Washington Weed Tax Drives Down Revenue Estimates

Washington’s recreational weed law has run into serious problems, even as the state prepares for the opening of its first legal pot shops.

Washington Marijuana FlagWhen voters approved Initiative 502 in 2012, they legalized marijuana and imposed a multi-tiered tax on cultivation and sale of the drug. Now, with consumers forced to pay an extra 44 percent on each purchase, estimates for future cannabis tax revenue have plummeted.

Analysts now say Washington will fall 69 percent short of earlier estimates. The state was initially expected to bring in $1.9 billion in tax revenue between 2013 and 2017. But because of heavy taxes and delayed licensing, that prediction has been lowered to $586 million.

The state has had mounting problems in preparing for opening day, currently set for July 8. Unlike Colorado, where the first pot shops opened in January to booming business and few problems, Washington has struggled to impose a more complicated law and tighter restrictions.

Tax Could Send Consumers Elsewhere

But the big problem facing the industry – and the state – is the heavy tax load. That burden could drive many customers away from legal pot to barely regulated medical marijuana dispensaries or the black market.

“If the final price is significantly higher than the illegal or medical markets, a subset of people will definitely stay in the cheaper markets,” said Robert McVay, a Seattle lawyer who works with dispensaries. “What we don’t know is how much people value the legality and safety of the regulated market.”

Of course, if prices climb high enough, it won’t matter how much anyone values legality, as they simply won’t buy what they can’t afford. The only alternatives are the medical dispensaries, which are mostly unregulated, and the black market, which is totally unregulated.

Bryan Casal, a Washington property manager who uses weed, told Business Week he, like many others, would stick with medical shops because the prices are better.

“At this point I have no plans to switch to recreational due to the pricing,” Casal said. Getting a prescription for medical pot “is just a hoop to jump through. Anybody can get it.”

Layered Excise Tax Means High Prices

The key factor driving consumer reluctance is a massive excise tax levied on pot consumers. Weed must pay not only the state’s sales tax of 9.6 percent, but also an additional 44 percent excise tax.

Marijuana and TaxesThe tax is broken into three levels, with transactions at each level taxed 25 percent. That means processors pay growers a 25 percent tax, retailers pay processors another 25 percent tax, and consumers pay a final 25 percent tax.

With each tax, the cost of the weed increases until shoppers end up paying the full burden. But that amount is less than the possible total of 75 percent because many cannabis businesses combine growing and selling.

Mark Kleiman, a professor of public policy at the University of California Los Angeles, said the hefty price tag is likely to drive away consumers, at least at first. And the state won’t reap the reward officials had hoped for.

“The potential windfall is limited,” Kleiman said. “In the first couple of months, I think the prices will be high. The tax collections will be small because the volume will be small.”

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