Lawmakers Dazed, Confused When Predicting Cannabis Tax Revenue

SALEM, MA — Lawmakers in the District of Columbia and the 10 states that have legalized recreational cannabis sales are having difficulty predicting how much tax revenue they will collect, according to a report released Monday by Pew Charitable Trusts. In Massachusetts, the state collects 10.75 percent on top of the 6.25 percent sales tax, and municipalities that host recreational cannabis dispensaries can add an additional local tax of up to three percent.

The problem stems from the lack of historical data, according to the report, and most states have been way off in their projections. In Nevada, for example, tax revenue on cannabis sales were 40 percent higher than projected in the first six months of legal sales. But in California, revenue was 45 percent lower than projections during the first six months.

"For standard forecasting models, it's helpful to have more detail about demographics, consumption, and product types," Josh Lehner, senior economist with Oregon’s Office of Economic Analysis, told Pew. "We’re not there, and other states I've talked to aren't there yet, either."

The report singled out Massachusetts, noting that towns and the state may have trouble predicting demand because recreational cannabis is also legal in nearby Vermont and Maine. Massachusetts has not yet released comprehensive data on cannabis tax revenue.

Salem and more than 20 other Massachusetts communities have operating retail cannabis shops. Five more communities are expected to see their first shops open in coming weeks.

The good news is that in the five states where data were available, the industry seems to be booming. In Washington, for example, marijuana tax revenue topped revenue from taxes on both alcohol and tobacco. Alaska saw revenue grow from $2 million in the first year of legal sales to $11 million in the second year.

But such growth may be short-lived as more states legalize recreational cannabis sales, the report warns. And in Colorado and Washington, the states with the longest record of legal marijuana sales, growth slowed as the industry matured.

"States should be careful to distinguish between marijuana revenue's short-term growth and long-term sustainability," the report concludes. "While these new dollars can fill immediate budget needs, they may prove unreliable for ongoing spending demands."

For more on this story, see Pew Charitable Trusts.