Taxes

Falling marijuana revenues provide reality check for states

The dip, resulting in less to spend on schools and services, could continue in the next fiscal year.
Jars of marijuana line a shelf at The Flower Shop Dispensary in Sioux Falls, S.D. on Oct. 14, 2022. (AP Photo/Stephen Groves)

Marijuana tax collections dropped in several states this year as the cannabis industry struggles with low prices and a drop in demand.

California, Colorado, Nevada, Oregon and Washington all collected less marijuana tax money in fiscal 2022 than the year before, according to a report from the Urban-Brookings Tax Policy Center, a joint venture between two Washington, D.C. think tanks. Most states end their fiscal years on June 30.

That means those states had millions less this past fiscal year to pay for school buildings, drug treatment programs, law enforcement and other services partly funded by taxing pot sales.

Tax revenue may fall even further this fiscal year. Some analysts say the downturn is a reminder that cannabis is an agricultural crop, not a guaranteed moneymaker.

The potential tax revenue “was always oversold as sort of a panacea to state budgets,” said Adam Koh, editorial director of Cannabis Benchmarks, a company that tracks wholesale cannabis prices.

Colorado collected about $370 million in marijuana taxes in fiscal 2022, about 13% less than fiscal 2021.

“We’re anticipating another pretty sizable decline for [fiscal 2023] as well, close to 16%,” said Jeff Stupak, a senior economist with the Legislative Council Staff, a nonpartisan team that advises the Colorado legislature.

Marijuana taxes have become a small but important source of revenue for states with longstanding legal markets. Marijuana excise taxes comprised between 1% and 2% of all revenue collected in many such states in fiscal 2022, according to the Tax Policy Center report.

“It’s comparable to revenue from alcohol and cigarette taxes,” said Richard Auxier, a senior policy associate in the Urban-Brookings Tax Policy Center. “And in Colorado and Washington, cannabis taxes are larger, now, than alcohol and cigarette taxes.”

Marijuana sales are rising in states that legalized recently, such as Michigan and Illinois, Koh said. But sales growth is slowing even in those states, he said.

The recent revenue drop follows a boom early in the COVID pandemic. People rushed to stock up on legal weed when governments ordered businesses to close and people to stay at home.

“There was nothing else to do,” said Truman Bradley, executive director of the Marijuana Industry Group, a business association that advocates for Colorado’s cannabis industry. “We couldn’t go to concerts, we couldn’t go to bars, or hotels, or those kinds of things. I do think that prompted higher purchasing of cannabis.”

Growers responded to the sales spike by rushing to plant more marijuana. “From what we’ve heard, a lot of operators in the industry anticipated that that elevated demand would stick around,” Koh said.

Favorable weather contributed to a bumper crop in 2021. But by then, demand had ebbed. Growers were left with far more cannabis than people wanted to buy. Prices plummeted — dragging down tax revenue, which is generally based on sales.

The price drops have been staggering. California marijuana flower in October 2020 was selling for a wholesale price of $1,575 per pound, Koh said. It was selling for 60% less last week. Colorado marijuana flower dropped by half over the same period, from $1650 per pound to around $800.

Some shoppers may be cutting down on marijuana purchases as prices rise for other goods and services, Bradley said. “After people put gas in their tank and food on the table and pay for lodging, there’s less money to go around.”

Legal marijuana’s expansion also may be contributing to the downturn. Twenty-one states now allow adults to possess small amounts of the drug.

Legalization in Arizona and New Mexico has depressed sales in southern Colorado, Bradley said, as people no longer need to cross Colorado’s southern border to shop at a dispensary.

Stupak said the growth of multi-state cannabis companies may play a role in lowering prices, perhaps as those entities achieve economies of scale.

Whatever the cause, cannabis businesses have been hard-hit. “Cultivators have planted less, and unfortunately have had to shut down some facilities,” Bradley said. “We’ve also seen layoffs and several companies have gone out of business.”

Stupak’s team expects marijuana tax revenue in Colorado to rise again starting in fiscal 2024. He noted that Colorado is still raking in hundreds of millions of dollars a year from legal weed. “There’s a lot more money than we ever anticipated coming out of this,” he said.

But Koh said his team expects marijuana prices to trend even lower over the long run — particularly if the federal government legalizes sales and eliminates federal laws that make it so expensive to run a cannabis business today.

“With states, I think they need to be realistic about revenue forecasts and what those will look like,” Koh said. Colorado’s marijuana prices seem low now, he said, but “I think maybe in 10 or 15 years those prices might seem high.”