The Pew Charitable Trust has issued a warning to states who have passed adult-use cannabis laws to proceed with caution when budgeting their newfound cannabis tax windfalls. Citing the stark contrast between Nevada’s and California’s first six months of cannabis revenue, where Nevada exceeded projected revenue by 40% and California was 45% below their projections, the polling firm offers several reasons for the uncertainty surrounding cannabis tax forecasts.
First, unlike taxes from cigarettes or alcohol, which have been around for decades, there is no historic data on the ebbs and flows of cannabis taxes. Additionally, reliable data on consumption rates is hard to come by due to the illegality of cannabis.
“Clearly if some random person calls on the phone and asks, ‘Have you smoked marijuana?’ at a time when it’s illegal, many people are inclined to lie,” Ken Alper, former Director of Alaska’s Department of Revenue, told Pew.
Additional factors such as a change in demand, black market viability, wholesale prices, and market friction all contribute to the unpredictability of cannabis tax revenues, according to the report.
The report says states can avoid stressing their budgets by putting cannabis tax revenues in separate funds to be spent the year after they were collected like Colorado and California, or placing a percentage of the collections in a “rainy day fund” like Nevada. However, they warn not to fund specific programs such as health care like Washington.
“States should be careful to distinguish between marijuana revenue’s short-term growth and long-term sustainability. While these new dollars can fill immediate budget needs, they may prove unreliable for ongoing spending demands. Policymakers should look to other, more familiar sin taxes for lessons on how to manage marijuana tax revenue most effectively.” (From the Pew Report “Conclusions”)
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