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New political disease: Addiction to marijuana taxes

May 27, 2015

The legalization of recreational marijuana led by Washington and Colorado is on the march nationally.  Our experience is being watched in cities, states and nations around the world and has global implications.

When the people of Washington legalized recreational marijuana they did so under the hope and expectation of a well regulated and appropriately taxed system. They were, it seems to me, simply tired of a failed war on drugs that did not increase public safety, severely punished relatively modest recreational drug use and did so at a staggering cost to taxpayers.  It was simply time for a new approach.

The troubling part of the experiment that I initially anticipated but did not fully grasp is a reckless, uncontrollable political addiction to marijuana taxes.

I have been unrelentingly critical of the 2015 Senate budget that is predicated on an extraordinary level of marijuana revenues. Unfortunately, thanks in part to a quirk of timing, the non partisan Economic & Revenue Forecast Council is projecting marijuana tax collections that are astronomical and, in my view, based on faulty assumptions. This, in effect, implies that the state Senate’s heavy reliance on marijuana taxes is reasonable.

But it is not. It’s a mistake we will most likely regret for years. My concern as Finance chair is that we have created a broad public expectation that marijuana revenues are manna from Heaven without implication or consequence.  It is the ultimate “tax the guy behind the tree” temptation that too many elected officials already cannot resist.

Washington has the most unfair and economically inefficient tax system in the nation. Adding marijuana revenues as a shaky new pillar is unwise, risky and a poor substitute for meaningful tax improvements.

But it’s not just financially reckless it’s philosophically irresponsible.  It is hardly an expected move from conservatives, especially given the Republican Party’s formal opposition to I-502.  Regardless of the past, marijuana revenues are too new, too uncertain and too unpredictable to be a responsible basis of an education budget.

While it’s always uncomfortable to be in a position of questioning the technical accuracy of our state’s respected forecast infrastructure, their new revenue estimates are, in my view, based on a deeply flawed policy and financial assumptions that are unlikely to be realized. The consequences of basing a two-year operating budget on these assumptions means we are likely to face another major shortfall once again when the next budget is due in 2017.

First, the state is projecting a total of $1.12 billion in marijuana revenues from 2015 through 2019, with $374 million expected in the next two years.  Think about that:  We are anticipating raising approximately the same amount in new marijuana taxes within a few years that we currently collect in traditional cigarette taxes.  Washington’s combined effective tax rate under the Senate plan is 47% for recreational and medical with no distinction between the two.  Since legalization in July of 2014, the state has collected a total of just under $50 million in total marijuana revenues.

Colorado by comparison—a state with an existing regulated medical marijuana market structure in contrast to our unregulated system– is projecting a total of $179.8 million over the next two years.  Washington’s estimates are 65% higher than Colorado’s forecast.  Our tax rate is 51% higher than Colorado’s.  Colorado effectively taxes medical marijuana at 6.5% while Washington taxes medical marijuana, under the Senate plan and projections, at 37%.

Regardless of tax rates, here’s the bottom line of total consumption:  Washington forecasters are anticipating our 7 million residents will consume a total of 6.2 million ounces per year.  Colorado forecasters are anticipating that their 5 million residents will consume 1.4 million ounces in that same year.  As I understand it, both state forecasters used the same core data and operating assumptions, metrics and customized studies provided by the respected Rand Corporation.

Here’s the difference:  Colorado legislators conservatively slashed the projections in half, delayed recognizing any revenue on their books for a year, and even then revised their estimates down substantially after actual revenue collections came in at less than 40% of projections in order to avoid the uncertainty.  Legislators rejected the initial estimates as too large.  Our Senate is pushing to do the opposite with the same basic data:  Recognize and book every penny of the initial estimates without questioning the common sense of it all.

Second, our state forecast does not take into consideration the legalization of marijuana in Oregon, a development that will take effect soon and is unpredictable at best. Under the Senate plan the difference between the tax rate in Oregon and Washington will be 37% given that Oregon’s tax is a mere 10% while ours is an effective rate of 47%.  The likelihood of Washingtonians along the border area finding ways to shop for recreational marijuana in Oregon does not seem trivial.

Third, the forecast assumes widespread availability of recreational marijuana to meet demand from at least 50% of the current medical marijuana market, yet dozens of cities and counties in Washington have instituted recreational bans and moratoria. Right now, there are an estimated 99 medical dispensaries in the city of Seattle alone, but only 138 I-502 retail stores operating across the entire state. The bans and moratoria make the prospect of achieving the long term projected sales of 52% of all marijuana activities seem remote.  How can legal marijuana reasonably expect to compete with the illegal market when availability is severely limited throughout the state?

Fourth, the reluctance of the Senate to share meaningful revenues with local governments–which face real impacts on the ground and under the current system receive no revenue share from Olympia–may further damage successful revenue collections and the willingness of cities and counties to invest in their own prevention, enforcement and public safety programs.

In partnership with many colleagues and stakeholders, I have attempted to improve the structure through House Bill 2136 an omnibus regulation and taxation framework.

But no bill can regulate elected officials’ inability to avoid the easy political temptation of marijuana tax revenues.  I have strenuously objected to overly optimistic revenue projections from day one.  The wave been difficult to stop.

As a parent of four children I am wildly unenthusiastic about the extensive availability of marijuana among our youth. We have rapidly socialized marijuana without prevention investments and programmatic support and we are seeing negative impacts in high schools across the state. While I don’t necessarily regret Initiative 502 passing given the importance of a new approach in our country, I very much regret the ineffective and unwieldy policy implementation that has been a disservice to the people of our state in both the recreational and medical markets.

The public was promised a well regulated and appropriately taxed system.  We have neither.  Now, the Senate is pushing the Legislature to book the political and tax benefits of legalization without recognizing the true financial costs to the community.  We are even fighting to protect pennies on the dollar of investments into prevention.

Most of all, as chair of the tax-writing Finance Committee and a budget writer, I regret that instead of meaningful tax policy–creating a modern tax system with low rates, broadly applied with few exemptions–we are conveniently retreating to a dangerous over reliance on marijuana tax revenues to prop up our state budget and meet our fiduciary obligations to fund public education.

I find it ironic that on the issue of marijuana taxation it is Democrats–who generally supported I-502– who are more cautious and fiscally conservative and Republicans–who generally opposed I-502– who are acting more like big spending addicts.

The world is watching.

Your partner in service,

Reuven.

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One Comment leave one →
  1. tpchairbarbara permalink
    May 31, 2015 4:49 am

    cute !

    HOWEVER !

    * If only *somehow voters understood that they are The State and taxes are *necessary *for services . . . and *If only *politicians didn’t use up so much money just getting offices

    * then maybe *politicians wouldn’t get so excited about taxing grass.

    How about we tax *lawns *cuz they use so much water. (Actually the LOTT program almost does that, but food gardens pay the same.)

    [?]

    Barbara

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