Research Essay

“I’ve always thought cost and revenue should not be the overwhelming concern, either if you are pro- or anti-legalization,” said Andrew Freedman of Freedman & Koski, a consulting firm that provides expertise in marijuana policy to state and local governments. “The direct regulatory system often takes up a third or a quarter of the direct revenue stream coming in, so there is still quite a bit left over for discre- tionary costs. On the flip side, the tax revenue itself is not as big of a game changer as it rests in some voters’ minds.”

Freedman guided the marijuana regulation and taxation process in Colorado as the state’s first director of marijuana coordination. Freed- man said during his time in Colorado marijuana revenue accounted for less than 1 percent of the total budget.

There is also the cost and logistics of creat- ing and navigating a regulatory system for a tightly controlled industry. The immediate regulatory costs of legalizing marijuana fall into three buckets: Setting up a regulatory and enforcement system, additional costs incurred by agencies that already exist, and change management.

“There are a lot of people at the top, executive levels that have to invest a lot of time figuring out how best to govern this new system on the front end,” Freedman said. “All those are costs, but they aren’t staggering. There are societal costs and benefits that are much more difficult to determine.”

He said the most difficult fiscal issue that arises during the legalization and regulation process is paying those costs upfront before revenue starts coming in. Much of the initial cost re- quires a loan from the general fund, which can be difficult for some state governments to float.

“Learning how to—in one sweeping mo- ment—create a highly regulated industry that is supposed to compete with the black market and 100 years of pre-existing distribution net- works—without having access to the federal resources you would for say alcohol or tobacco or any other highly regulated industry—is really difficult,” Freedman said. “You don’t have broad or immediate access to banking, which means you lack a lot of financial oversight in a heavily cash-based industry.”

Marijuana is still federally illegal, so states that have legalized cannabis or are interested in exploring legalization must rely on each other for information and best practices.

“It is beholden on state leaders to start creating the connective tissue with other states that is more than a weekly call, but is remaining in pretty constant contact to share lessons learned and real-time data about what is hap- pening,” Freedman said.

Maine state Sen. Roger Katz, chair of his state’s Marijuana Legalization Implementation Com- mittee, said a key to getting the legalization process right is to take your time and be delib- erate, particularly in a state like his where

by Lisa McKinney

» Maine state Sen. Roger Katz

W E H AV E T R I E D T O G O S L O W A N D C O N S E R VAT I V E I N H O W W E R O L L T H I S O U T.

The Economics of Marijuana Legalization

F or voters and state leaders in many cash-strapped states, marijuana legalization looks like a promising way to literally grow revenue. Thirty

states and the District of Columbia have laws legalizing marijuana in some form, and eight states and the District of Columbia have legalized marijuana for recreational use. While legal marijuana in North America was estimated to be a nearly $10 billion industry in 2017, it might not be the golden goose that will solve states’ fiscal issues.

L E G A L M A R I J U A N A I N N O R T H A M E R I C A W A S E S T I M A T E D T O

B E A N E A R L Y

$ 1 0 B I L L I O N I N D U S T R Y I N 2 0 1 7 .

could create

$ 1 3 2 B I L L I O N in federal tax revenue

and inject

OVER A MILLION JOBS into the U.S. labor market

by 2025 if it becomes legal nationwide.

Marijuana legalization

Source: New Frontier Data. https://newfrontierdata.com

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the marijuana legalization referendum passed by a narrow margin.

“We have tried to go slow and conservative in how we roll this out,” he said. “We’ve had a few guiding principles: making sure (marijuana) doesn’t end up in the hands of children, we want to make sure we are doing everything we can to keep our highways safe, and we want to have a market that is available for small Maine entre- preneurs and a licensing system that is going to ensure safe, well-labeled products.”

For those states that have navigated the legaliza- tion process, many have encoded how their new stream of revenue can be spent. Schools, law enforcement, and mental health and drug abuse programs are often the biggest beneficiaries of marijuana revenue. Oregon’s revenue distribu- tion practices are indicative of this larger trend.

Oregon collected about $108.6 million in state and local marijuana taxes from January-August 2017. About $9.5 million went toward regulatory and tax collection costs.

In October 2017, Oregon announced it would distribute $85 million in marijuana taxes to fund

MANY STATES REQUIRE DIGITAL TRACKING OF MARIJUANA PLANTS from seed to sale using radio frequency identification, or RFID, tags.

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funding the future

schools, mental health and substance abuse programs, and law enforcement within a week—the first distributions of state marijuana tax revenues since the law allowing recreation- al use took effect in 2015.

The State School Fund receives 40 percent; 20 percent of the funds are allocated to men- tal health and drug services; Oregon State Police get 15 percent; and 5 percent is used for alcohol and drug abuse prevention, early intervention and treatment services. Another 10 percent goes to cities, based on population

and number of licensees, and 10 percent to counties, based on total available grow canopy size and number of licensees.

The largest share of revenue goes to the State School Fund, which flows directly to school dis- tricts for costs such as teachers and textbooks. Most of the fund’s $8.2 billion per biennium budget comes from the general fund and the state lottery.

For 2017–2018, the state will contribute $4.1 billion to the State School Fund, with $36,684,952 being derived from marijuana

tax revenues, according to Michael Wiltfong, Oregon’s director of school finance and school facilities. This amounts to just under 1 percent of total state dollars contributed.

The total value of the fund is closer to $6.1 billion, he said, which results in a proportionate share of approximately six-tenths of a percent of money derived from marijuana tax revenues.

“However, we welcome these additional re- sources, as it does make a difference of approx- imately $52 per weighted student statewide,” Wiltfong said.

Medical marijuana broadly legalized

Marijuana legalized for recreational use

No broad laws legalizing marijuana

Source: Governing www.governing.com/gov-data/state-marijuana-laws-map-medical-recreational.html

» Andrew Freedman, Freedman & Koski

L e a r n i n g h o w t o — i n o n e s w e e p i n g m o m e n t — c r e a t e a h i g h l y r e g u l a t e d i n d u s t r y t h a t i s s u p p o s e d t o c o m p e t e w i t h t h e b l a c k m a r k e t a n d 1 0 0 y e a r s o f p r e - e x i s t i n g d i s t r i b u t i o n n e t w o r k s — w i t h o u t h a v i n g a c c e s s t o t h e f e d e r a l r e s o u r c e s y o u w o u l d f o r s a y a l c o h o l o r t o b a c c o o r a n y o t h e r h i g h l y r e g u l a t e d i n d u s t r y — i s r e a l l y d i f f i c u l t .

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