Study: Legalized marijuana tax boon may falter as Michigan's shortfall shows
Lower than expected revenue from Michigan's medical marijuana tax could foreshadow struggles ahead for the state’s collection of the $97.5 million forecast for next fiscal year's legalized marijuana tax revenue, according to a study released Monday.
The slow licensing and revenue shortfall that Michigan experienced while restarting its medical marijuana industry isn't unique to the state. Factors such as licensing and competition are prompting researchers to warn states against over-relying on marijuana tax revenue, citing the unpredictability of the emerging market and the volatility of “sin" taxes in general.
The variability of marijuana tax rates from state to state, demand for pot, the extent of local control over commercial marijuana regulations and the speed with which the industry becomes licensed can sink or bolster a state’s predictions for marijuana tax revenue. Competition from neighboring states and black market influence could also play roles in sales and ultimately tax revenue.
“Supporters of legalizing recreational marijuana expected a new revenue source for states, but market uncertainties continue to challenge revenue forecasters and policymakers,” a Pew Charitable Trusts report said.
Local governments have been cautious about any local tax revenue sharing stemming from the legalization of recreational marijuana, said Chris Johnson, general counsel for the Michigan Municipal League.
The persistence of the black market and the ability for individuals in Michigan to grow their own weed make the prospects for significant tax revenue dim, Johnson said. The tax formula also allows the state to recoup implementation costs before additional revenue is parsed out to other budget priorities such as counties or cities where a marijuana retail shop is located.
"The Marijuana Regulatory Agency already is getting pretty large, so that will be fully funded before there’s any left for the locals," Johnson said. "I would look at it like statutory revenue sharing — you can’t count on it until they actually deliver it.”
Agency spokesman David Harns countered that the implementation costs borne by the Marijuana Regulatory Agency would instead be fully funded through regulatory fees to avoid tapping into the recreational marijuana excise tax revenue that would otherwise go to other budget priorities designated in the ballot initiative.
The states have had different experiences in predicting pot revenue.
The Colorado Legislative Council was right on the mark with its revenue estimate in 2015, which it based off a Washington state marijuana consumption survey and the National Survey on Drug Use and Health. The state predicted $67 million from marijuana excise taxes in fiscal year 2015 and reaped about $66.1 million.
Colorado has since pulled in annual marijuana tax revenue very close to or exceeding its annual March forecasts.
Other states haven't experienced the same precision. Nevada’s first six months of marijuana tax revenue came in 40% higher than predicted, while California pulled in 45% less.
Michigan’s 10% excise or “sin” tax on top of a 6% sales tax is one of the lowest rates among the 10 states that have legalized recreational marijuana. Colorado and Maine’s retail and general sales tax rates are lower, but they also levy cultivator excise taxes.
Michigan forecasters fall short
In Michigan, forecasters overshot medical marijuana tax revenue significantly. In 2017, the state forecast a new 3% medical marijuana excise tax would bring in $18 million once fully phased in, but the tax generated roughly $560,000 before it expired in March, according to the state Treasury Department.
Licensing and implementation delays may have impacted the eventual revenue, said Treasury Department spokesman Ron Leix. In addition, the Medical Marihuana Facilities Licensing Act ended the excise tax six months after the legalization of recreational marijuana, shortening the window in which the tax could be collected, Leix noted.
The state has collected $9.8 million in sales tax revenue from the $164.3 million in medical marijuana products sold from early November to Aug. 9.
The Treasury Department has estimated it will collect about $97.5 million from the 10% recreational marijuana excise tax in fiscal year 2020, $143 million in 2021, $154 million in 2022 and $163 million in 2023.
During the 2020 fiscal year that begins in October, about $10 million of the anticipated revenue will go toward implementation, $20 million to marijuana research, $10.1 million each to cities and counties, $23.6 million to the Michigan School Aid fund, and $23.6 million to state transportation, according to the state budget office.
Sales tax revenue from recreational marijuana is expected to total roughly $59 million in fiscal year 2020, with $42.9 million going to the School Aid Fund, $5.9 million to revenue sharing and $9.7 million to the General Fund.
The sales tax revenue from recreational marijuana is forecast to increase to $86 million in 2021, $92 million in 2022, and $98 million in 2023.
Budget on pot cash?
The state would be mistaken to incorporate the forecast recreational marijuana tax revenue into its budget, said Scott Greenlee, president for Healthy and Productive Michigan, the ballot committee that opposed legalized marijuana and now functions as a 501(c)4 social welfare advocacy group.
Based on the experiences of other states, Michigan may be slow to realize the campaign forecasts of big tax hauls, Greenlee said.
"It’s the black market," he said. "It's so available that people are acquiring it in different ways and getting around buying it in these stores where tax revenue is collected. I think it will only get worse as black markets continue to thrive.”
Tax revenue was never a "key selling point" in the campaign to legalize recreational marijuana, said Josh Hovey a spokesman for Michigan Cannabis Industry Association and past spokesman for the successful legalization campaign. Instead, the group focused on ending unnecessary arrests and creating a new industry, Hovey said.
The expected tax revenue and its corresponding allocation to priority budget items such as education and roads was listed among the top four bullet points describing the ballot initiative on the campaign website, immediately after a basic description of the bill, the industry set-up and communities' ability to opt out of the industry.
Michigan would do well to learn from other states that made the barrier to entry too high for businesses and dissuaded people from the licensed market, helping to fan the flames of illegal sales, Hovey said.
The end of the black market depends on "how fast the state can license businesses and how many communities opt in to let these businesses operate," Hovey said. "Any time a community decides not to allow one of these businesses, they’re essentially encouraging the black market.”
In five early-adoption states, tax revenue has been booming. But forecasters warn of early indications that revenue growth is slowing in Washington and Colorado, two of the earliest states to legalize marijuana.
Pew researchers recommend states shore up the money for a year before spending it or stash it away in savings so government officials don't rely on the money for ongoing expenses.
“States typically use forecasts of how much revenue they will collect during the next year to develop budgets,” the Pew report said. “Recognizing the uncertainty with marijuana revenue, Colorado and California collect the taxes in a separate fund and then use the money for the following year.”