New NerdWallet Report Projects Significant Revenues from Marijuana Legalization

October 1, 2014

As nationwide political momentum for marijuana legalization grows stronger, a recent estimate shows potential revenue from a marijuana taxes could result in an approximately $3 billion increase in available state funds. Although the general underpinning of the estimate, published by NerdWallet, has been subject to criticism for relying on data not available to other economists, it may continue to fuel states’ willingness to pursue marijuana legalization as a means to raising state and local government revenue.

Estimating the size of states’ revenue gains as a result of marijuana legalization has proven difficult. Currently, Washington and Colorado are the only two states that tax marijuana. Tax revenues in Washington are within the projected range, while Colorado’s tax revenues have failed significantly to live up to initial estimations. Colorado’s projection error has largely been attributed to the slower than anticipated transition from medical marijuana use to recreational marijuana use (for further background and detail, see our previous research). Recently, however, retail marijuana sales in Colorado have exceeded sales of medical marijuana.

Meanwhile in Oregon and Alaska, where a ballot vote for legalization of marijuana will take place in November, the approach to assessing the impact of taxing marijuana differs. Oregon’s Legislative Revenue Office projected a $16 million potential boost of state funds in fiscal year 2017, rising to $20-$25 million in 2019. Alaska, on the other hand, has decided not to conduct a study until the Measure 2 initiative is approved. NerdWallet estimates claim potential revenue gains in Oregon and Alaska could be in the range of approximately $50-$100 million and $10-$20 million, respectively.

The discrepancy betwen the NerdWallet and the Oregon Legislative Revenue Office estimate is stark. Although NerdWallet’s estimate is illustrative, it is significantly higher than the Oregon Legislative Revenue Office’s estimate for both 2017 and 2019. The key reasons for this difference are that NerdWallet uses high-level national estimates, such as the total estimated size of the U.S. marijuana market, as well as a higher assumed tax rate, to infer revenue potential. The Oregon Legislative Revenue Office, conversely, uses more state-specific data, which likely makes it a more reliable indicator.

Moreover, in light of the official pre-vote revenue studies administered by Colorado, Washington, and Oregon, the absence of a revenue assessment in Alaska is concerning. Alaska Governor Sean Parnell (R), who is opposed to legalizing marijuana, has refused allocation of funds toward a state sponsored estimate of potential revenue gains until Measure 2 is approved (the Alaska Department of Commerce, Community, and Economic Development has nonetheless conducted a ”cost study,” estimating first-year implementation costs to be in the range of $3-$7 million).

As expected, the process of implementing marijuana taxes is complex. Recent developments in Oregon exemplify this as a number of cities in Oregon have pre-emptively decided to levy a city tax on marijuana, despite such a tax being prohibited in Oregon’s Measure 91. Cities are pushing for such taxes in the hopes of being ”grandfathered into” the new tax regime.

NerdWallet’s report accurately points out that states stand to enjoy a significant revenue windfall if marijuana sales are legalized and normalized, such that they can be easily taxed. However, the usefulness of their state-level assessments are limited, because they make broad assumptions about each state based on national approximations, while state revenue offices tend to use more granular data.

Furthermore, gauging the revenue capacity of a potentially prohibitive taxing structure is difficult. A tax levied to discourage consumption of a specific good tends to underperform over time and poses a challenge with respect compliance and administration costs. Against that backdrop, the potential revenue boost from taxing marijuana may be much more limited than some policymakers, and the researchers at NerdWallet, expect.

Read more on excise taxes here.

Read more on Alaska here.

Read more on Oregon here.

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