Paula Dwyer: Marijuana could replace tobacco as sin-tax jackpot

By Paula Dwyer

Marijuana could open a tax spigot and let cities and states reduce spending on drug enforcement. Photo / Getty
Marijuana could open a tax spigot and let cities and states reduce spending on drug enforcement. Photo / Getty

Is marijuana the new sin-tax gusher for the states? It sure looks that way.

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

Unlike the fierce battles of the past over decriminalisation, 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 legalised 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.

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 legalise marijuana outright, while Arkansas, Florida, Montana and North Dakota will determine whether to allow medical use only.

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

So if you buy weed in Denver, you'll pay combined taxes of 35 per cent. 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 legalise 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 legalisation is strong.

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

There's no denying that marijuana opens a tax spigot and also lets cities and states reduce spending on drug enforcement.

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. Recognising this, Colorado's 10 per cent special marijuana tax will drop to 8 per cent 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 US 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 legalised 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 US 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.

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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