Bloomberg News

Legal Pot Estimate Cut as 44% Washington Tax Curbs Demand

June 19, 2014

Washington is poised to be as much of a disappointment as Colorado at filling its coffers from sales of legalized marijuana as buyers in the Pacific state balk at paying an effective sin tax rate of about 44 percent.

Revenue in Washington from voter-approved recreational pot sales, which start next month, is projected to fall 69 percent short of initial estimates as the state issues as few as 10 of 334 recreational licenses and the lower cost of medical marijuana undercuts demand, as it did in Colorado.

State officials across the U.S. have been watching to see whether legalizing marijuana will help balance their budgets as the economy rebounds from the worst financial crisis since the Great Depression. Alaska voters will consider legalization in the November election, and an effort is under way to place a similar measure on the ballot in Oregon. Two years from now, legal-pot advocates plan campaigns in Arizona, California, Nevada, Massachusetts, Maine and Montana.

“The potential windfall is limited,” said Mark Kleiman, a public policy professor at the University of California, Los Angeles, who helped devise Washington’s marijuana policy as a consultant to the state. “In the first couple of months, I think the prices will be high. The tax collections will be small because the volume will be small.”

One of the challenges for state governments is to design a tax regimen that won’t be so burdensome that buyers seek cheaper pot available from medical providers or, in some cases, turn to the illegal dealers who have been the traditional source of the drug.

Higher Taxes

Medical consumers in Washington, who get prescriptions from doctors to buy marijuana, pay sales tax of as much as 9.6 percent. Recreational buyers will have to pay those levies, plus Washington’s effective pot tax rate of 44 percent.

Just before the vote to legalize recreational sales in Washington two years ago, state officials projected tax revenue totaling as much as $1.9 billion from July 2013 through June 2017. Officials now estimate revenue at $586 million over the four years starting in July 2015. Colorado, where legal sales started in January, has collected an average of $2.7 million per month, trailing last year’s state estimate of $5.5 million to $8.9 million per month.

“We had bad forecasts,” said Larson Silbaugh, economist at the Colorado Legislative Council, the legislature’s research arm. “The fact that revenue is coming in lower than those initial projections is just that it’s a brand new industry and brand new revenue stream. I don’t think anyone had a whole lot of confidence in it.”

334 Licenses

Washington, home to Amazon.com Inc. (AMZN:US), Microsoft Corp. (MSFT:US) and Starbucks Corp. (SBUX:US), may never see the use of all of the 334 licenses for recreational pot stores allowed by the Liquor Control Board, said Brian Smith, an agency spokesman.

“There are bans all over the state and moratoriums where they can’t open or grow or do anything,” Smith said. “What we’re focused on is issuing a batch of licenses in some of the more populated areas, and keeping geography in mind so it will be spread around the state.”

Shy Sadis, a pot user and founder of two Seattle-based medical dispensaries, said the recreational tax “is too high for the consumer.”

“The real hard-core consumers who are penny-pinchers, they’re going to stay with medical to get the better deal,” Sadis said.

The price of pot in medical outlets suits Bryant Casal, 28, a property manager and marijuana consumer from Newcastle, Washington, he said in a telephone interview.

Hoop Jumping

“At this point, I have no plans to switch to recreational due to the pricing,” Casal said. The prescription needed to get a medical-marijuana card “is just a hoop to jump through,” he said. “Anybody can get it.”

Under the ballot measure approved by Washington voters, producers, processors and retailers each must pay the state a 25 percent excise tax. The actual levy on pot sales will be lower than the combined 75 percent because many producers and processors will operate as one entity.

“If the final price is significantly higher than the illegal or medical markets, a subset of people will definitely stay in the cheaper markets,” said Robert McVay, an attorney at Seattle-based Harris Moure PLLC, which has helped open medical dispensaries. “What we don’t know is how much people value the legality and safety of the regulated market.”

Colorado Levies

In Colorado, voters in November approved marijuana levies of about 25 percent. Transactions are also subject to state and local sales tax.

The Alaska ballot measure would impose a $50 per ounce excise tax on the sale of marijuana by a grower to a retail store or product manufacturer.

Over time, said Kleiman of UCLA, the legal pot market in Washington will displace the illegal market and may also supplant medical outlets as more supply becomes available and the price of recreational pot falls.

Eventually, the illegal market “goes away,” he said. “It looks like the moonshining market -- which is, it doesn’t exist. It’s much cheaper to produce something legally than illegally.”

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

To contact the editors responsible for this story: Stephen Merelman at smerelman@bloomberg.net Jeffrey Taylor, Pete Young


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