Looking at the Colorado Department of Revenue’s most recent report, it seems retail marijuana sales may finally be on the rise. Recreational sales have increased by just over 16% from those of the previous month, bringing in approximately $34.1 million in revenue for the month of August. Medical marijuana sales came in just under at $33.4 million marking August as the first month in which recreational sales have surpassed those of medical.
It’s likely the medical market’s consistently higher sales are attributed to customers’ reluctance to switch to the retail market since medical marijuana is taxed at lower rates than recreational marijuana.
As outlined by The Tax Foundation, a non-partisan research think tank based in Washington, DC, creating a tax structure for recreational marijuana has been challenging. Excise taxes are imposed on general products as a specific amount regardless of retail price. Since marijuana can be purchased in a variety of forms such as a cigarette, a liquid, an edible, etc., a specific excise tax can’t be determined. Currently, the tax structure for recreational marijuana in Colorado includes a 15% excise tax on wholesale marijuana, accompanied by a 12.9% state tax (10% state tax on retail marijuana + 2.9% state sales tax), plus any local sales or marijuana taxes. The city of Denver, for example, tacks on a local tax of 3.5% bringing the overall tax rate to around 30%.
During the initial legalization campaign, voters approved these taxes with the promise that the first $40 million collected each year from the 15% excise tax would be dedicated to school construction projects while proceeds from the 10% state tax would go toward regulations governing legalized marijuana such as retailer licensing and enforcement. But with total tax revenue coming in at nearly 65% below initial estimates, it’s hard to remain optimistic.
By the end of the fiscal year, which closed earlier this summer, Colorado collected just a little more than $12 million in marijuana tax revenue, a far cry from the $33.5 million originally projected by the official fiscal analysis last November. Larson Silbaugh, a Colorado Legislative Council senior economist tells The Huffington Post estimating revenue for a new market is risky business. Silbaugh, who worked on a team to forecast tax revenue from marijuana sales, says, “You’re forecasting an illicit drug and there isn’t good, reliable information on it.”
It’s difficult to say why the state’s initial projections were too high but many believe the revenue shortfall goes back to consumers’ hesitance to shift from the medical market to recreational. Because it’s fairly easy for CO residents to obtain a medical marijuana card and because medical dispensaries are slow to convert to retail facilities, many users are opting to remain in the medical market where marijuana is less expensive and more abundant. As detailed in a new report from the Colorado Department of Revenue,
Using the latest retail marijuana tax statistics from the Department of Revenue, we also found that conversions from medical to retail consumption is relatively low. Instead, retail supply of marijuana is growing, while medical marijuana is relatively constant. This may indicate that medical consumers would rather pay the medical registration fees as opposed to the higher tax rates, or that there are currently relatively few retail outlets compared to medical centers.
Another reason for lower recreational sales may be due to a disconnect between legal supply and surveyed demand of marijuana as researchers have concluded. Their study estimates a total market demand for marijuana to be about 130 metric tons each year. But with retailers providing only about 77 metric tons of legal supply, the black and grey markets are making up for the remaining 53 tons.
According, marijuana revenue committee Chair State Rep. Dan Pabon, another cause of low recreational sales is due to a provision in Colorado law that allows residents 21 years of age and older and “caregivers” to grow medical marijuana for other people and personal use. Pabon states, “What we’ve seen is caregivers may be diverting product from their patients and putting it onto the black market. That’s having an impact on recreational sales because people aren’t going to the regulated market as much as we had planned for.”
With nearly 40% of the marijuana sold in Colorado being sold illegally or grown for personal use and not taxed, the State’s expectation that legalization would cannibalize grey and black market sales seems rather presumptuous. It appears some longtime consumers are hesitant to bail on their trusted sources in favor of new legal suppliers.
But where Colorado has found success in legalization is in the retail growth due to tourism and expansion. According to news reports, Colorado was among the most popular spring break destinations this year and Colorado colleges and universities received a 1/3 bump in enrollment applications. Along with the boost in marijuana tourism, industry experts credit the increase in recreational marijuana sales to the growing numbers of retail stores opening up throughout the state.
Mike Elliott, executive director of the Marijuana Industry Group, says, “Every day that goes by, or at least every week, we have new recreational marijuana businesses opening in Colorado, and that helps explain the increase in tax revenue.”
Back in May, one of the biggest cities in the sates approved recreational sales. As of Oct. 1, the city of Aurora, which has issued 21 licenses for retail shops, is the most recent city to join the recreational market. Elliot continues, “What we’re probably going to see is a huge bump in recreational sales numbers beginning in another month or two because of Aurora coming on line.”
Meanwhile, economists have adjusted their revenue predictions for the current fiscal year, beginning July 1, to $30.6 million.