Marijuana tax revenues may not be the long-term answer to Michigan budget woes

While the revenues from marijuana sales are expected to explode in Michigan next year, a study from the Pew Charitable Trusts released Monday warns that experiences from other states show the gravy train will probably level off in a few years.

Medical marijuana sales have consistently increased in Michigan since legal sales began in October, when the state reported $641,079 in sales. There hasn’t been a decline in monthly sales since those first purchases, with July numbers coming in at $30.1 million, according to the Marijuana Regulatory Agency.

And that doesn’t take into account how sales will blast off once the market for recreational marijuana opens up later this year or in early 2020.

The state House Fiscal Agency has estimated that when the recreational market for marijuana is fully established after 2020, annual sales will approach $949 million, bringing in $94.9 million from the 10% excise tax and $57 million from the 6% sales tax.

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Investors attending the Capital Cannabis Conference, sponsored by the financial news website Benzinga in Detroit last week, predicted the Michigan market could exceed $2 billion.

“This is a market that in the next few years could easily eclipse $2 billion,” said Sat Joshi, chief information officer for Rose Capital, a Connecticut-based investment firm that focuses on the cannabis industry. “I think we could see much more growth than that."

That prediction comes as Michigan is rated as the second-largest medical marijuana market, with 283,770 patients. Colorado, which is the oldest marijuana market in the nation but has 4.3 million fewer residents than Michigan, surpassed $1.5 billion in sales in 2018.

According to the Pew Trusts study, however, that peak may not grow much larger.

“This is a highly unpredictable revenue source,” said Alexandria Zhang, a member of the Pew research team. “Revenues have varied greatly from state to state.”

In Nevada, for example, tax revenues were 40% higher than state officials had anticipated in the first six months of legal weed sales, but in California, the revenues were 45% lower than expected.

And while tax revenues showed sharp growth curves in five of the 10 states where recreational marijuana sales are legal, those numbers in several states are starting to level off, including Colorado, Washington, Oregon and Nevada.

In some markets, such as California, where taxes are especially high — a 15% excise tax, 7.25% sales tax and additional excise taxes on growers — the black market has continued to thrive as an attractive, and less expensive, alternative to the legal pot industry. The study found that “not knowing how to account for the competition with the black market may be one reason why California’s legal market hasn’t met revenue expectations.”

The people who put together the Michigan ballot proposal to legalize marijuana for people 21 and over purposely set the tax rates low — it’s the lowest among the 10 states that have legalized pot — in an effort to better compete and possibly limit the black market for marijuana in the state, said Josh Hovey, spokesman for the ballot committee and the Michigan Cannabis Business Association.

The House Fiscal Agency analysis acknowledges the difficulty in predicting the market for marijuana in the state. Prices for pot vary widely and in other legal states have been high initially, but taper off as supplies increase. The number of users buying legal weed also is hard to determine because it doesn’t account for people who will continue to buy from the black market that they’ve been using for years and how many people will choose to grow their own pot because Michigan’s law allows people to grow up to 12 plants for personal use.

“The potential revenue impact from recreational marijuana depends on a variety of factors, most of which can only be estimated with fairly wide margins of error,” the agency said in its analysis of the marijuana legalization proposal.

The Pew Trust study encourages states to put their tax revenues into either a rainy day fund or some other type of savings account and to definitely “budget those tax dollars after they’re collected,” Zhang said.

Michigan doesn’t have that luxury. The ballot proposal dictates where the tax revenues from the 10% excise tax go and the projected revenues from the taxes have already been included in the fiscal 2020 budget, said Jenni Riehle of the state Budget Office.

According to the proposal, the first $20 million in tax revenues in the first two years of recreational marijuana sales goes to research on the benefits of marijuana to treat ailments such as post-traumatic stress disorder.

The remainder is split between payments to cities and counties that allow marijuana businesses in their towns, the school aid fund and the transportation fund to improve roads. But those projected tax totals — $97.5 million in 2020, growing to $163 million in 2023 — are a small fraction of the state’s $60 billion budget.

The projected revenues from the 6% sales tax — from $59 million in 2020 to $98 million in 2023 — are earmarked for the school aid fund, revenue-sharing payments to cities, townships, villages and counties, and the state’s general fund.

One place the tax revenues won’t go in Michigan is to pay for the Marijuana Regulatory Agency, which is charged with licensing marijuana businesses and regulating the industry. While the Legislature appropriated $10 million to set up the agency, application fees and regulatory assessments are set at a level that will cover the cost of the agency.

“While setting up the fee structure for the adult-use marijuana market, we purposely decided to include the costs of the regulatory system in the licensing fees so that 100% of the excise tax would go where the voters intended,” said David Harns, spokesman for the agency.

The state came up with the rules that will govern the recreational marijuana market earlier this month and will begin accepting applications for business licenses later this fall. The first licenses will go to business owners who already have a medical marijuana license and have been vetted by the state.

Contact Kathleen Gray: 313-223-4430, kgray99@freepress.com or on Twitter @michpoligal.