If Maryland decides to legalize marijuana — and that’s a big if — officials may have a difficult time figuring out how much money the state will bring in from taxing the drug.
Some states with legal marijuana have vastly underestimated the amount of tax revenue they would collect. Others overestimated revenues, forcing difficult budget decisions. All have grappled with making forecasts based on scant information, according to a new report from the Pew Charitable Trusts.
Marijuana is “a highly unpredictable revenue source,” said Alex Zhang, a co-author of the report, titled: “Forecasts Hazy for State Marijuana Revenue.”
That could represent a challenge for Maryland lawmakers, some of whom are looking at marijuana taxes as one way to pay for increased spending on the state’s public schools.
“I don’t want to be too exuberant about the revenue potential,” said Del. David Moon, a Montgomery County Democrat and longtime proponent of marijuana legalization. He serves on a bipartisan work group of lawmakers that’s sorting out issues related to potential legalization.
Moon was a sponsor of a legalization bill that went nowhere last year. It would have created an excise tax on wholesale marijuana sales and charged the 6% state sales tax on retail sales.
The analysts at the nonpartisan Department of Legislative Services did not estimate how much money Moon’s bill would have generated for the state — but offered a prediction that revenues would increase “potentially significantly.”
The analysts are expected to come up with estimates before the 2020 General Assembly session, when lawmakers are expected to look more closely at legalizing marijuana. Legislators could pass a new law or put a referendum on the 2020 general election ballot to let voters decide the issue.
Moon said some rough estimates put the tax money at somewhere between $50 million and $200 million per year in Maryland. That’s a lot of money generally, but would be a small contribution to the state’s $46 billion annual budget.
It also would only make a small dent in an expected increase in public school funding. A group called the Kirwan Commission (named for its chairman, former University of Maryland, College Park, President William “Brit” Kirwan) has recommended scores of costly improvements to public schools, including raising teacher pay, expanding prekindergarten and boosting community services provided by schools.
The Kirwan Commission’s wish list could be as expensive as $4 billion per year. The group is working on plans to pay for the new spending, likely with contributions from the state and counties.
Some say part of the state’s portion could come from marijuana taxes.
“It’s one of a handful of revenue options that really have a chance of being passed to fund Kirwan,” said Del. Eric Luedtke, another Mongtomery County Democrat who supports legalization. “Whether that happens and in what form is still a question mark.”
Luedtke cautioned that taxing marijuana isn’t the only answer for funding public schools.
“We should do it, but it’s not enough on its own to fund Kirwan,” he said.
“The numbers that I’ve heard is maybe $90 to $100 million. That gets us nowhere near Kirwan,” said Del. Kathleen Dumais, a Mongtomery County Democrat who co-chairs the marijuana work group, which will hold its second meeting Monday.
Dumais noted that however much the marijuana revenue might be, some of it could go to education. But some also could go to other needs, such as filling gaps in mental health services.
States need to be cautious when estimating marijuana tax revenue and deciding how to spend it, according to the Pew report, which analyzed rules in the states that have legalized marijuana and have active markets for the drug.
There are three general options for taxing marijuana: a state’s standard sales tax, a special marijuana excise tax on retail sales, and excise taxes on marijuana producers. The excise taxes can be a percentage of the total sale — just as sales taxes are calculated — or a fee based on the quantity of the marijuana product.
Once the tax rates are set, then state budget officials need to figure out how much people will buy and use marijuana. That’s a tricky proposition, given the limited data available.
Among the considerations: how many black-market marijuana buyers will switch to the legal market, how many new users will buy the drug, how much product customers will buy and whether tourists or residents from nearby states will purchase the drug.
Maryland could be well-positioned to see out-of-state visitors arriving specifically to buy marijuana, given that most states with legal marijuana are in the West. The District of Columbia has legalized recreational marijuana, but it’s not sold there as a retail product.
“I would theorize that having Maryland pretty well situated on transportation infrastructure, we would be benefited greatly from being first in the Mid-Atlantic region,” Moon said.
There’s also a question of how the market for medical cannabis may be affected by legalizing recreational marijuana. Will some medical patients switch to recreational marijuana? Sales of medical cannabis — which is not taxed — began in Maryland in late 2017. In the first full year, 2018, medical cannabis sales in Maryland totaled $109 million. From January through May of this year, medical cannabis sales topped $85 million.
Even looking to other states for guidance has limited value, as there’s not a long record of sales. Colorado has the most mature legal marijuana market, with sales starting in January 2014. In Colorado — which, like Maryland, has about 6 million residents — marijuana-related taxes and fees generated $67 million in the first year, a number that grew to $266 million last year, according to the Colorado Department of Revenue.
Six other states have established retail markets since Colorado, according to the Pew report: Alaska, California, Massachusetts, Nevada, Oregon and Washington.
Some states have found difficulties in predicting use and sales of marijuana, the report said. For example, in the first six months of sales in Nevada, tax revenue came in 40% more than predicted. But California’s first six months of sales brought in 45% less than projected.
It’s also tough to forecast how much marijuana sales will grow. Some states saw rapid growth in the first couple of years, followed by a leveling off, according to the report.
Given these challenges, Pew recommends that states not count on marijuana tax revenue for immediate budget needs — at least not right away.
The report highlights Colorado and California, where the states hold onto marijuana money for a year before putting it into the budget and spending it. That way, the state knows how much money it has to spend. Another option highlighted is Nevada, where retail tax on marijuana is sent to the state’s “rainy day” fund.
The report cautions: “While these new dollars can fill immediate budget needs, they may prove unreliable for ongoing spending demands.”
