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Early California Cannabis Tax Revenue Is Less Than Expected

The first three months of legal adult-use cannabis sales in California weren’t quite what the state was hoping for.

Earlier this year, state budget forecasters expected cannabis sales to produce $175 million in annual excise tax revenue. But sales in the first quarter of 2018 underperformed that number, coming in at $34 million. That extrapolates to $136 million, or about $39 million less than budget forecasters expect.

First-quarter sales produced $34 million in tax revenue, but the state was hoping for more.

The state levies two excise taxes on cannabis: a retail excise tax and a cultivation tax. (Local governments may levy additional taxes.) These taxes went into effect on January 1, 2018, and the first payments were due on April 30.

That early revenue figure was released yesterday by the Legislative Analyst’s Office, the California legislature’s nonpartisan economic policy advisor.

There are a couple caveats that come with that number. California adult-use sales began on January 1 with a limited supply of fully licensed stores. Many dispensaries continued as medical-only until their adult-use license was approved, so tax revenue has been constricted by a limited supply of open retail outlets. Second quarter revenue is expected to present a more realistic picture of the market, as most stores will be up and running through the entire quarter.

Also, the issue of “cannabis deserts” has emerged over the past three months, further complicating the picture. Proposition 64 allowed local municipalities to set their own rules with regard to cannabis companies, and many counties and cities have opted to impose outright bans on all cannabis businesses–at least temporarily.

Tuesday’s announcement was a short preview. The Legislative Analyst’s Office is expected to release its full report on first-quarter cannabis excise tax revenue on Friday.

Meanwhile, in Other Legal States

Outside of California, a new report found that legalizing and taxing marijuana boosts revenue for state and local governments, but not by much.

The credit rating agency Moody’s Investor Service said in a study released Tuesday that legalizing recreational use of marijuana brings governments more money than it costs to regulate it.

In Colorado, a marijuana tax brings in the equivalent of about 2% of the state budget.

Despite high taxes on the legal sales of the drug, the revenue accounts for a small portion of government budgets. In Colorado, the first state to legalize recreational use, a marijuana tax brings in the equivalent of about 2% of the state budget.

In Washington state, gross revenue from marijuana legalization equaled 1.2% of general fund revenue in the 2015-17 state budget.

Most of the states that have legalized marijuana earmark the revenue for law enforcement, drug treatment and other specific programs, which doesn’t help the states’ financial flexibility.

Likewise, Moody’s described the revenue effect as minimal on local governments in states with legal cannabis.

Creating revenue for the state is one argument proponents use for legalization in New Jersey. Gov. Phil Murphy, who supports the effort, is planning on having an additional $60 million in taxes from legalized marijuana in the next fiscal year. That’s less than 1% of the state’s annual spending.

Twenty-nine states now allow marijuana for either medicinal or recreational uses, and the business is growing quickly. Moody’s cited data from the market research firm Euromonitor International that projects it will grow from a $5.4 billion business in the U.S. in 2015 to $16 billion by 2020.

Meanwhile, illegal marijuana sales are estimated at $40 billion.


The Associated Press contributed to this report.

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Leafly Staff

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