Recreational Marijuana Tax Revenue is Hard to Predict

The nascent nature of the cannabis industry makes it hard for states with potential or emerging markets to accurately predict the amount of revenue legal sales would bring in.

A new report from Pew Charitable Trusts suggests that calculating revenue projections for legalized marijuana tax revenue is particularly challenging. According to the report, actual revenue has differed from initial expectations once adult, recreational marijuana use has become law.

Nevada, one of the most recent states to legalize recreational marijuana, ended up collecting 40 percent more revenue than what was initially predicted, while California received 45 percent less than the amount analysts expected.

And as the markets mature in Colorado and Washington, the two states to first legalize recreational marijuana in 2012, cannabis tax revenue has been growing at a slower pace than in the market’s earlier years. This is quite logical.

Because the nation’s legal marijuana markets are so new, a lack of reliable data makes it challenging at times to predict revenue specifics.

“Supporters of legalizing recreational marijuana expected a new revenue source for states, but market uncertainties continue to challenge revenue forecasters and policymakers.”

“The difficulty in forecasting revenue is compounded by the fact that states have only recently begun to understand the recreational marijuana market: the level of consumer demand for recreational marijuana products, the types of users and how much they might pay for the drug, and competition with the black market,” the report from Pew concluded.

As the industry matures, more data will become available to study.

“The biggest hurdle for states is the lack of reliable data,” explained Alexandria Zhang, one of the authors of the report.

Zhang added that part of the reason that California tax revenue has so far fallen so far short of projections was that it has taken the state longer than expected for its legal market to begin operating.

In addition, the high fees companies must pay in California to comply with regulation have caused prices to be higher than expected. These high prices are believed to be incentivizing consumers to purchase their cannabis products from the illegal market, reducing the amount of tax revenue the state derives from legal sales.

Alaska has had legal marijuana sales since October 2016. Ken Alper, former Director of Alaska’s Department of Revenue, told The CT Mirror the lingering stigma around cannabis use, particularly when it remains illegal, contributes to the challenges of developing revenue estimates. Potential consumers surveyed about prior cannabis use are more inclined to lie, rather than be truthful regarding their consumption habits.

The diversity of marijuana products that have sprung up in legalized markets also complicates the picture. Because these products are taxed at different rates, it can be hard to judge how much revenue will be brought in. For example, in Colorado, marijuana edibles and cannabis concentrates have become more popular, while in Washington, cannabis extracts are the top choice for consumers.

All these factors have made predicting a state’s legal marijuana market difficult, often leading to unreliable calculations.

In Connecticut, where recreational marijuana legalization is currently being debated, budget analysts have predicted that the state will receive $30.1 million in tax revenue from legal marijuana sales in the market’s first year. Marijuana-legalization advocates, however, estimate that Connecticut could collect as much as $60 million in that first year.

Tax Revenue a Key Factor in Marijuana Support

Many lawmakers, cannabis advocates, and members of the general public are incentivized to support full marijuana legalization because of the tax revenue legal sales are expected to bring in.

Legalizing marijuana is commonly seen as a way to increase revenue for states that are reluctant to raise taxes.

Overall, support for marijuana legalization is higher than it has ever been before. More than 60 percent of those polled in the United States now believe that marijuana should be legalized for adults to use on a recreational basis.

Eleven states and Washington, D.C. have legalized recreational marijuana,

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