The movement to legalize marijuana is riding high. This year voters in California, Maine, Massachusetts, and Nevada joined Colorado, Washington, Oregon, and Alaska in legalizing the recreational use of marijuana, while Arkansas, Florida, Montana, and North Dakota voted to allow medical marijuana.
Oklahoma narrowly missed out joining the latter group this year. Proponents gathered enough signatures to put medical marijuana on the ballot as SQ 788, but they submitted the signatures too late to make the 2016 elections. SQ 788 will be scheduled for a vote by 2018 at the latest.
Advocates for Oklahoma’s measure have primarily stressed the medicinal qualities of marijuana and the expanded personal freedom that comes with ending prohibition. Others — including many who comment on OK Policy’s blog and social media pages — point to the potential tax revenue that legalization would bring. Now that several states have embraced medical marijuana, the revenue effects have come into clearer focus. The experience in other states suggest that legalizing marijuana for medical purposes only would have negligible revenue effects, but the legalization of recreational marijuana could bring significant benefits — though it would not by itself solve Oklahoma’s persistent revenue shortfalls.
Medical marijuana-related revenue tends to be small and uncertain
Advocates for medical marijuana promote it as medicine, not an antidote for budgetary problems, so the potential for revenue generation is rarely discussed. Likely for this reason, medical marijuana sales tend to be taxed at standard sales tax rates. For instance, Colorado’s 2.9 percent tax on medical marijuana brings in about $12 million per year, while licenses and fees bring in another $10 million. California’s 8.4 percent tax brought in $49.5 million in 2014. These revenues support the agencies that regulate medical marijuana in each state.
If Oklahoma’s medical marijuana initiative passes, it would levy a 7 percent sales tax on marijuana sales, with revenue going first to the state agency with regulatory oversight of the medical marijuana market. Any surplus amount beyond what is budgeted for that agency would be earmarked for common education and drug and alcohol rehabilitation.
Recreational marijuana tax revenue has exceeded projections
The states that have so far legalized marijuana for recreational purposes have larger populations and higher median incomes than Oklahoma. Colorado legalized recreational marijuana in a 2012 voter referendum and levied a 10 percent retail tax and 15 percent excise tax for large wholesale transactions. In 2015, the state received about $129 million from these taxes. Cities and towns that have chosen to allow retail marijuana shops in Colorado have also seen significant revenues, and the boost in local sales taxes have helped supplement education, public health, law enforcement, and general operations.
Washington also voted to legalize recreational marijuana in 2012, but retail sales did not start until July 2014. Because legalized marijuana was set into place alongside a separate, barely-regulated medical marijuana system, it brought in little revenue at first. After a unified system was implemented in 2015, the state placed a 37 percent excise tax on consumers. Monthly revenues have grown quickly in the last year, reaching $26 million in September 2016.
Oregon, which legalized recreational marijuana this year and collects a 25 percent tax on retail sales, brought in $25 million in the first 6 months of 2016. The state had expected to bring in just $18.4 million over two years.
These states brought in much more money from legalizing recreational marijuana than they had expected, but the revenue is still a tiny fraction of their state budgets. While Colorado’s $129 million is certainly a lot of money, it’s still a tiny portion of Colorado’s General Fund of nearly $10 billion in FY 2017. Washington State has estimated tax revenues of $40.2 billion over two fiscal years, 2015-17; at its current pace, marijuana tax collections would represent less than 2 percent of total revenues. Similarly, Oregon’s marijuana tax collections are on pace to raise about $50 million per year, compared to an average annual budget of $9 billion. In the four states that just voted to legalize marijuana, new revenue estimates range from 0.3 to 1.6 percent of general fund revenue.
Law enforcement and court savings are hard to calculate and do little for the bottom line
Beyond creating a new revenue stream, the legalization of marijuana removes criminal penalties and saves resources that are spent to arrest, prosecute, and incarcerate people for marijuana possession. Harvard economist Jeffrey Miron estimated that the enforcement of marijuana laws accounted for $5.3 billion in state and local expenditures in 2003. Estimates of savings run anywhere from $12 to $60 million per year in Colorado, as they have avoided about 10,000 arrests for marijuana possession annually. Law enforcement made 7,580 arrests for marijuana possession in Oklahoma in 2015.
But there is little evidence that states reduce budgets for public safety and courts as a result of these savings. In Oklahoma especially, continued cuts to every agency mean that any savings would be needed to plug the big holes in their budgets. In fact, if law enforcement depends on asset forfeitures from people caught with marijuana, they may take a financial hit when the drug is legalized. This could be an especially big problem in Oklahoma, where 70 percent of forfeiture revenues are used for salaries.
Marijuana tax revenue cannot solve the structural imbalance in our budget
So how much revenue could Oklahoma expect to raise from legalizing recreational marijuana? Based on the results in Colorado and Washington, the Tax Foundation estimates that Oklahoma could collect as much as $108 million per year based on a 25 percent effective tax rate. That would be a good start to cover budget deficits that continue to climb higher, last year reaching $1.3 billion. But it’s unknown how much legalized marijuana would cut into sales of currently legal recreational drugs like alcohol and tobacco, which means the newly taxable sales would be supplanting that revenue rather than adding to it.
This projected revenue from legalizing marijuana is also much less than many of the sensible solutions that OK Policy put forward but were left on the table by lawmakers last year. For example, suspending this year’s income tax cut would have brought in $147 million; increasing the cigarette tax by $1.50 per pack would bring in over $180 million. The problem is that there are too many expenses and too few revenues to pay for them, creating a persistent structural deficit. Legalizing and taxing marijuana may be a part of the solution, but it would not substitute for the need to take a sober look at what we want government to do, how much it will cost, and how to pay for it.