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Study warns states not to count on a windfall from marijuana legalization

Lauren Downes, left, an employee at the Seattle area's second recreational marijuana retail store, Herbal Nation, sells $99.64 worth of weed to customer Matt, no last name given, at the store's "soft launch" Monday, Aug. 11, 2014, in Bothell, Wash. (AP Photo/seattlepi.com, Jordan Stead)

Lauren Downes, left, an employee at the Seattle area’s second recreational marijuana retail store, Herbal Nation, sells weed at the store’s “soft launch” in 2014. (AP Photo/seattlepi.com, Jordan Stead)

A new study from the Pew Charitable Trusts is urging states to be cautious about projecting revenues from legalizing recreational marijuana and to avoid tying big-ticket spending plans to an anticipated marijuana windfall.

The report released Monday morning comes hours before a Maryland legislative panel that is sorting through the public policies related to legalizing recreational marijuana meets for the second time. That panel and the General Assembly will have to work through the thorny issues of new taxes on a product that currently is not available legally.

Seven states are already in the recreational market — three more have legalized it but have yet to start the first sales. The Pew study found that revenues are difficult to project and often volatile and vulnerable to pressures from medical marijuana sales as well as continued illegal or black markets.

“Looking at the financial aspects of this is not something that is straightforward,” said Sen. William “Bill” Ferguson, D-Baltimore and Senate co-chair of the joint legislative Marijuana Legalization Work Group. “We really need to think through how best to create a taxation structure that best accomplishes the objective of legalization of adult-use recreational marijuana.”

The Pew report notes that determining that revenue has been “notoriously volatile and difficult to predict” in ways that other so-called “sin taxes” on tobacco and alcohol are not. Alex Zhang, a researcher on state and local fiscal policy for Pew Charitable Trust, urged states like Maryland to be cautious when it comes to revenue expectations from marijuana legalization.

“States should not assume the revenue from legalization of recreational marijuana will be reliable in the long term,” said Zhang. “Given the uncertainty, policymakers should be cautious about dedicating revenue to ongoing spending to help ensure that future budgets balance.”

In Nevada, which began recreational sales in 2017, revenue was 40 percent higher than projected. Conversely, in California, which began sales in January 2018, revenues were 45 percent lower than the $1 billion projected for the first six months of tax collections.

“It’s like predicting the weather,” said Ferguson. “You hope to get close, but it’s impossible to be perfect.”

Sen. Andrew Serafini, R-Washington and a member of the legislative panel, said Colorado officials similarly urged caution as Maryland looks at legalization.

“They said, ‘Please don’t promise people you’re going to pay for stuff. We did that, and we had to back it up,'” Serafini said. “I think to rely on this, for us to make promises that this is going to solve the issue is very doubtful.”

Why projections are off

A number of factors can affect projections, including difficulties in determining demand. Zhang said some who conducted surveys felt the results were tainted by respondents who were hesitant to disclose their use of marijuana.

Pricing and regulations can also affect the conversion of users from the non-taxed medical market as well as those who may continue to buy from unlicensed street dealers because legally regulated cannabis is more expensive.

The California Cannabis Advisory Committee found that the state’s “legal marijuana market does not present an attractive alternative to the black market, in large part due to high prices.”

Falling prices as markets mature can also affect state revenues unless sales increase.

And while some states — Colorado and California — specifically set aside money in a trust fund and spend it a year later, states should consider using revenue from recreational marijuana for savings or one-time expenses as opposed to funding ongoing programs, Zhang said.

“Forecasting challenges and a lack of data have made legalized recreational marijuana a highly unpredictable revenue source, but policymakers can manage this uncertainty by budgeting the revenue in careful ways,” said Zhang.

Maryland established its medical cannabis program in 2012, but it didn’t launch until 2017.

The debate on legalizing recreational marijuana in the state has largely stalled as lawmakers wait for the medical program to gain its footing after a number of stutter steps. Fiscal pressures, including the need for additional funds to pay for nearly $4 billion in new annual public education spending recommended by the Kirwan Commission, has caused lawmakers to discuss marijuana legalization in earnest.

“We need to not commit this to a specific line item but instead but it in a separate bucket and see where it hits and then see where it goes,” said Serafini. ”

There are no official revenue estimates for legalizing and taxing recreational marijuana in Maryland. Some lawmakers compare Maryland to Colorado, a state of similar population, which reported more than $250 million in taxes in 2018.

There are those in Annapolis who think legalizing marijuana could generate $300 million or more annually.

Ferguson notes that Maryland’s medical program, which is not taxed, generated sales of $100 million in the first year and doubled that in year two.

“Certainly this is not enough data to make any kind of an educated guess on the marketplace for recreational, but it’s the data we have,” said Ferguson.

 


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