It appears that Colorado has come up $21.5 million short in taxes on marijuana. The state was expecting $33.5 million. The reason is an interesting reflection of the market and the means for marijuana users.
The state officials assumed that people would naturally prefer official suppliers for pot as did drinkers when they turned away from bathtub gin after prohibition. Some 60 percent do buy from official sources. However, the black market for pot is still doing well and there are other complications.
First, and here is an incredible figure in itself, some 23% of the estimated marijuana users in Colorado (or 2% of the state population) have medical cards. They can buy medical marijuana cheaper than retail marijuana due to the high taxes placed on pot. Rational actors are not going to pay the tax if it is cheaper through a medical card. States have faced the same phenomenon with cigarettes where over half of the money does not go to tobacco companies but to states and the federal government. The result is a rising black market for cigarettes. The difference is that pot can simply be grown and dried by citizens and sold more easily.
Second, people in Colorado are allowed to have up to six marijuana plants for their private use. This allows for a steady supply of privately grown pot to be exchanged or sold.
With privately grown pot available and medical pot going for $200 rather than $220, the state is likely to continue to experience lower than anticipated tax revenues. However, this is not a complete picture in my view of the relative economics in favor of marijuana legalization.
One way to increase retail sales is for the state to give retailers a break on the high taxes which stand at an astounding 27%. So long as the state is adding over 25% to the purchase price, it will be fueling a black market.
Putting aside the issue of individual choice in the use of pot like alcohol, there are economic savings.
First, there is the reduced costs to the criminal justice system in the investigation and prosecution of marijuana offenses.
Second, there is the avoided costs to citizens who are pulled into the criminal justice system to face criminal charges.
Third, there are the collateral taxes for equipment and resources used for growing marijuana within the state.
Finally, there is the tourism revenue associated with people who consider the fact that Colorado (which is already a top spot for skiers and tourists) has legalized pot (as opposed to other ski locations like Utah or California).
A full revenue picture would need to incorporate those areas of revenue (as well as added costs associated with any increase in driving accidents, arrests for DUI, and other collateral harm associated with increased marijuana use).
What is clear is that marijuana has some but not all of the revenue characteristics of post-prohibition alcohol sales. How that will affect other states looking at legalization will be itself quite interesting. Critics will likely use the revenue figures in Colorado to reduce enthusiasm for pot sales as a financial boon for states. Working for legalization is a huge emerging market (and a rising number of companies) involved in pot sales — both retail and medical. Those sales remain a key impetus for legalization.