Bloomberg News

Washington Races Colorado for Billions in Pot-Tax Revenue

June 24, 2013

Race for Marijuana Between States Cast in Doubt by U.S.

Colorado and Washington are designing frameworks for regulating the cultivation and sale of recreational marijuana. The drug has the potential to provide some much-needed cash to states emerging from the recession, a revenue stream that may not emerge if the feds block recreational pot sales. Photographer: David McNew/Getty Images

In Washington and Colorado (STOCO1), legalization of marijuana may draw as much as $2.1 billion in revenue for the states from new taxes in five years.

The states, whose voters in November became the first to legalize the drug for adult use, may not claim those windfalls if U.S. authorities, which still label pot an illegal substance, decide to step in.

“The projections are really premature because we don’t know what the federal government is going to do,” said Jeffrey Miron, who teaches economics at Harvard University in Cambridge, Massachusetts. “All that uncertainty and that legal risk means the industry is likely to stay somewhat still in the shadows.”

Colorado and Washington are designing frameworks for regulating the cultivation and sale of recreational marijuana. The drug has the potential to provide some much-needed cash to states emerging from the recession, a revenue stream that may not emerge if the feds block recreational pot sales.

Washington (STOWA1) estimates it may collect as much as $2 billion in new taxes over five years. The state faces a projected $900 million budget shortfall for the 2013-2015 biennium, according to a November estimate by its financial management office.

In Colorado (STTLCO), legalization may produce as much as $23 million a year in revenue. A $1.1 billion surplus is projected for fiscal 2013, according to a June 20 estimate by the Colorado Governor’s Office of State Planning and Budgeting.

Washington’s revenue from pot “could be as low as zero” since federal law enforcement could prevent the development of a functioning market, according to the management office.

Legal Marijuana

“The state is moving ahead with the creation of a legal marijuana sales market,” Ralph Thomas, a management office spokesman, said in a statement. “However, given there are still uncertainties surrounding that effort, the state at this time is not counting on any marijuana-related revenue for its next two-year budget.”

U.S. Attorney General Eric Holder said in March he is considering what the federal response will be to legalization in the states. In 2011, federal prosecutors used property seizures and criminal charges to crack down on medical-marijuana dispensaries in California.

In Colorado, state revenue from taxing recreational pot sales and licensing fees could range from $4.7 million to $22.6 million in the first year, the Colorado Legislative Council said in a September report. The state collected $5.4 million in sales taxes on $199.1 million in medical marijuana sales in fiscal 2012, according to its Revenue Department.

Tax Rates

Washington plans to impose a tax of 25 percent each on growers, processors and retailers. Colorado lawmakers last month approved an initiative on a tax of as much as 15 percent on wholesale sales and a 10 percent on retail purchases.

The tax plan in Washington was a selling point to win passage of the recreational marijuana ballot initiative, said Brian Smith, a spokesman for the State Liquor Control Board, which is writing rules to regulate the new industry.

Washington’s taxes are “going to be the cost of doing business if people want to be part of this market,” Smith said.

The Evergreen State also has to determine how to deal with retailers who are selling marijuana for medical use, which remains illegal there, Smith said. The budget pending in the legislature directs the state liquor board, health and revenue departments to make recommendations.

Sales Prices

In Washington, marijuana will sell for an estimated $3 per gram at the producer level, while processors are forecast to charge $6 per gram and retailers $12 per gram before taxes, on average, according to estimates from the state Office of Financial Management.

Legal pot prices will likely be lower than those for black-market or medical marijuana, Alison Holcomb, drug policy director at the American Civil Liberties Union in Washington state, said by telephone.

“There’s a lot of prohibition inflation built into current marijuana prices” by sellers, Holcomb said. “Currently, what’s built into marijuana prices includes the risk that the individual is facing -- being arrested, being prosecuted, having property seized.”

In a legal market, those risks go away and more people are willing to enter the market to compete, Holcomb said.

Muraco Kyashna-tocha, director of the Green Buddha Patient Co-Op, a medical-marijuana dispensary in Seattle, plans to become a pot grower and processor once the state’s recreational-pot rules take effect, a move she said may triple her income.

Kyashna-tocha said she’s undeterred by taxes on the cannabis she produces, predicting she’ll earn from $70,000 to $100,000 annually, compared with the $24,000 she got last year.

Final Price

“If I’m allowed to produce enough amount of it and put it out on the market, the tax that’s added to it, the final price of the product is going to be reasonable, that’s what’s going to ensure the sale,” Kyashna-tocha, a 55-year-old Seattle resident, said in a telephone interview.

She anticipates selling her crop to retailers at $3 a gram.

The Washington pot taxes will still be outpaced by a 95 percent sales levy the state charges on tobacco products except cigarettes, said Mike Gowrylow, a Revenue Department spokesman. The state charges $30.25 for a carton of 200 cigarettes.

Eighteen states and Washington, D.C., allow the medical use of marijuana and 11 permit sales through dispensaries, according to the Denver-based National Conference of State Legislatures.

To contact the reporter on this story: Alison Vekshin in San Francisco at avekshin@bloomberg.net.

To contact the editor responsible for this story: Stephen Merelman in New York at smerelman@bloomberg.net.


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