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Michigan's foray into recreational marijuana use has cut off an anticipated source of revenue for pot-friendly communities, the result of a little-noticed stipulation slipped into the state's medical marijuana licensing law.

Dozens of municipalities and counties no longer share the cash generated by a 3% excise tax on medical pot from the dispensaries operating in their communities.

It ended March 6 as required by the 2016 licensing law, which contained amendments requiring the medical pot excise tax end three months after Michigan's recreational marijuana law took effect. A key Republican lawmaker who shepherded the bill through the Legislature didn't remember why or how the conditional tax expiration was added to the bill.

Many communities will be deprived of a slice of the estimated $24 million the tax was expected to produce annually after the new licensed market was in full operation, according to a House Fiscal Agency analysis. The revenue was one of the reasons municipal officials say they decided to allow pot shops within their boundaries.

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Stuart Carter, owner of Utopia Gardens, talks about the expiration of a 3% excise tax on medical marijuana and the upcoming 10% excise tax on recreational marijuana. Clarence Tabb Jr., The Detroit News

Some local government officials say the end of the medical pot excise tax is pressuring them to salvage their investments in medical pot and expand into the licensed recreational market. But they don't foresee a pot of gold from the 10% recreational excise tax either because it is divvied among more groups.

“The fact that the tax revenue from medical has been taken away and repealed makes it where, now that we’re in the industry, the only option we have for revenue is if we’re in on recreational as well,” said Adrian city attorney Tamaris Henagan. 

The reason for the end of the 3% excise tax on medical marijuana is hazy. The main sponsor of the 2016 Medical Marihuana Facilities Licensing Act said he couldn’t remember why lawmakers included the sunset provision on the 3% excise tax after the legalization of recreational marijuana.

Former Rep. Mike Callton, R-Nashville, didn’t know the provision was in the 2016 law until The Detroit News told him about it. The tax expiration was likely a compromise needed to get the bill moving, he said. 

“This thing has so many moving parts,” Callton said. “It took me longer to do this bill than it took me to get a bachelor’s degree at Michigan State.”

Regardless of how the repeal originated, it was the right thing to do for the state's 293,000 registered medical marijuana patients, said Josh Hovey, a spokesman for the Michigan Cannabis Industry Association that represents legal marijuana-related businesses. 

"It makes sense to repeal the tax should we have an alternative supply via recreational," Hovey said. "(Patients) should get a discount on their marijuana because it is a medicine."

How excise tax died

Neither Callton nor former GOP Rep. Klint Kesto of Commerce Township, who led the Judiciary Committee in 2016, could remember including the language repealing the medical marijuana excise tax. Both assumed it was part of the many compromises made to get the legislation approved.

“Sometimes you put in language and think that’s the best you’re going to get, never realizing recreational would pass so soon,” Callton said.

Sen. Jeff Irwin, an Ann Arbor Democrat who was vice chair for the House Judiciary Committee at the time, said the compromise was one he pushed to appease some groups opposed to any type of excise tax. The House also dropped the medical marijuana excise tax from 8% to 3% during negotiations, Irwin said.

“These medical patients really don’t deserve to pay these extra taxes,” Irwin said. “In fact, it’s quite sad we haven’t been able to persuade their insurance companies to cover the cost.”

Licensed marijuana businesses have different tax rates imposed on their product depending on whether they involve medical or recreational sales. 

Recreational marijuana sales will be assessed a 6% sales tax plus a 10% excise tax when licensed sales begin. The state also assesses a 6% sales tax on medical marijuana sales and, until March 6, a 3% excise tax.

In the nearly five-month period when Michigan collected a 3% excise tax on medical marijuana — Oct. 15, 2018, to March 6 — the tax brought in roughly $1.2 million in revenue. About 60%, or $720,000, will be split among the 24 municipalities and 15 counties that had licensed provisioning centers operating during that time period.

When the medical marijuana excise tax was being considered in 2016, an initial House Fiscal Agency analysis estimated the tax would bring in roughly $24 million in revenue a year based on the experience of Colorado.

Compared with the expected excise tax revenue from recreational pot, the $1.2 million from medical is a pittance. The Senate Fiscal Agency in November estimated the 10% excise tax on legalized marijuana use among adults would generate $53.8 million in 2019-20, $100.7 million in 2020-21 and $149.9 million in 2021-22.

Slicing up pot revenue

But, like medical marijuana, the excise tax on recreational marijuana will be diced up considerably before making it to individual communities.

After the state’s implementation costs are paid and $20 million is given to research on the use of marijuana to prevent veterans' suicides, 15% of the remaining excise tax revenue will go to municipalities and 15% to counties. The money will be divided up based on the number of marijuana provisioning centers and micro-businesses in each community.

The resulting revenue for cities, townships and counties could be much smaller than imagined, said Landon Bartley, a senior planner with the city of Grand Rapids.

"There has been a perception that this could be a huge windfall for a community, and I personally don’t think that’s going to be the case," Bartley said.

Callton, who now works as a consultant in the marijuana industry, said he’s heard many communities grumbling about the short time frame in which they benefited from the medical excise tax.

As the slow-moving state licensing process butted up against the November voter approval of legalizing recreational marijuana, the window to collect the excise tax shortened and the number of business from which communities could collect was sparse. In the Oct. 15-March 6 period, nearly 60 provisioning centers spread across 24 communities were licensed to operate. 

“By the time you actually had a functioning sale system, things changed,” Callton said, referring to the legalization of recreational marijuana in November. 

The Michigan Municipal League has no official position on the medical or recreational marijuana markets, said spokesman Matt Bach, but the league cautions municipalities about betting on potential revenue from the industry.

"We tell our members that any 'new' taxes on unproven markets may not yield the 'expected' results promised by those that pushed the legislation," Bach said in a statement.

Communities have other ways of generating revenue to pay for administering their licensing and enforcement duties, said Andrew Brisbo, director for the Bureau of Marijuana Regulation. Each community is able to assess a $5,000 fee per year on each licensed business.

And other communities, including Adrian, recognize the potential benefits for a marijuana-friendly community go beyond tax revenue. 

“We’ve got new buildings going up; we’ve got new jobs being created,” Henagan said.

Creating recreational rules

The tax differences between medical and recreational marijuana will become clearer when the recreational marijuana market begins sales later this year or in 2020. Recreational users will pay a combined 16% for their marijuana, while registered medical marijuana patients will pay the 6% sales tax for what is essentially the same product.

The arrangement presents a challenge to businesses hoping to obtain both recreational and medical licenses. Potential licensees have asked the state to clarify whether the  price difference should be evident on the store floor, processed at different counters or added at the point of sale.

The state is mulling the questions as it creates rules for legalized adult use. 

“We want to be open to all feedback and lay things out in a way that makes it industry-friendly but ensures that it can be tracked appropriately and, obviously, that it is safe for customers,” Brisbo said.

Most marijuana businesses and pot-related stakeholders argued last week to state regulators that Michigan's recreational pot rules should be similar to those for medical marijuana.

State law requires that first priority in recreational licensing should go to those already holding state licenses for medical marijuana sales, so its likely many of the first recreational marijuana facilities will be dual license holders.

In that case, it makes little sense to create rules that would require different standards for what is essentially the same flower, said Stuart Carter, owner of Utopia Gardens in Detroit.

“Right now, the state is saying they want two separate containers of this marijuana, yet it’s the same,” Carter said. “I was trying to convince the panelists that it's redundant. The difference should be at the point of sale.”

Medical sales to dip

Brisbo expects the medical marijuana population to decline, as it has in other states that legalized pot after approving medical use. 

Although the lack of an excise tax for medical marijuana gives customers an incentive to seek a spot on the medical registry to avoid the higher cost of recreational marijuana, the ease of purchasing recreational pot without a card is expected to draw other consumers. 

Some patients — such as children and teens — will still need access to the medical pot industry. 

“I think it’s reasonable to assume the medical market will decline over time," Brisbo said. "Whether or not it fully collapses in on itself I can’t really say."

eleblanc@detroitnews.com

(517) 371-3661

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