Money Talks – How Much is Cannabis Legalisation Worth?

A major talking point for the cannabis sector has been the influx of tax revenue for states who have legalised or decriminalised portions of the industry. Colorado, for instance, raked in over $265 million (~€234 million) in 2018, according to a recent Forbes report. Other states like Washington and California boasted figures above $300 million (~€265 million). While some entrepreneurs have complained about the high tax rates, the benefits of this new source of income have served local economies well.

Related: Know your Bud: Following the Supply Chain of Cannabis Production in Europe

In the following, Strain Insider will examine the other side of regulations and pick out where the ability to tax cannabis has been hugely advantageous. Canada is a prime example, but municipalities in the United States and across Europe will paint an oft-overlooked feature to the budding market.

 

Answering the billion-dollar question

Although Canada beat the United States in legalising recreational cannabis federally, how the U.S. is approaching regulations is much different. The industry is federally illegal, but not locally, meaning states pick and choose how legal or illegal they want to make the plant.

In the state of Alabama, for instance, the recreational use of marijuana can be punished as a felony. This may change, however, as the state recently voted to create a commission that would help form a medical marijuana bill in 2020. Conversely, Washington state has fully legalised recreational, medical and, with a proper license, the cultivation of cannabis and its derivatives. Several other states have pursued, or are in the process of pursuing, similar legislation.

(Source: Business Insider)

The legal boundaries between places with convergent viewpoints also puts pressures on moving cannabis from state to state. Although marijuana is legal in both the neighboring states Oregon and Washington, transporting cannabis products between these two jurisdictions is still illegal. Cannabis attorney Alison Malsbury told Leafly that ‘you’re still, by crossing the state lines, falling within the jurisdiction of the federal government’.

It’s a bit confusing, but the states that have legalised the plant are nonetheless at a clear advantage for different reasons.

As mentioned above, Colorado, Washington and California have all legalised the pot industry within their borders to varying degrees. As such, all three states have enjoyed an influx of revenue from the myriad businesses, both retail and agricultural, which have opened shop. This also means that each of these businesses must pay taxes to the state, thus opening up a lucrative revenue stream for the state. Although entrepreneurs report steep tax rates, local treasuries are putting the ocean of money to great use.

Colorado reportedly spent the $1 billion (~€886 million) tax revenue generated between 2012 and 2014 on things like public health and safety and other human services. These days, budget writers in the state funnel this money primarily to education to improve public schools.

The Washington State Treasurer indicated that of the roughly $319 million (~€283 million) generated in fiscal 2017, half of that went to the Basic Health Plan Trust Account. This account serves working people or those who lack adequate medical insurance to enjoy a modicum of basic health services. Thirty-one percent of the remaining funds went to the General Fund, which is the state’s multi-purpose purse. Another 10.7 percent were used to soothe alcohol and drug addiction, and the final slice was divided up between public education, drop-out prevention, and community health centers.

An unreported chunk of all the revenue goes to federal taxes, too. A January 2019 report from the Institute on Taxation and Economic Policy (ITEP) predicted that:

‘Nationwide legalization and taxation of recreational cannabis could generate approximately $11.9 billion [~€10.5 billion] in state and local excise and sales tax revenue each year. This assumes taxation levels similar to those that currently exist in Washington State.’

To begin, it is vital to understand how excise taxes on things like alcohol and tobacco function, as cannabis is often placed under the same banner.

This distinction means that goods and services that fall into this category are taxed at the point of manufacture rather than at the point of sale. Cannabis businesses in both California and Colorado, for instance, incur a 15 percent excise tax which goes directly to the state. Washington state faces much harsher excise taxes at 37 percent on top of state and local taxes.

Canada is markedly different and indicates that an excise tax should not exceed $1 (€0.89) per gram or ten percent of the sales via the manufacturer.

America’s neighbors in the north also report slightly lower figures as Canada legalised cannabis products federally in 2018. From legalisation in October last year to March 2019, Canadian governments did manage to bag $186 million (~€164 million) from the sale of cannabis products. The provinces enjoyed a larger piece of this sum, but federal taxes still amounted to $19 million (~€16.8 million) in total.

Europe is looking to North America when approaching this very subject, too. As the European cannabis industry is not regulated in the same way as the United States and Canada, there is far less data on how much tax revenue the European Union could generate from legalising the sector.

 

Limited resources for a massive market

As previously reported, Strain Insider highlighted the massive potential for a fully-regulated cannabis market in Europe. It is predicted that the EU could generate upwards of €123 billion by the year 2028, thus making it the largest market in the world.

Unfortunately, the state of prohibition has prevented more exact figures as to how much countries could earn via taxation. A November 2018 report from the cannabis activism association, Deutscher Hanfverband (DHV) confirmed that:

‘According to the federal government, there is no information available as to which revenues in the form of taxes and fees could be realized through legalization.’

Nonetheless, the German lobbying group is aware of the potential profits to be made in the case of legalisation. Using Colorado, California, and Canada as models for how to tax cannabis, the DHV arrives at some very intriguing conclusions.

Based on these models, as well as the national sales tax of 19 percent in Germany, the DHV concludes that if Germany were to produce and sell 250 tons of cannabis, the potential tax revenue could reach as high as €650,000,000. This is also assuming an average price of €10 per gram.

At first glance, the quantity of cannabis needed to fulfill this figure, indeed, seems daunting. However, in 2015, three years before legalising marijuana, Statistics Canada reported that Canadians’ overall consumption of cannabis totaled 697.5 tons. With an even larger population than Canada and critical infrastructure already in place following the boom of hemp and CBD products, it’s not difficult to assume that Europe will easily cross this threshold.

Ancillary features of this regulated market extend beyond tax revenues as well. The cost of incarceration, a swelling prison population and also a growing opioid crisis, which marijuana can reportedly soothe, all represent opportunity costs that could be omitted entirely following legalization.

 

Curbing crime and enthusiasm

Indeed, the economic activity engendered by cannabis is enticing, but it’s important to recognise how little such revenues amount to in the face of national incomes. For instance, the United States is expected to earn $3.643 trillion (~€3.232 trillion) in total tax revenue by 2020. Of that, excise taxes make up $157 billion (~€139.4 billion).

(Source: The Office of Management and Budget)

Between 2017 and 2018, Canada reported $313 billion (~€278 billion), of which only 5.4 percent make up excise taxes. Comparatively, the portion brought in via cannabis taxes is slimmer to the rest of the economy. Still, it’s nothing to balk at.

If one also considers the cost of prohibition, these numbers are much more striking. In a report called The Consequences and Costs of Marijuana Prohibition from the University of Washington, researchers stated that ‘as the number of marijuana arrests grew, so too did the domestic law enforcement component of the federal drug control budget, from $4.6 billion in 1991 to $9.5 billion in 2002’.

Similarly, the American Civil Liberties Union (ACLU), a lobbying group in the U.S. that works to promote individual rights, estimated that legalising marijuana ‘would save $7.7 billion per year in government expenditure on enforcement’.

These figures should be taken with a grain of salt, though; with more competition that would naturally arise following legalisation, the price of cannabis would also drop. If a tax regime is determined based on the price per gram, like in Canada, then this would also result in lower tax revenues.

Still, when examining how to best approach the cannabis industry from a legislative and taxation perspective, Europe would do well to heed North America. Much can still be improved, of course, but the opportunity costs of not pursuing similar measures are inevitably costlier over the long run.

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