Economics behind legalizing pot

Medical marijuana expansion could give state boost in revenue


SAN ANTONIO – Colorado was one of the first states in the country to legalize marijuana, and tax collections have gone above and beyond expectations -- raising billions of dollars per year in tax revenue off marijuana sales. That’s according to the Tax Foundation, an independent nonprofit organization that examines tax policies.


States following in the Centennial State’s footsteps are learning that there’s big money to be made off legalizing the controversial substance that’s been outlawed for years.

These examples, however, come from sales of recreational marijuana.

What about medical marijuana? And what about Texas?

Texas has begun the process of looking into expanding its medical marijuana bills. State Sen. Jose Menendez filed SB 269 in December. The first reading happened on the floor at the end of January, just a little over a week into the 85th Texas Legislature. It will go to a committee on Health and Human Services to weigh the ins and outs of the proposed expansion.

By all measures, medical marijuana is more loosely regulated and less taxed that recreational marijuana. And it appears that even when the legalization process takes effect, the process of generating revenue is long until people can get used to the idea that marijuana is legal.

Recreational marijuana

Each use of marijuana has to be specifically defined to get an idea of how it will impact the economy. For recreational pot, states like Colorado, Washington, Oregon, and the District of Columbia place a flat tax or excise tax (a tax on a specific good) on marijuana. In Colorado, it’s 15 percent plus a 10 percent state tax, which drops to 8 percent in July.

According to NerdWallet.com, Colorado’s population of people over the age of 25 who has smoked marijuana in the past month is 7 percent, equal to about a quarter of a million smokers. The marijuana market size there, according to the site, is over $349 million. Revenue from the sales of marijuana in that state now exceeds expectations tremendously, raking in an estimated $140 million, according to the Tax Foundation.

Side note: the tax is decreasing slightly this summer because a study found that the high tax rate for marijuana helps sustain black market sales of marijuana.

Even if 44 percent of retails sales belong to out-of-state visitors in Colorado, the fact remains that it’s doing well and the tax is contributing to the overall statewide economy there.

So where does all the money go?

After a smoker buys a bag of weed at the store, paying several taxes in the process, the wholesale tax made on the pot goes entirely to schools. Colorado has a program called BEST, and it gives grants to local school districts to improve facilities and build new ones. It’s said to be producing tangible results, especially in rural areas.

Local governments get a cut of about 15 percent from the state’s special tax on marijuana and the rest of the taxes produce revenue that the state Legislature is free to spend at their discretion.

Medical marijuana

Medical marijuana isn’t quite as lucrative, but it does have its own smaller impact. In Colorado, a 2.9 percent sales tax is placed on the sale of medical marijuana. Experts believe that generates about $10 million for the state each year, but that it has remained flat year after year since the sale of recreational marijuana began.

The tax structure is radically different, too. Coloradans who buy weed for medical purposes pay one-third the rate imposed on recreational marijuana. Medical marijuana comes with a registration fee of $15 and is subject to state and local taxes.

Calculating impact

It’s hard to say exactly how Texas could benefit from marijuana sales, either recreational or medical, because of the legal hangups. NerdWallet.com created estimates based on the number of marijuana smokers in each state ages 25 and over, multiplied by the state’s population over the age of 25, which results in the number of users in that state.

Then, using the state’s users as a percentage of total users in the United States over 25, that number was multiplied by $14 billion (the total marijuana market estimate given by Harvard University economist Jeffrey Miron) to see what the market size in each state is.

For Texas, NerdWallet.com predicts $166,303,963 in revenue to be brought in from sales and excise taxes on the sale of marijuana. That’s with a 15 percent excise tax rate, and 8.15 percent combined state and local sales tax.

That’s a lot of money. What would Texas do with it?

It could make upgrades to local school districts, especially in rural districts. That’s what’s happening in Colorado. But the tax isn’t enough to build brand new schools.

Still, these “sin” taxes, similar to that of alcohol or tobacco, can be put toward public improvement projects that would benefit the most number of people in the greatest way.