2014OFA-0781

July 11, 2014

FROM:

Evelyn Arnold

   
   

SUBJECT:

Revenue Impact from the Legalization of Marijuana

You asked for a revenue impact of legalizing marijuana in Connecticut in a similar manner as (1) Colorado and (2) Washington State.

Under a policy similar to Colorado, it is estimated that Connecticut would generate $ 25. 6 million in FY 16, assuming a July 1, 2015 effective date. Under a policy similar to Washington, it is estimated that Connecticut would generate $ 55. 3 million in FY 16, assuming a July 1, 2015 effective date.

Estimate Details: Scenario 1: Colorado Model

Colorado imposes a 15% excise tax on the average market rate of retail marijuana, a 2. 9% state sales tax, an additional 10% state sales tax (charged on the final consumer purchase price), plus applicable local sales taxes. 1

The table below lists the estimated revenue that may be generated by applying the Colorado model to Connecticut. In this scenario, the current Connecticut sales tax rate of 6. 35% is applied. An additional 6. 55% sales tax rate is also applied in order to mirror Colorado's overall state sales tax rate of 12. 9%. The overall effective tax rate is estimated to be approximately 17%. It should also be noted that this estimate does not include local sales taxes which exist in Colorado but not in Connecticut.

Estimated CT Revenue from Colorado Model

Revenue Type

Tax Rate

FY 16

Wholesale Excise Tax

15. 00%

7,300,000

Retail Sales Tax

6. 35%

8,700,000

Additional Sales Tax

6. 55%

8,900,000

Licenses/fees

 

600,000

Total

 

25,600,000

The estimate license and fee revenue is derived from tax data reported in May 2014 by the Colorado Department of Revenue (See Data Sources below). The licensing fee structure may be found here.

Scenario 2: Washington Model

Washington imposes a 25% excise tax on each level of the system: producer to a processor, processor to a retailer, and retailer to customer. Additionally, a Business and Occupation gross receipts tax is applied. The state sales tax of 6. 5% and local sales taxes also apply.

The table below lists the estimated revenue that may be generated by applying the Washington model to Connecticut. In this scenario, the current Connecticut sales tax rate of 6. 35% is applied. The overall effective tax rate is estimated to be approximately 38%. It should be noted that this estimate does not include local sales taxes and the Business and Occupation tax which exist in Washington but not in Connecticut.

Estimated CT Revenue from Washington Model

Revenue Type

Tax Rate

FY 16

Producer Excise Tax

25. 00%

12,200,000

Processor Excise Tax

25. 00%

15,300,000

Retailer Excise Tax

25. 00%

19,100,000

Retail Sales Tax

6. 35%

8,700,000

Licenses/Fees

 

500,000

Total

 

55,300,000

The estimated license and fee structure is based upon the estimated revenue collected by Washington. The list of license applications and approvals may be found here. The law establishes a license application fee at $ 250 and a $ 1,000 renewal fee for each of the three licenses: marijuana producer, marijuana processor and marijuana retailer.

Data Sources and Methodology

The estimates above utilize marijuana-related tax data reported by the Colorado Department of Revenue in May 2014, the most recent data at the time of this report, as well as the June 2014 forecast revenue estimates from the Colorado Legislative Council Staff on the impact of the marijuana policy. Colorado began sales of recreational marijuana January 2014 and thus has actual data on taxes collected. As such, Colorado has been able to use actual tax data, though limited to a few months, to update forecasts. Washington began sales on July 8, 2014, and therefore does not have actual data available as of yet.

The Colorado data was pro-rated to Connecticut for the purposes of this report by calculating the ratio of each state's population.

Caveats and Other Factors to Consider

1. The revenue estimates above do not take into account any potential impact that the Connecticut medical marijuana industry may have on recreational purchases and vice versa.

2. Colorado imposed a temporary 70/30 cap whereby retailers must grow 70% of their own product. Washington imposed a cap on total allowable production, which is two million square feet. Such policies, not accounted for in the estimates in this report, may impact supplies and therefore potentially pricing and ultimately sales tax on retail pricing.

3. Colorado data was utilized in the Washington model estimate (see Data Sources above). To the extent that the Colorado data reflects any potential differences in the two states' policies (e. g. Colorado permits residents to grow a small number of plants for their personal use while Washington requires all marijuana to be grown by licensed farmers), there may be an impact to that Washington model estimate in this report.

4. Because the estimates in this report utilize Colorado tax data, the estimates assume the same level of non-resident sales as have occurred in Colorado. However due to Connecticut's location in the Northeast, which is a highly populated area, there may potentially be higher non-resident sales. Any such occurrence would impact the revenue estimates listed above.

5. This report addresses the gross revenue impact of enacting certain marijuana policies. It does not address the potential costs of implementation and enforcement. Any such costs would decrease the overall net fiscal impact of both policies.

I hope that you find this information helpful. Please contact me if you have any questions or need further assistance.

1 C. R. S. 39-28. 8-101(1) defines the Average Market Rate as the average price, as determined by the department on a biannual basis in six-month intervals, of all unprocessed retail marijuana that is sold or transferred from retail marijuana cultivation facilities in the state to retail marijuana product manufacturing facilities, retail marijuana stores, or other retail marijuana cultivation facilities. Current average market rates are listed here.