The marijuana industry has been extremely lucrative since its emergence into the light of regulation. Arcview Market Research Group, a consulting firm for the marijuana industry, estimates that the legalized cannabis industry generated $6.9 billion in 2016 and may amass as much as $21.6 in revenue billion by 2021.
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That trend represents the potential for legal marijuana to make a significant contribution to the US GDP.Or it represents the potential for marijuana to be a major moneymaker for the black market.
It’s Time to Reschedule Cannabis
In 1970, the Controlled Substances Act, a section of the Comprehensive Drug Abuse Prevention and Control Act, created a drug schedule, or a categorization of drugs according to their danger and potential for abuse. Cannabis was classified as a Schedule I drug, or a drug “with no currently accepted medical use and high potential for abuse.”
States with legalized cannabis are directly at odds with the federal government, and this puts the industry in a very precarious position. In 2015, the DEA spent $950,000 of taxpayer money on its cannabis eradication program… in Washington, the same Washington that legalized marijuana for recreational use in 2012. In fact, in 2015, the DEA spent approximately $18 million on destroying cannabis plants throughout the country. Seems like an interesting use of money and resources when 60% of Americans support the use of legal marijuana. Just saying.
While the Obama administration’s DEA kindasorta made an effort to compromise with states when it stated in 2009 that it would not pursue consumers or businesses operating within their states’ pot laws, the Trump administration’s department of justice may renege, especially with a Jeff Sessions overseen DEA. Sessions has been an outspoken critic of marijuana reform, and when you can’t even trust a DEA that says it’s going to chill with all of the pot crack down and doesn’t, how do you trust a guy who’s said that marijuana poses “very real danger” and reform is a “tragic mistake”?
Here’s the thing, though. Lots of people are consuming pot, legal or not. The National Survey on Drug Use and Health found that in 2014-2015, 22 million people, 8.3% of Americans, used marijuana monthly, and almost 37 million people used it at least once. A lot of those users come from places where marijuana is legalized in some fashion, but that still means that illegal users are willing to spend money and risk legal status in order to purchase cannabis. Because marijuana is federally illegal and still illegal in several states, those states and the federal government are losing money to drug dealers and cartels while taxpayers pay $51 billion annually on the US “war on drugs.” Of that $51 billion, over $3 billion is spent on enforcing marijuana laws.
The federal government is spending a lot of money on eradicating and seizing a substance that the states that make up said government are working to legalize. Let’s take a closer look at one of the most seductive reasons why states are pushing for something the feds are trying to destroy: money.
2016 Tax Revenue Breakdown by State
Not all states impose taxes on marijuana, nor do they all report the revenue generated by the industry. Here’s the information currently available on 2016 state revenues.
Colorado—Colorado generated approximately $140 million in tax revenue. Medical marijuana is taxed at a low 2.9%, which prevented the cannibalization of the medical industry by the recreational one. The recreational marijuana tax rate is approximately 29% based on the following tax structure: a 15% excise tax on the rate of wholesale marijuana, a 10% state tax on retail sales, 2.9% state sales tax, local sales tax, and local marijuana sales tax. However, the 10% state tax fee will be reduced to 8% in July of 2017 as an attempt to eliminate the black market.
Washington—Washington state generated $62 million in excise taxes, $10 million in state sales taxes, $1.3 million in Business and Occupation (B&O) taxes, and $3.6 million in local sales taxes. Washington imposes a 37% excise tax on the retail marijuana sales in addition to imposing a state sales tax, a B&O tax, and a local sales tax. Washington is projected to amass approximately $270 million in tax revenue annually.
Oregon—Oregon imposes a 17% tax on the retail price of recreational cannabis in addition to a local 3% tax. Tax revenue was recorded in January 2016, but only 253 of 309 licensed dispensaries actually made tax payments either because they were unaware of their obligation to collect taxes or because they were not selling recreational marijuana. Despite this, Oregon generated $3.48 million in taxes in January and is projected to generate approximately $60 million in tax revenue annually.
Alaska—Alaska began selling recreational marijuana in late 2016 at a 20% tax rate and is projected to generate between $5.1 million and $19.2 million in tax revenue annually.
District of Columbia—A provision introduced into the federal budget bill by Maryland Congressman Andy Harris (R) stating that D.C. is prohibited from using federal or local funds to “enact or carry out any law, rule, or regulation to legalize or otherwise reduce penalties associated with the possession, use, or distribution of any schedule I substance” prevents D.C. from imposing taxes on marijuana. If D.C. were able to impose a 15% sales tax on cannabis, it would potentially amass $20 million in taxes annually.
Forecasting Future Revenue
According to a 2016 report by the Tax Foundation, the marijuana industry could produce approximately $28 billion in tax revenues if it follows its current trend. This would include $1.5 billion in income and payroll taxes, $5.5 billion in business taxes, and $7 billion in federal taxes. If the federal government imposed an additional tax on marijuana the way it does on tobacco, it could generate between $500 million and $5.3 billion in taxes annually, depending on the taxation method it chooses.
The same report indicates that federal legalization would significantly reduce the risks associated with opening and operating a marijuana business under current law, making it cheaper for startups to engage in the industry and easier for all cannabis businesses to turn a profit.
If the federal government continues to pushback on marijuana legalization, it will be in an incredible show of willful ignorance entertaining no one but the major players in the black market.