TheFiscalImpactofAmendment64 onStateRevenues

April24,2013 Preparedby:
CharlesBrown Director ColoradoFuturesCenter PhyllisResnick LeadEconomist ColoradoFuturesCenter

www.colostate.edu/coloradofutures

Summary
ColoradovotersapprovedAmendment64inNovember2012,legalizingtheproduction,saleanduseof adultrecreationalmarijuanaunderColoradolaw.Sincethen,variousmechanismsofstategovernment havebeenlookingathowtoimplementtheamendment,includinghowbesttoregulateandtaxthesale ofrecreationalmarijuana.TheColoradoGeneralAssemblysJointSelectCommitteeonthe ImplementationofAmendment64recentlyhandeddownlegislationthatincludesthefollowing proposedtaxesrelatedtoAmendment64: Anexcisetaxlevyof15%ofthewholesalevalueofmarijuana; Aspecialsalestaxof15%ontheretailsaleofmarijuana;and Extensionofthestatesexisting2.9%generalsalestaxtosalesofmarijuanaandmarijuana products.

TheColoradoFuturesCenteratColoradoStateUniversitysoughttoprovideacleareyedandunbiased analysisofthefiscalimpactoftheproposedAmendment64taxmeasuresaspartofabroader commitmenttolookholisticallyatthesustainabilityofColoradosstatebudget.Thispaperwilladdress thefollowingkeyfindings: 1. TheadultrecreationalmarijuanamarketinColoradowillbe$605.7millionandtaxationof thatmarketwillbringanadditional$130.1Millioninstatetaxrevenueinfiscalyear2014 15.1,2 2. The15%wholesaleexcisetaxcreatedbytheamendmentwillnotreachthegoalof$40Million forschoolconstructionasstipulatedintheballotlanguageapprovedbyvoters. 3. Thehighwatermarkformarijuanataxrevenueislikelytobeinthefirstfewpostlegalization yearswithrevenueflatteningordecliningthereafter. 4. Marijuanataxrevenuesmaynotcovertheincrementalstateexpendituresrelatedto legalization. 5. MarijuanataxrevenueswillnotcloseColoradosstructuralbudgetgap.

Thisamountdoesnotincludesalestaxrevenuefromthesaleofmarijuanaparaphernaliabutdoesincludeconsumablessuchasbakedgoods. Italsodoesnotaccountfortheeffectoflocalsalestaxesonconsumptionandthepriceofmarijuanaortheoffsettinglossinstaterevenuefrom decliningmedicalmarijuanasalesasmedicalpatientstransitiontotheadultrecreationalmarijuanamarket. 2 TheserevenueestimatescomefromamodelCFCbuilttoestimatetherevenuepotentialofmarijuanataxation.Themodelwaspopulated withwhatwebelievearethemostlikelyassumptionsconcerningcost,consumerbehaviorandtaxrates.However,othersmayholddifferent assumptions.Toallowforchangestotheassumptions,themodelisavailableonourwebsite,www.colostate.edu/coloradofutures,inan interactiveformforuserstoassesstherevenueimpactunderdifferentassumptionsthanthoseusedforthisstudy.

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Background
Amendment64,legalizingadultrecreationalmarijuanaforColoradans21yearsandover,waspassedby ColoradovotersinNovember2012.InDecember2012,GovernorJohnHickenloopercreatedatask forcechargedwithmakingrecommendationsconcerningtheregulatoryandtaxingenvironmentforthis newindustry.InFebruary2013,thetaskforcereportedtothegovernoraseriesof58 recommendations,acopyofwhichisavailableatwww.colorado.gov/cms/forms/dor tax/A64TaskForceFinalReport.pdf. Thegubernatorialtaskforcerecommendedtwoseparateanddistincttaxesformarijuana,whichare nowbeingconsideredbytheGeneralAssembly.Thefirstisa15%excisetaximposedatthepointof transactionbetweenmarijuanacultivatorsandproductionfacilitiesorretailstores.Thistaxwas proposedintheoriginallanguageoftheamendment,butsincethetaxinglanguageinAmendment64 wasnotTABORcompliant,theexcisetaxmustberesubmittedforapprovalbythevoters.Thelanguage oftheamendmentdedicatesthefirst$40millionofproceedsfromtheexcisetaxtotheBuilding ExcellentSchoolsToday(BEST)programforschoolcapitalconstruction. Inadditiontotheexcisetax,thetaskforcerecommendedthatvotersbeaskedtoapproveaspecial salestaxofupto25%imposedatthepointofretailformarijuanaproductsandparaphernalia.Aselect committeeofthelegislatureloweredthespecialsalestaxcapto15%andrecommendedamechanism fortheproceedstobesharedwithlocalities.Citiesorcountiesthatprohibitmarijuanalicenseeswould notbeeligibleforashareofproceedsfromthespecialsalestax. Finally,underthecurrenttaxcode,thesaleofmarijuanaproductsandparaphernaliawillbesubjectto the2.9%existingstatesalestaxaswellaslocalsalestaxeswithoutavoteofthepeople.Aseparate recommendationofthelegislativeselectcommitteedirectedthatallproceedsfromthetaxationand feesonmarijuanatransactionsbedepositedintoanewlyformedmarijuanacashfundforthepurposes ofregulatingtheindustry.Currently,theGeneralAssemblyisconsideringthecommittee recommendations,andassumingthetaxrecommendationswillnotbeamended,weestimatedthe revenuepotentialoftheproposedtaxesascurrentlyproposed.

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RevenuePotentialoftheProposedMarijuanaTaxes
Estimatingtherevenuepotentialofproposedmarijuanataxesisafourstepprocess.Buildingon previouslypublishedmethodologies3,theColoradoFuturesCentermodelestimatespostlegalization demandformarijuana,thewholesalecostandretailprice,thepriceinducedchangesinconsumption behaviorlikelytoresultfromadecisiontolegalize,andultimatelythetaxrevenuethatwillresultfrom legalization.Estimationsoftaxrevenueareheavilyinfluencedbyassumptionsaboutdemandforand thewholesaleandretailpricesofmarijuana.AssumptionsusedintheCentersmodel,alongwiththe rationaleforeach,aredetailedinthesectionsbelow.However,toallowforchangestothe assumptions,themodelisavailableonourwebsite,www.colostate.edu/coloradofutures,inan interactiveformforuserstoassesstherevenueimpactunderotherassumptions. STEPONE:EstimateDemandforAdultMarijuana(notincludingconsumables) Thedemandforadultmarijuanaisdependentonthenumberofconsumersandtheamountconsumed peruser.UnderColoradolaw,thepurchaseofadultrecreationalmarijuanawillbelegalforanyone21 yearsoldandover.Thecurrentrecommendationfromthelegislaturewouldnotlimitaccessto Coloradans,makingthepurchaseofmarijuanalegalforthose21andoverregardlessoftheirplaceof residence.ThisextensiontononColoradansmakestheestimationofdemandmorecomplicated. Whiletherearedatabystateontherateofmarijuanausage,itisdifficulttodeterminetheextentofthe demandformarijuanathatwillcomefromnonColoradans.Inaddition,whileillegal,itislikelythat marijuanawillbepurchasedandtransferredtothoseundertheageof21.Sincethereisnoreliabledata ontheprobableextentofmarijuanatourismandillegaltransferstominors,theseactivitiesarenot accountedforintheCentersmodel,soourestimatesmaybeunderstatedtosomeextent. ThemostreliabledataonmarijuanausagecomesfromtheNationalSurveyonDrugUseandHealth.4 Thelatestsurveydatafrom201011reportsharesofthepopulation,byagecohort,thathaveused marijuanainthepreviousyear.Forthoseyears,thesurveyreportsthefollowingusageratesfor Colorado: 41.29%intheagecohort1825 11.54%intheagecohort26andabove ToestablishourestimateforthenumberofColoradansusingmarijuanain2014,thefirstyearof legalization,weappliedtheusageratesfromthesurveytotheColoradoStateDemographyOffices 2014forecastforpopulationinthoseagecohorts.Toadjustthe1825cohorttothe21andover cohortthatislegallyabletopurchasemarijuana,weassumedthattheusagewasevenlydistributedand usedastraightlineapproach.Initiallyweestimatethat554,710Coloradanswillusemarijuanain2014. Sincethisestimateisbasedonsurveydataconcerningatopicthatisbothillegalandmaycarryasocial stigma,weassumethatusageisunderreportedinthesurvey.Studiessuggestthattherangeof underreportingmaybeanywherebetween0%and40%.ConsistentwiththeCCLPsanalysis,we assumeanunderreportingrateof20%.Adjustingourestimateofusersforunderreporting,weforecast that665,652Coloradanswilluselegalmarijuanain2014.However,asofFebruary2013,108,951
3 4

SeeforexampletheColoradoCenteronLawandPolicy(CCLP)athttp://www.cclponline.org/postfiles/amendment_64_analysis_final.pdf http://www.samhsa.gov/data/NSDUH/2k11State/NSDUHsaeTOC2011.htm Page|3

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Coloradansheldmedicalmarijuanacards.Again,consistentwiththeCCLPanalysis,weassumedthat 79%ofthosecurrentlypurchasingmedicalmarijuanawillmigratetotheadultrecreationalmarijuana marketwiththeremaindercontinuingtoaccessmarijuanathroughmedicalmarijuanaestablishments. Accountingforthisadjustment,weestimatethatthemarketforlegalmarijuanatobe642,772 Coloradans.Finally,weassumedaperpersonperyearusagerateof3.53ounces,againconsistentwith theCCLPanalysis.Thisresultsinaprelegalizationestimateofdemandformarijuanaof2,268,985 ouncesannually. Therearethreatstothisestimate.Twothatarementionedabovemarijuanatourismandthe purchaseofmarijuanatobeillegallytransferredtothoseundertheageof21makeourestimateof usesomewhatconservative.Ifeitherorbothofthoseeffectsoccur,demandwillbehigherthanwe estimate.Ourestimateofdemandalsodoesnotaccountforchangesinbehaviorduetolegalization. Therearelikelytobeoffsettingeffectsofthoseattractedtomarijuanaorinclinedtoconsumelarger quantitiesbecauseitisnowlegalandthosewholoseinterestinmarijuananowthattheforbidden fruitaspectofmarijuanauseiseliminated.Weimplicitlyassumethatthoseeffectsoffset. STEPTWO:EstimatethePostLegalizationWholesaleandRetailPrices Thenextcomponentnecessarytoestimatethesizeofthelegalmarijuanamarket,andthusthetax revenuepotential,isthepriceofmarijuana.Becauseofthedifferingstructureoftheproposedexcise andspecialsalestaxes,boththewholesaleandretailpricesofmarijuanaarerelevant. Sincegrowingmarijuanaisfederallyillegalandcontinuestobeillegalinmoststates,thereisscantdata onthecoststructureofagrowoperation.However,in2010researchersattheRandInstituteestimated arangeonthecostofgrowingmarijuanainCalifornia.Theirestimatesvarywidelyfromdeminimisto atopestimateof$400/lbforagrowoperationthatusesa1500squarefoothomeasthelocationofthe cultivation.5InflatingRandshighend2010estimateof$400/lbwithaproducerpriceindexforecastfor allfarmproductsfromMoodysEconomy.com,weestimatethatmarijuanawillcost$592/lbtogrowin 2014.Inourmodelweusedaroundedassumptionof$600/lbtogrowmarijuana. Buildingfromwholesalecosttoretailpricerequiresaccountingforexcisetaxes,distributioncosts,and variousmarkupsalongthesupplychain.Afteraccountingforalloftheadditionstowholesalecost,we estimatethepostlegalization,presalestaxretailpriceofmarijuanatobe$2,509/lbor$157/oz.After applyingtherecommendedsalestaxes,weestimatethattheretailpriceformarijuanawillbe $2,959/lbor$185/oz.Again,theretailpricecalculationisextremelysensitivetotheassumptionsmade foralladjustmentsalongthesupplychainaswellastothecultivation(wholesale)costofmarijuana. Thetablebelowshowsourcalculationsfromcultivationcosttoretailprice,alongwiththebasisforour assumptions.Userswishingtovarysomeoftheseassumptionsmaydosoonourinteractivemodelat www.colostate.edu/coloradofutures.
5

http://www.rand.org/content/dam/rand/pubs/working_papers/2010/RAND_WR764.pdfand http://www.rand.org/content/dam/rand/pubs/occasional_papers/2010/RAND_OP315.pdf
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Table1.CalculationsfromCultivationCosttoRetailPrice Value(allperlb. CostItem unlessnoted) BasisforAssumption WholesaleCost,perlb. $600 RandStudy,adjustedforinflation ExciseTaxat15% $90 Amendment64 CCLPstudy,basedonsimilaragricultural ProducerMarkupRateat25% $183 productmarkups DistributionCost,perlb. $40 CCLPassumption,basedonRandanalysis MiddleestimatebetweenCCLPanalysisand numerousmarijuanablogs.Alsoaccountsfor overheadcostsassociatedwithoperating RetailerMarkupRateat175% $1,597 marijuanaretailestablishments. RetailPrice,perlb/oz.(before $2,509/lb. salestax) $157/oz. SelectCommitteerecommendationfor SpecialSalesTaxat15% $376 maximumrate StateSalestaxat2.9% $73 RetailPrice,perlb.(aftersales tax) $2,959/lb. RetailPrice,peroz.(aftersales tax) $185/oz. STEPTHREE:EstimatePriceInducedConsumptionChangesandthePostLegalizationDemandfor AdultMarijuana Assuminghighendestimatesforthecostofcultivationandretailermarkupsonmarijuanaand accountingforthetaxburden,weforecastthepostlegalizationpriceof$185/oztobelowerthan currentblackmarketpricesinColorado.Thebestsourceforpricesforblackmarketmarijuanain ColoradoisthecrowdsourcingwebsiteThePriceofWeed6whichreported,asofApril10,2013,thatthe averagepriceofanounceofmarijuanaofallqualitieswas$206.Aswithmostothergoods,areduction inthepriceresultsinanincreaseinthequantitydemanded.Weexpectthesametobetruefor marijuana. Therelationshipbetweenpriceandquantityofgoodsconsumedischaracterizedbytheelasticityof demand.Elasticititiesmeasurethepercentchangeinquantitydemandedthatresultsfroma1%change inthepriceofagood.Thebestestimatefortheelasticityofdemandformarijuanacomesfromthe researchersattheRandInstitute7whoestimatethatmarijuanahasapriceelasticityofdemandof0.54. Theinterpretationofthismeasureisthata1%decreaseinthepriceofmarijuanaresultsina0.54% increaseinquantitydemanded.Applyingthismeasuretoourforecast10%decreaseinthepriceof marijuanaafterlegalization,weexpecta6%increaseinquantitydemanded,ultimatelyresultingina postlegalizationdemandformarijuana(notincludingconsumables)of2,394,428ounces.
6 7

http://www.priceofweed.com/ Kilmeretal2010pg.23athttp://www.rand.org/content/dam/rand/pubs/occasional_papers/2010/RAND_OP315.pdf
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STEPFOUR:CalculateTaxRevenue

Undertheproposedtaxmeasures,andassumingapprovalbythevoters,allmarijuanaandmarijuana relatedpurchaseswillbesubjecttotheexcise,specialsalesandexistingstatesalestax.Whilewedo nothavegooddataonthesalesofmarijuanaparaphernalia,wecanusethemodelaboveandother researchtoestimatethetaxrevenuepotentialfromallothermarijuanapurchases,including consumablessuchasbakedgoods. AccordingtotheinvestorrelationswebsiteforMedicalMarijuanaInc.8,consumable(oredible) marijuanaaccountsfor38%ofthetotalmarketformedicalmarijuana.Assumingthatthesharewill remainthesameforrecreationalmarijuana,wecanimputethesizeofthetotalmarketforall marijuana,includingconsumables,byknowingthatthenonediblepurchases,estimatedabove,account for62%ofthetotalmarket.Bythatcalculation,andassumingthedemandandcoststructureoutlined above,thetotaldollarvalueoftheretailandwholesalemarketsforadultmarijuanaareestimatedtobe $605.7Millionand$144.8Million,respectively.Applyingthe15%taxatwholesale,the2.9%statesales taxatretailandtheproposedspecialsalestaxatretailof15%yieldsthefollowingtaxrevenueestimates for201415,thefirstfiscalyearofadultmarijuana: A15%excisetaximposedatthepointofcultivationwillyield$21.7Million Aspecialsalestaxof15%willyield$90.9Million Theexistingstatesalestaxof2.9%willyield$17.6Million

http://www.medicalmarijuanainc.com/index.php/press/22pressreleases/2012pressreleases/107medicalmarijuanaincportfolio companyreddiceholdingsseescontinuedbrandrecognitionwithcobaseddixieelixirs
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ConcludingThoughts:WhatwillMarijuanaTaxationMeanfortheStateBudget?
InNovember2013,Coloradovoterswillbeaskedtoapprovetaxesrelatedtothisnewindustry.Passage ofthetaxmeasureswouldresultinapproximately$130.1MillioninadditionalstaterevenueinFY2014 15(includingthe$17.6Millionestimatedtobegeneratedbytheexistingstatesalestax).Whatwill thesenewrevenuesmeanforthefiscalpositionofthestate? IMPACT:The15%ExciseTaxwillnotYield$40MillionfortheBuildingExcellentSchoolsToday (BEST)Program ThelanguageofAmendment64dedicatedthefirst$40Millioninrevenuefromthemarijuanawholesale excisetaxtotheBESTprogram.Althoughtheexcisetaxratewillneedtobesubmittedtothevoters,the 2013ballotlanguageislikelytocomportwiththelanguageofAmendment64anddedicatethefirst$40 Milliontoschoolconstruction. ConsistentwithAmendment64,theexcisetaxlikelywillbestructuredas15%ofthewholesalecostof marijuana.Inthecurrentverticallyintegratedsystemformedicalmarijuana,withfewornoarms lengthtransactionsbetweencultivatorandseller,itisdifficulttoascertainthewholesalecostof marijuana.Ourassumptionof$600/lb.basedonestimatesbytheRandInstituteandadjustedfor inflationresultsinour$21.7millionestimatefortherevenuepotentialfromtheexcisetax,whichfalls significantlyshortofthetargetof$40Millionforschoolconstruction.Inordertogenerate$40Million fortheBESTprogram,thecosttogrowapoundofmarijuanawouldneedtobeintherangeof $1,100/lb.,alevelalmosttwotimestheRandestimateadjustedforinflationandonewhichrisksraising theretailpriceofmarijuanatoalevelthatwouldencouragethecontinuationofablackmarket. IMPACT:RevenueLikelytobeHighestinEarlyYearswithRevenueFlatteningorDecliningin SubsequentYears Whilethisstudydidnotmodelbeyondthefirstfullyearafterlegalization,ourpreliminaryanalysis suggeststhatthehighwatermarkformarijuanataxrevenueswillbeintheyearsjustfollowing legalization.Thiswillbetheresultofcoreandinterrelatedeconomicandbehavioralphenomena including: Increasedcompetitioninthecultivation(wholesale)andretailmarketsformarijuanawhichwill driveefficienciesanderodemarginsintheindustry.Ascompetitionforcesgrowersandsellers tobemoreefficient,marginswillerodeandbothwholesalecostandretailpriceswillforecastto fall.Withoutoffsettingincreasesinconsumption,fallingpricesresultinlowertaxrevenue. Adeclineintherateofgrowthofconsumptionasthewowfactorerodesovertimeandany marijuanatourismbeginstodecline,particularlyifotherstatesfollowColoradoandWashington andlegalizemarijuana.Onewaytostabilizerevenueinanenvironmentoffallingcostandprice isforconsumptionincreasestobesufficienttooffsetthelowerprices.However,our expectationisthatafteraninitialpostlegalizationperiodofintenseinterestandcuriosity, consumptiongrowthrateswillstabilizeorevenperhapsdeclineashasbeenthecasewith cigaretteconsumption.
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IMPACT:MarijuanaRelatedRevenuesMayNotCoverIncrementalStateExpendituresRelatedto Legalization

Whileitwasoutsidethescopeofourstudytoestimatetheexpenditureimplicationsoflegalized marijuana,werecognizethattherecommendedregulatorystructure,publichealthandsafety initiatives,humanservicesresponsibilities,andpotentiallawenforcementneedswillplaceademandon thestatesbudget.TheGeneralAssemblysJointSelectCommitteealsorecognizedthisandmadea recommendationthatallmarijuanarelatedrevenuesbedepositedintoamarijuanacashfunddedicated tofundingtheregulatoryfunctionintheDepartmentofRevenue. Inrecognitionthatthecashfundmaybeinsufficienttosupporttheregulatoryfunction,thecommittee recommendedageneralfundsupplementformarijuanaenforcementwithanexpectationthatitwillbe reimbursedinthefuture.Thisstructureraisessomequestionsandconcerns: Willtherevenuesfrommarijuana,eitherintheearlyyearsorastheindustrymatures,everbe sufficienttofundtheregulatorystructureandotherstateexpenditureneeds? Ifnot,whatwillbethelongertermmechanismforfundingtherequiredregulation,makingany necessaryreimbursementstotheGeneralFund,andfundingtheotherpublichealth,public safetyandhumanserviceinitiativesrecommendedbytheAmendment64TaskForce? Thesequestionsareofevenmoreconcerninlightofourexpectationthatthemostproductive marijuanataxrevenueyearswillbetheyearsjustafterlegalization. IMPACT:MarijuanaTaxRevenueswillnotCloseColoradosStructuralBudgetGap Coloradoslongtermgeneralfundstructuralgapiswelldocumentedinpreviousworkdonebythestaff oftheColoradoFuturesCenteratCSU.Oneconclusionfromourworkwasthatraisingsintaxes, particularlythoseoncigarettesandtobacco,willnotclosethestructuralbudgetgap.Wehaveevery reasontobelievethatthesameistrueformarijuana.AftermeetingtheobligationsforBESTand fundingtheregulatoryandotherpublichealthandsafetybudgetdemands,revenuefrommarijuana taxeswillcontributelittleornothingtothestatesgeneralfund.Whiletaxesfrommarijuanawill contributetoschoolcapitalconstructionneedsandmaycovertheincrementalcostsassociatedwith legalization,theywillnotcontributeinanysignificantwaytosolvingthestructuralgapdevelopinginthe statebudget.

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