How much will NJ really make from taxing legal weed?

How much money could New Jersey bring in if the state ever legalizes recreational marijuana?

The question is difficult to answer, and states that have tried predicting legal weed revenue have been all over the place due to hazy data, according to a new study by The Pew Charitable Trusts. 

After a drawn-out, failed effort earlier this year to legalize adult-use cannabis in the Garden State, New Jersey political leaders said they would like to give the legislation one final shot before potentially shifting the question to voters in a 2020 ballot question. 

It's unclear what this latest attempt will look like, or how exactly New Jersey will try to make money off the new market. Pew's study, released last Monday, includes advice for governments looking to supplement state spending with a new cannabis cash cow, and how New Jersey, a state with a ballooning public pension problem and a need for more sustainable tax inflows, should think about using such an unpredictable revenue source. 

How well have other states predicted marijuana money?

So far, seven states have active legal cannabis markets that bring in money to the governments: Alaska, California, Colorado, Massachusetts, Nevada, Oregon and Washington state. While Maine, Michigan, Vermont and Washington, D.C., have also legalized recreational-use marijuana, they don't have systems set up yet.  

So how good have states been at predicting the money they will bring in with the new taxes? It's been totally all over the place, Pew found. In the first six months of the new marijuana tax, Nevada collected 40 percent more revenue than its budget officials predicted. But in California, the state took in only 45 percent of what it expected. An advisory committee found that the high taxes on the legal product didn't make consumers want to leave the black market, which could be a reason why revenue predictions were so far off. 

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Colorado, on the other hand, got really close, estimating $67 million from excise taxes in the first year. The actual number? $66.1 million. 

Why is it so hard to predict?

Estimating revenue for a formerly illegal product that is still illegal under federal law is tough. Because only a handful of states have legal recreational marijuana markets, which were created so recently, there's a shortage of data budget analysts can use. 

And then there's predicting exactly who will buy the drug. States rely on state surveys or the National Survey of Drug Use and Health, but because questioners are asking about illegal or formerly illegal drug usage, they expect people won't always feel comfortable telling the truth. So states don't have a clear picture of what the demand really looks like.

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Budget analysts also didn't always understand how long it would take to get operations running, some state economists told Pew. In Colorado, they expected the businesses to be licensed and operating much more quickly than they were. Alaska forecasters didn't consider the three to four months it takes for seeds to mature. Oregon received a huge rush of applications from producers, which created a bottleneck as the state processed them. 

Has marijuana been lucrative for these states?

Sales were booming in the five states where Pew was able to get at least a full year of available data: Alaska, Colorado, Nevada, Oregon and Washington. They collected a combined $2.1 billion in taxes from February 2014 through June 2018, the Pew report said. 

But though revenue rose quickly when states first offered recreational marijuana, those growth rates slowed as time passed.

Click through the tabs on the graph to see monthly revenue collections for the five states:

How does this work in New Jersey?

The last iteration of the recreational marijuana legalization bill included a flat tax rate on cultivators growing the plant of $42 tax per ounce of marijuana.

The Legislature completed a fiscal impact analysis for an early version of the bill, but it doesn't calculate the costs for the latest proposal. 

The Treasury Department estimated that recreational weed would bring in $60 million in six months, starting in January 2020. That would mean New Jersey would have taxed more than 89,200 pounds, or 1.4 million ounces, of marijuana. 

And about $21 million of those funds would go into launching the program, so recreational cannabis would leave New Jerseyans really with an additional $39 million in revenue. 

The Treasury Department got those numbers by looking at first-year revenues from recreational cannabis in Colorado, Nevada, Oregon and Washington and weighing the states' populations against New Jersey. 

That total was a much more conservative estimate than the $300 million Gov. Phil Murphy said was possible while he campaigned for governor.

Charles Menifield, the dean of Rutgers' school of public affairs, said he had seen earlier large estimates in the media and was skeptical that the numbers were possible. 

"Politicians and bureaucrats sometimes make these blanket statements and you can't find the source," Menifield said. "I wanted to know how they came up with these numbers." 

Menifield predicted New Jersey could collect between $118.2 million and $173.5 million per year, once the market is fully up and running, from taxes and application and licensing fees. He presented his model and calculations at a conference last fall, using Colorado data and the National Survey on Drug Use and Health estimate that the Garden State had 832,000 marijuana users in 2016.

He's interested in studying further the ways in which legalization of recreational marijuana will affect crime, education, health and other factors in the state. 

What should states use marijuana tax money for?

Since the revenue is so unpredictable, the report warns against depending too heavily on marijuana money. 

States could collect the funds in a separate account and decide how to spend it in a later budget, as California or Colorado did. 

“We don’t want to have to make agencies give money back if there’s not enough, or rescind appropriations, so we’ll just budget it in the year after it’s collected,” Larson Silbaugh, Colorado's principal economist, said in the report. 

Nevada uses the retail tax revenue for its rainy-day fund, which can be tapped only in case of a recession or emergency. New Jersey's rainy-day fund remained empty for a decade until this budget season, when Murphy moved $401 million into safe keeping.

One-time spending items are also safe, Pew says, though most states use at least part of their marijuana revenue on recurring expenses, such as health programs. 

It's important to consider whether neighboring states have legalized yet when committing the money to certain programs, Menifield warned. 

"If New Jersey legalizes before New York, Pennsylvania or Delaware, they could get accustomed to the higher level of revenue," Menifield said. "But if they don't have a game plan for the reduction in revenue when those states legalize, that's where they can get into trouble."

It's up to lawmakers to decide in the bill where exactly that revenue should go. The last debated version placed the money into a special cannabis fund that would pay for the commission that would oversee legal weed, as well as subsidizing police officer training. Any leftover money would go into the state's general fund.