the 15 percent tax targeted for school construction.

The report concluded that for the tax to raise the $40 million anticipated for schools, given current consumption estimates, the cost to grow a pound of marijuana would be in the range of $1,100 a pound, almost twice earlier estimates. That level risks raising the price of retail marijuana so high that it could send users back to the black market.

"Our overall conclusion was while there is some revenue here, this is not a panacea for fiscal imbalance going forward," said Phyllis Resnick, lead analyst and author of the report. "Our conclusion at the end was there is at least a risk, even with a high revenue number, once you take all this into account, there is not going to be a significant amount left over relative to the size of the (state's budget) gap," which is anticipated to be $3 billion to $3.5 billion by 2025.

In Washington, a state government estimate predicted revenue could reach $1.9 billion over five years, "assuming a fully functioning marijuana market."

Brian Smith, spokesman for the Washington State Liquor Control board, which will regulate legal marijuana sales, said licenses to sell pot will be issued beginning in December. Taxes of 25 percent will be imposed at three levels -- producer, processor and retail.

Smith said it will take time for money to make its way to state treasury. "Until you start those initial sales between producers to processor, you won't begin the flow of revenue," he said.

While noting the lucrative tax estimates, Smith said the state is being cautious and hasn't "banked" any of the revenue for the next two-year budget cycle, which begins in July. "It's too unknown," he said. "We're operating as if we are going to implement this (tax) system, but the future is unknown."

Both states have made assumptions about consumption of marijuana in order to set their revenue estimates. For example, the Washington state study used the U.S. Department of Health and Human Services national drug survey from 2008-2009, which estimated that 17.2 percent of Washington residents aged 18 to 25 used marijuana, plus 5.6 percent of those over 26.

From those figures, the study estimated 363,000 Washington marijuana users in 2013, plus a 3 percent increase in 2015 to account for population growth and inflation. (Colorado and Washington will restrict recreational use to those over 21.)

"My intuition tells me there will be a cross border effect," said Scott Drenkard, an economist with the Tax Foundation who has studied the issue. "It will be cheap and available. That's something to consider. There is going to be a tourism boom of some sort. It won't be illicit."

But he added, "It's hard to know because it's an entirely new product on the legal market."