Prepare Your 'Green' Puns: Legal Weed Is a Tax Bonanza in Colorado

When Colorado legalized marijuana in a 2012 vote, the state told voters that it could earn $70 million in tax revenue from the drug. That was wrong.

When Colorado legalized marijuana in 2012, the state told voters that it could earn $70 million in tax revenue from the drug. That was wrong. The actual figure is likely to be 40 percent higher: $98 million in sales tax. Lots of green! Higher than expected! More money in the pot! And so on.

The Denver Post happily avoided stupid puns in its report. The new figure comes from Gov. John Hickenlooper's 2015 budget, which carves out a portion of that windfall into programs ensuring that any negative effects of legal pot are minimized: $45.5 million for youth use prevention; $40.4 million for substance abuse treatment.

Slate's Matt Yglesias wonders if the bonanza might be masking a decline in taxes from other places — namely, decreased alcohol consumption. "To the extent that legal marijuana displaces legal booze purchases, you're going to see an offsetting decline in alcohol tax revenue," he writes. "Which would be fine — a big win for public health, in fact—but not quite the financial bounty states may be hoping for." In Colorado, recreational marijuana is subject to a 12.9 percent sales tax by the state while alcohol is taxed at the same 2.9 percent as any other good. Meaning that even a significant decline in alcohol consumption could be easily made up for by marijuana proceeds. Assuming that there exists a large population of people that only drank socially because marijuana was illegal. Speaking anecdotally, that seems unlikely.

Last November, The New Yorker looked at how the implementation of legalization would work in Colorado and Washington, which passed a similar law also in 2012. A consultant hired by that state, Mark Kleiman, thought that collecting heavy taxes at the outset was a bad idea.

“The optimal tax system . . . if I were doing it on a blackboard, would have been somewhat homeostatic. You’re looking to maintain a price maybe a little bit below, or a little bit above, the current illicit price. And, therefore, you’d like to have the tax be low at the beginning . . . and rise as the cost in the industry falls.” The state didn’t reconsider its tax plan, however; the prospect of an immediate windfall was perhaps too tempting.

His concern was that higher taxes would push people out into the still-extant illegal market. If Colorado is any indication, those concerns were largely unwarranted. The immediate windfall was tempting — and the actual result.