Legal weed states have lessons to share

By: Associated Press//January 2, 2015//

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By KRISTEN WYATT
Associated Press

Cannabis City clerk John Golby, left, helps customers looking over a display case of marijuana products Dec. 30 at the shop in Seattle. A year into the nation’s experiment with legal, taxed marijuana sales, Washington and Colorado find themselves with a cautionary tale for Oregon, Alaska or other states that might follow suit. (AP Photo/Elaine Thompson) — John Golby (left) helps customers looking over a display case of marijuana products Dec. 30 at a shop in Seattle. A year into the nation’s experiment with legal, taxed marijuana sales, Washington and Colorado find themselves with a cautionary tale for Oregon, Alaska or other states that might follow suit. (AP Photo/Elaine Thompson)

DENVER — To see the tax implications of legalizing marijuana in Colorado, there’s no better place to start than an empty plot of land on a busy thoroughfare near downtown Denver.

It is the future home of a 60,000-square-foot public recreational center that’s been in the works for years.

Construction costs started going up, leaving city officials wondering whether they’d have to scale back the project. Instead, they hit on a solution: tap $3.2 million from pot taxes to keep the pool at 10 lanes, big enough to host swim meets.

The Denver rec center underscores how marijuana taxation has played throughout Colorado and Washington. The drug is bringing in tax money, but in the mix of multibillion-dollar budgets, the drug is a small boost, not a tsunami of cash.

Much of the drug’s tax production has been used to pay for all the new regulation the drug requires — from a new state agency in Colorado to oversee the industry, to additional fire and building inspectors for local governments to make sure the new pot-growing facilities don’t pose a safety risk.

And estimates for pot’s tax potential varied widely.

Some government economists predicted a huge boost to public coffers. Others predicted a volatile revenue stream that could spike wildly based on how consumers and the black market would respond.

LESSONS LEARNED

Don’t worry about a federal lawsuit. But do worry about tax rates. Those are among the many lessons Colorado and Washington have to share from the front lines of America’s marijuana experiment.

LESSON 1: DON’T BE TIMID

Public officials in the pioneering marijuana states were flat-footed when voters made pot legal. At first waiting for a possible federal lawsuit, then trying to figure out how to monitor and tax a product that had never been fully regulated anywhere in the world, the states spent many months coming up with rules for how the drug should be grown, sold and consumed. The delays were understandable. But they led to one of the biggest disappointments of the marijuana markets: lower-than-hoped tax collections.

LESSON 2: DON’T GET TOO EXCITED, EITHER

Both Colorado and Washington have seen tax collections fall below some rosy projections. The effective tax rates are about 44 percent in Washington and 29 percent in Colorado, with plenty of asterisks and local variances. The states assumed that pot users would pay a steep premium to stop using drug dealers and have clean, safe stores in which to buy their weed. But the tax rates have led to a continuing black market, undercutting the top argument for legalizing in the first place. Months of delays for permitting and licensing meant that potential pot taxes went uncollected. And limited marijuana supply in both states has further driven up the price of legal weed.

LESSON 3: THINK OUTSIDE THE BONG

Pot users these days aren’t using the drug the same way hippies in the 1960s did. But Colorado and Washington weren’t entirely prepared to deal with popular new forms of edible and concentrated weed. It took more than 18 months for Washington to begin sales of edible pot. Colorado had regulations for edible pot already in place from the medical market — but it stumbled, too, when the edibles proved a lot more popular than officials expected and many first-timers weren’t sure how much to eat. Colorado has had to go back after the fact to tighten rules on edible pot packaging and dosing.

LESSON 4: THINK ABOUT THE KIDS

It’s an obvious consequence of legalization: Wider availability for adults means easier access for kids. School districts in both Colorado and Washington have reported more kids showing up at school with weed. There have been more kids treated at emergency rooms for marijuana ingestions, too. Marijuana exposure isn’t fatal, but the experience so far in both states underscores the need for states to have plans for talking with minors about pot.

LESSON 5: THE THIN, GREEN LINE

Law enforcement has a big role in reducing potential public safety effects of legalization. States that legalize pot need a plan in place for how officers determine whether drivers are impaired by marijuana. After legalization, simply sniffing pot in a car or seeing a joint on the seat isn’t enough to haul someone to jail. Officers also need new guidance on handling marijuana evidence, telling legal growing operations from illegal ones, and protecting new businesses may be targets for robbery because they operate with large amounts of cash (because banks are leery of assisting businesses that sell a drug that is illegal under federal law).

— KRISTEN WYATT, Associated Press

Some even guessed that legal weed would cost more than it produced in taxes, through higher public safety costs and possible expensive lawsuits because the drug remains illegal under federal law.

In Colorado, where retail recreational sales began Jan. 1, 2014, the drug has a total effective tax rate of about 30 percent, depending on local add-on taxes.

Through October, the most recent figures available, Colorado collected about $45.4 million from sales and excise taxes on recreational pot sales.

That puts the state on pace to bring in less than the $70 million a year Colorado voters approved when the agreed to a statewide 10 percent sales tax and 15 percent excise tax on recreational pot.

Voters set aside the first $40 million in excise taxes for school construction; so far that fund has produced about $10 million.

But adding fees and licenses and the taxes from medical marijuana sales, Colorado had collected more than $60 million through October. Local governments can add additional taxes, too.

That’s what led to additional revenue streams like Denver’s $3.2 million for a bigger pool at its rec center.

In Washington, where recreational pot sales began in July, recreational weed is taxed on a three-tier system as the plant moves from growers to processors to retailers. The total effective tax rate is about 44 percent.

State tax officials are just getting a look at the first few months of pot taxes, and the money is coming in slowly because there aren’t many stores there yet. State economists have predicted pot sales will bring in $25 million by next July.

The state anticipates a $200 million increase by mid-2017, and about $636 million to state coffers through the middle of 2019.

There remain more questions than answers about pot’s tax potential.

A new president in 2017 could sue legal weed states to shut down sales completely.

And no one knows how the opening of new recreational markets will drain sales from Colorado and Washington. Oregon voters have approved retail pot sales beginning in 2016; Alaska has approved sales but it’s not clear when they’ll begin.

And the biggest market in the West — California — is expected to consider recreational pot legalization in 2016.

In other words, budgeters curious about marijuana’s tax potential will have to wait.

“If they’re looking at pot as something that might swoop in and save them, they need to keep looking,” said Joseph Henchman, an analyst who has studied marijuana tax collections for the Tax Foundation, a nonpartisan tax think tank.

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