Recreational cannabis has been legalized in states starting in 2012. Recreational and medicinal cannabis legalized in Washington state as a result of a voter approved ballot initiative 502. California voters legalized cannabis in November 2016. As a result of recreational legalization, local governments (city and county) may not prohibit adults from growing, using, or transporting marijuana for personal use.

Other states followed suit, including Colorado, Oregon, Michigan, Illinois among others. On November 3, 2020, voters in four states, Arizona, Montana, New Jersey, and South Dakota, approved statewide ballot measures to legalize marijuana.

This trend demonstrates voter’s acceptance of adult-use marijuana. Two-thirds of Americans say the use of marijuana should be legal, reflecting a steady increase over the past decade, according to a new Pew Research Center survey. The share of U.S. adults who oppose legalization has fallen from 52% in 2010 to 32% today.

Cannabis entrepreneurs have benefitted from this change. But to what extent is the cannabis business successful. The valuer of retail outlets, manufacturers and associated service business have steadily increased, but is the business outlook as rosy as it might seem?

An economic analysis commissioned by the Washington CannaBusiness Association (WACA), and performed by Seattle-based High Peak Strategy, was published in December of 2021, the first study to use a quantitative approach to the regulated cannabis industry in Washington state.

The study compared Washington’s tax and regulatory policies on adult use cannabis to other states highlighting the expanding role of the cannabis industry in Washington’s economy. The purpose of the analysis is to advocate for policies which will support the ongoing health of the industry.

As it turns out, unsurprisingly, the biggest competitor to legal marijuana is illegal marijuana.

In Washington, a robust cannabis industry is growing rapidly pace, but high tax rates push retail prices to a point where many consumers prefer to purchase on the illicit market. The concern over tax is not restricted to Washington. Operators in California also are threatening to stage a tax revolt over high California taxes.

According to a January 11 article in the Sacramento Bee:

“Facing a possible industry revolt over California cannabis tax structure, Gov. Gavin Newsom on Monday signaled that he is open to rethinking the taxes the state levels on marijuana growers and purchases. The governor included in a budget proposal he released this week that he “supports cannabis tax reform and plans to work with the Legislature to make modifications to California’s cannabis tax policy to help stabilize the market.””

Adult cannabis use drives economic growth. According to the Washington study, Washington’s cannabis industry is a significant contributor of jobs, income, and tax revenues to the Washington state economy. In 2020, more than 1,600 unique businesses held 2,795 cannabis licenses and these operations (which includes growers, processors, transporters, labs, and retailers) directly employed 11,330 workers, generating more than $1.4 billion in business revenues.

The study further concludes the full statewide cannabis economic impact is responsible for 18,360 jobs, $876.5 million in labor income, and $2.7 billion in business revenues.

Besides the benefits to workers and operators, there is significant impact on state tax revenues. In 2020, adult use cannabis directly generated $660.8 million in state excise taxes and state and local sales taxes. Colorado brought in a record $423 million in tax revenue from marijuana sales in 2021, according to the latest market report from the state’s Department of Revenue (DOR).

In all, Colorado has sold more than $2 billion in marijuana through November 2021, making it the second consecutive year that the state has eclipsed that mark. In 2020, the state collected $387 million in taxes from the sales.

However, state regulators should consider Aesop’s fable of the goose laying the golden eggs: a farm couple own a hen which lays a golden egg each day. Supposing the Hen must contain a great lump of gold inside, they kill her to get rich quick, finding no gold and depriving themselves of the daily golden egg.

In many states, state adult use cannabis regulations adversely impact the industry. Increasingly, cannabis businesses are overwhelmed by taxes, pushing retail price points to an extent that consumers prefer to purchase on the unregulated and untaxed illegal market. There may also be stringent residency requirements for receiving a distribution, growing or retail license.

Washington’s 37% adult use cannabis excise tax rate is the highest U.S. cannabis tax. Colorado and California excise tax rates are 15% and in Illinois, cannabis with a THC level above 35% is taxed at a rate of 25% of the purchase price: a cannabis-infused product shall be taxed at a rate of 20% of the purchase price.

Needless to say, cannabis purchased on the illicit market is not taxed at any rate.

The lesson here for legislators should be cannabis can bring many benefits. California’s budget projection assumes the state will collect $787 million in cannabis revenue during the 2022-23 tax year. However, taxes should also be evaluated to ensure that operators continue to remain profitable as consumers purchase and consume cannabis from the regulated legal market.

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