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Kushioning the budget

How states are allocating tax revenue from recreational cannabis sales

Stacks of cash its on green surface in solid green environment.

Much like marijuana, it’s no secret that taxes have a long and sordid history in the United States. There’s drama. There’s scandal. There’s bipartisanship.

Yet, there’s also a critical argument for community betterment on both large and small scales. With so much money coming in from commercial sales, the legalization of recreational cannabis has provided states with an opportunity to boost local economies and raise much-needed revenue through taxes. While many were expecting quite a windfall from the cannabis industry, the reality has been much more of a slow burn.

The challenge with “sin”

The challenge with “sin” taxes—those derived from products like tobacco, alcohol, and now cannabis—is that they are often intended to as a regulatory measure intended to curb use. As a result, these industries are often less dependable as stable sources of revenue—particularly when the goods are cheaper on the illegal market. And, due to its novelty, the cannabis industry has an additional challenge. The culture, business practices, and regulations are rapidly evolving, making it difficult to predict trends and incoming tax dollars. As states modify legislation surrounding legalization and revenue allocation, those numbers will continue to be unpredictable.

This is why many states are practicing caution when it comes to making budget commitments. While tax revenues are likely to continue to climb in the short term, it’s difficult to anticipate if and when the numbers will stagnate or drop. As the data rolls in, legislators in areas that legalized recreational cannabis during the 2018 midterms are looking to established industries like those Washington, Colorado, and California for guidance. Local governments rely on dependable sources of income to fund essential functions, programs, and projects, and many can’t afford to take risks with unpredictable tax revenue. For now, some states are opting to treat tax revenue from cannabis as found money, allocating it to the government’s general or rainy day fund.

Every Dollar Counts

Regardless of the challenges and potential shortcomings, every dollar counts. Most states are using revenue to fund all or part of their cannabis regulatory systems, as well as their general funds. But every state also sees this new source of income as an opportunity to get creative and fund new research, support public services, and improve infrastructure. Maine, for example, hopes to train law enforcement on new cannabis regulations, while Michigan and Massachusetts hope to fund public education. In New York, where cannabis is only available for medical use, there’s a push to legalize recreational in order to use tax dollars to fund the rapidly deteriorating subway system.

While these states are developing their cannabis tax laws, states with established legal cannabis industries are forging ahead, adapting to new data and reaping the benefits of the new income. From the ambitious to the creative, here’s how states are putting cannabis taxes to work:

Alaska

Tax: $50 per ounce excise tax on wholesale bud.

Challenges: high tax has resulted in black-market expansion

Community focus: supporting social services department and fighting domestic violence

Alaska’s market is small considering its size: only 5 stores are open statewide. However, those stores alone are expected to rake in $6 million in tax revenue in 2018. Currently, those dollars are split 50/25/25 between criminal reform programs, marijuana education initiatives, and the general fund. While there are challenges to the current tax structure, legislators are responding and changes are in the works.

California

Tax: 15% excise tax

Challenges: cheaper product on the black-market

Community focus: communities affected by the war on drugs, research

According to Forbes, California is leading recreational cannabis sales, raking in a whopping $2.75 billion. Of the tax dollars collected from those sales, $10 million is allocated to aid communities disproportionately harmed by the war on drugs, which have historically been communities of color. The initial $10 million is intended to increase every year before capping at $50 million.

The majority of the remaining funds will go toward research, with $10 million granted for university-based research on legalization, and $2 million for medical marijuana research at UC San Diego. $3 million will also go to the California Highway Patrol, aiding in the development of protocols intended to recognize drivers under the influence of cannabis.

Colorado

Tax: 15% tax in most areas

Challenges: total revenue not meeting budget expectations

Community focus: school infrastructure, substance abuse programs

As a trailblazer in the recreational cannabis industry, Colorado is working to make adjustments to their original budget plans to accommodate actual tax revenue. Currently, 26% is allocated to a program called Building Excellent Schools Today (BEST), which supports school infrastructure and related construction projects.

While schools are the focus, additional revenue is being used to fund law enforcement, child welfare training, and aid for low income residents. Some of the money is also supporting inpatient detox sessions and substance abuse programs for young people and pregnant women.

Nevada

Tax: 15% wholesale tax, 10% excise tax

Challenges: uncertain; generated revenue currently outperforming projections

Community focus:schools

Nevada’s industry is relatively new, as recreational cannabis sales officially began on July 1, 2017. So far, however, collected revenue has far surpassed expectations by over $5 million. Right now, taxes collected from wholesale are used to fund regulatory processes in the industry, with the remaining amount deposited into state’s Distributive School Account. Excise tax dollars are added to the Nevada Rainy Day Fund.

Oregon

Tax: up to 20% tax

Challenges: oversupply driving down prices

Community focus: schools, particularly in rural districts; mental health and addiction services

Oregon’s cannabis industry is bursting at the seams, which has proven to be supremely beneficial to programs receiving tax dollars. Rural school districts are seeing extra income with the generous 40% allocation to public schools. Mental health, alcoholism and drug service programs are also reaping the benefits, with a 20% distribution. The remaining funds go toward supporting local and county law enforcement, with 5% allotted to the Oregon Health Authority for substance abuse prevention programs and treatment services.

Washington

Tax: 37% tax

Challenges: critics looking to change allocation

Community focus: public health and the opioid epidemic, research

Of all the states, Washington has by far the highest tax on recreational cannabis. Yet, those tax dollars are projected to bring a staggering $730 million—a promising amount for local communities. In 2018, $262 million went to fund Washington’s portion of Medicaid, which provided healthcare for 1.8 million low-income residents. In fact, Washington is laser-focused public health services, distributing 60% of collected funds not only to Medicaid, but also to substance abuse prevention programs, community health centers, children’s mental health services, and maternal and prenatal care. Additional funds are allotted for research projects at the University of Washington and Washington State University, where studies are looking into the long and short term effects of cannabis use.

So Why Does it Matter?

Here’s the bottom line: if you live in a state with a commercial cannabis industry, those tax dollars are helping to fund essential programs that benefit you and your community. While the influx has been gradual, the success of the cannabis industry is still bringing millions of dollars in revenue to state budgets, making it possible for local governments to fund essential programs that citizens rely on every day. It will be interesting to watch the progress of research, health care, public schools, infrastructure, and other systems as cannabis legislation evolves–both state wide, and across the US.

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