The western U.S. has been conducting an experiment that went awry. What began as loosening restrictions on the recreational use of marijuana snowballed into legalizing the possession and use of hard drugs, such as heroin and fentanyl. Now, states are starting to reconsider the wisdom of those policies. In this series, the Washington Examiner will take a look at blues states that are starting to come Down from the High.
When Colorado became one of the first states to legalize recreational marijuana, hopes were high that revenue from taxes on the substance would reap dividends.
A decade after retail sales began, however, these hopes have been dashed as revenue from the tax plummets. The state saw record highs during the COVID-19 pandemic, raking in $423,486,053 from recreational marijuana taxes in 2021. Sales then nosedived in the ensuing years, falling to $274,121,043 in 2023. This trend is set to continue this year, with sales from January through August amounting to $173,986,426.
According to the Colorado Department of Revenue, the state’s marijuana tax revenue comes from three taxes: “the state sales tax (2.9%) on marijuana sold in stores, the state retail marijuana sales tax (15%) on retail marijuana sold in stores, and the state retail marijuana excise tax (15%) on wholesale sales/transfers of retail marijuana.”
Colorado’s government hitched its hopes on these taxes, relying on the money to fund new and existing programs. Joint Budget Committee Chairwoman Shannon Bird announced earlier in the year that the projected totals from marijuana tax revenue wouldn’t be able to cover new programs or even some existing programs, the Colorado Sun reported.
Worst of all, the situation only seems poised to get worse.
“This feels like Groundhog Day,” Craig Harper, JBC staff director, said, according to the outlet. “I gave pretty much the same presentation last year. It’s almost impossible for me not to picture you in the same position next year.”
Official analysis showed that the state would need to tap into its reserves to make ends meet, resulting in the delay of some programs, including a $20 million school construction program.
Colorado isn’t alone. Washington and Oregon also saw a plummet in tax revenue from the substance. These three states, which legalized the drug the earliest, have seen the largest plummet in sales.
Taxes on marijuana are modeled on other “sin taxes” such as alcohol and tobacco. These taxes are heavier than those on normal products, partially in order to discourage use and mitigate their negative social effects, Indiana University economist Boyoung Seo wrote in the Conversation.
Tax revenue was one of the biggest arguments for marijuana legalization. It was argued that states could make a significant amount of money by placing taxes on substances people were likely to use anyway. When legalization gained ground, officials gave grandiose estimates of the dividends that would be reaped, resulting in consistent overestimation.
When legal sales began in Colorado in 2014, then-Gov. John Hickenlooper predicted that the state would collect $130 million in marijuana taxes. Instead, it collected just $88 million. Washington gave a similarly outsize guess of $434 million compared with the actual amount, which was about half.
One unintended consequence of recreational marijuana legalization that further affected finances was citizens exchanging one vice for the other rather than an increased use of both.
Research from Seo and Keaton Miller, published in the University of Chicago Journal, examined economic data from Washington state regarding sin products. It found that users would substitute marijuana for the other sin products of alcohol and tobacco, causing revenue from them to decline. The study found that from July 2014 to June 2015, an eye-watering 40% was siphoned from liquor, wine, and cigarette tax revenue, amounting to $56 million.
Burgeoning supply has also hurt revenue; recreational marijuana flooded the market in anticipation of new markets from further legalization across the United States, sending prices down. In Colorado, marijuana prices fell 60% from 2014 to 2023.
Rather than raising other taxes, state governments have sought to cut spending instead, disappointing many by canceling, delaying, or cutting social spending.
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Some analysts argue that the marijuana market is simply returning to normal after the unsustainable high of the pandemic years. Denver Excise and Licenses Executive Director Molly Duplechian told Axios in April that the industry was stabilizing.
Whether collapsing or stabilizing, one thing is for sure: Recreational marijuana tax revenue has proven disappointing for state governments and advocates alike, the former of which must look elsewhere to fill their coffers.