Which States Budgets Are Benefitting From Medical Marijuana -- and Who Is Missing Out?

By Jonah Loeb and Chris Graf  NOV 08, 2012 10:06 AM

Among the states where cannabis is a legal drug, and the two where recreational pot is now legal, there are massive discrepancies between the amount of tax revenue generated. Here's why.


MINYANVILLE ORIGINAL  While marijuana is a controversial product, it’s still, well, a product. That means wherever it’s legal for medicinal or recreational use, there is money to be made through tax revenue. With several states making big steps forward in the push for legal pot in Tuesday's elections, it’s time to evaluate the economic potential of marijuana.

From a budgetary perspective, the economic benefits of decriminalization are more complex and harder to quantify than those of medical initiatives, since medical marijuana plans generate revenue while decriminalization leads to reduced costs for law enforcement.

Since there’s no way to quantify whatever palliative benefits marijuana has, the only real metric for measuring its usefulness is tax revenue. Each state legislature that experiments with medical marijuana approaches it in a different way, and the returns in revenue vary accordingly.

Some recent developments, though, point in a very revenue-friendly, and pot-friendly, direction (naturally attracting some market interest in public companies already in the business, such as Medical Marijuana, Inc. (PINK:MJNA), Cannabis Science (PINK:CBIS), and Hemp (PINK:HEMP).

Let’s take a look at how some states are handling the process.

The Kingpins

Hard work, determination, and a well-run network of dispensaries -- these are the qualities that separate the buds from the chaff. These states give their fellows something to which they might aspire, providing the sick and suffering with cannabinoid relief while bolstering their pool of public funds. Just keep in mind that this is all in relative terms: Even the most lucrative of medicinal cannabis programs return less than half of 1% of their states' budgets. 
Medical marijuana legalized? Of course.
Decriminalization: $100 fine for possession of less than an ounce.
Sources: As much private cultivation as the patient can justify, plus over 1,000 dispensary “collectives” regulated on a local level.
Tax rate: 5% state, various municipal on dispensary sales.
Revenue: Up to $100 million by the end of this fiscal year.

This one, at least, is no surprise. As the first American locality to legalize it for medicinal use way back in 1996, the Golden State became the de facto guru of ganja, and has not come close to relinquishing the title since. Today, many sources estimate the total population of medical marijuana users at well over 1 million, comprising almost 3% of the state’s 38 million residents and likely over half of all patients nationwide, figures no doubt aided by the Golden State’s notoriously flexible patient licensing process.

Between local excises and a 5% statewide levy on lids, California’s several hundred dispensaries are expected to bring in between $60 and $100 million in 2012 -- not a huge portion of the state’s projected $96 billion in total revenue, but the additive benefits were no doubt noticed by a governor’s office striving to turn last year’s $3.6 billion budget shortfall into a $948 million surplus.

While many states cap home growth of marijuana to a certain number of usable ounces or mature plants, California patients have been allowed to grow as much as necessary to manage their particular medical need. Despite this notable allowance the state’s dispensaries deliver tidy tithes, even after accounting for California’s massive population advantage over its peers.

Prescription: California won the throne, now it has to defend it. Its high profile in the legalization movement has drawn the ire of federal enforcers, who have shuttered many otherwise successful dispensaries since.  Defenders in the state legislature have vowed to resist national interference in local affairs, however, with a recent bill intended to shield state-law-abiding citizens from Department of Justice persecution.
Medical marijuana legalized? Yes, since 2000.
Decriminalization: Legalized for recreational use. Wow, did we just write that?
Sources: Private cultivation, plus around 1,000 dispensaries.
Tax rate: Varies based on locality.
Revenue: Over $20 million a year.

If California is the current monarch of medical marijuana, Colorado is the current heir apparent. Though the state has been in the business since 2000, its tax revenues from the sale of botanicals continue to expand at an elevated rate. The Centennial State more than doubled these gains from $2.2 million in 2010 to $5.5 million in 2011 from over 600 dispensaries. Dispensary applications brought in a further $9 million, which, combined with another $11 million from patient licensing fees, buoyed the state budget by about $22 million before costs.
As in California, pot sales contributed only a little to state’s total revenue, but the difference can be felt at the margins. After subtracting spending and the required reserve, Colorado was left only $442.7 million in the black, an achievement in itself after the state’s Office of Planning and Budgeting predicted a $22 million shortfall in June of 2010.

If the growth of the cannabis program continues to outstrip annual increases in gross revenue (which seems likely, considering Colorado’s gross General Fund revenue actually fell $3 million from the previous year), the budget balancers in Denver will have their own reasons to sing pot’s praises.

Prescription: Like California, Colorado must learn how to modulate the expansion of its program to meet the needs of patients without making itself any more of a priority for federal anti-drug agencies.
Medical marijuana legalized? Yes.
Decriminalization: Legalized for recreational use.
Sources: Around 100 dispensaries.
Tax rate: 25% (proposed).
Revenue: $1.9 billion over five years (estimated).

Washington’s government is full of budget hawks these days, and that’s why pro-pot advocates saw a huge opportunity in 2012: As long as they proposed a high enough tax on marijuana, the numbers alone would sway not just the legislature but also the people. They slapped a 25% tag on pot and sent the issue to the polls, where the people voted to legalize marijuana for recreational use.

So how does this work? Well, the weed is taxed three separate times: When it moves from the grower to the processor, from the processor to the retailer, and from the retailer to the customer. Seem steep? Well, sure, but it’s also going to raise an estimated $1.9 billion in tax revenue over the next five years.

Washington’s next step will be avoiding the Feds; the federal government is still fighting its "War on Drugs" and may sue to block sales of marijuana. But Washington and Colorado, the first states to explicitly legalize rather than decriminalize the drug, may be at the forefront of a movement to convince the federal government that there are, well, pots of money to be made from legalization.

The High Hopers

Hold on to these rookie cards. Most states are still finding their footing in legislative and/or logistic aspects of medical marijuana, but a few standouts are getting their act together and showing some real promise. These guys already run respectable programs, but given a few more years, they could be moving on to the majors.
Rhode Island
Medical marijuana legalized? Yes.
Decriminalization: Nope.
Sources: Private cultivation by patients and approved caregivers, three dispensaries set to open later this year.
Tax rate: None at the moment, 4% profits, plus 7% sales on the imminent dispensaries.
Revenue: Up to $700,000 when the program is fully operational.

A month or two down the road and this one might be deserving of an upgrade, but as things stand Rhode Island still has some major hurdles before it can realize the potential of its pot programs. We shouldn’t be too hard on the little legalizer: private cultivation by approved patients has been flourishing since 2006. But though the state lawmakers have proven themselves staunch supporters of medicinal cannabis, Governor Lincoln Chafee has held back the proposed dispensary program, first by veto in 2009, and after that was overridden by Providence’s House and Senate, by refusal to grant permits to the three approved dispensaries.

Gov. Chafee claims he acted in good faith, concerned by threats from the US Attorney’s office about violating the Controlled Substances Act. Rhode Island’s executive and legislative branches finally reached a compromise this May allowing the dispensary program to move forward, though the first facility won’t open its doors until autumn at the earliest. Despite the state’s liberal tax structure -- 4% of net revenue on top of 7% of sales -- the estimated $700 thousand in annual revenue won’t begin to materialize until well into 2013.

Prescription: Patience -- on both sides of the debate. If the governor’s office stops interfering with the capitol’s plans, the law as it stands will produce favorable outcomes for patients, merchants, and general taxpayers.
Medical marijuana legalized? Yes.
Decriminalization: None.
Sources: Over 100 approved dispensaries, but only a handful actually open for business.
Tax rate: 6.6% of sales.
Revenue: Modest at the moment, but could grow to tens of millions annually.

New Mexico may be the Land of Enchantment, but its neighbor to the east could become the industry’s true Cinderella story. Thought it approved a medicinal cannabis program back in 2010, Arizona’s first few dispensaries only opened last month. The half dozen or so stores currently active represent only a small fraction of the 124 approved by the state. Once the market is in full swing, however, speculators see Arizona becoming the inhalation destination of the Southwest, earning up to $40 million a year off its 6.6% sales tax on THC products.

Prescription: Like in Rhode Island, time may be the only major obstacle to Arizona discovering an efficient arrangement for patients and budgeters.
Medical marijuana legalized? Yes.
Decriminalization: Yes.
Sources: Both dispensaries and private cultivation.
Tax rate: 5% of sales, 7% on food items  
Revenue: $650,000 within a couple years, according to estimates.

Compared to the turbulent reefer odysseys experienced by many states on this list, Maine’s own history with medicinal cannabis reads fairly tame. Voters passed a referendum legalizing vulnerary gardens in 2009, the governor signed the bill into law in 2010, and the first dispensary opened in 2011. Neither are current revenue forecasts particularly notable compared to those of fellow legalizers: though Maine’s population is around a fifth the size of Arizona’s, current predictions award the former between $400,000 to $650,00 in annual revenue, mostly from a 5% levy on marijuana sales in the handful of registered dispensaries. Maine actually abolished the registration requirement in September of last year, however, meaning anyone with appropriate doctor’s note can grow their own plants.

Relief is close at hand for Maine’s sufferers of nausea, epilepsy, glaucoma, and other approved conditions, thanks to the lax permit requirements on top of an established dispensary network. With the costs of the program likely to be more than covered by the dispensary tax, Maine’s medical marijuana advocates should already feel comfortable patting themselves on the back.

Prescription: To increase the secondary economic benefits on top of the primary medical ones, legislators could provide more physicians with more discretion in determining the suitability of cannabis for treating pain and illness in their patients. Approving more dispensaries, balanced with a reintroduction of the registration program, could expand coverage while preserving the spirit of the law.

The Nice Guys

Not everyone takes such a calculating approach to their weed industry, of course. Taxing cannabis channels can aid the budget, but there’s no such thing as a free munchie. The following states have taken the high road, so to speak, forgoing the tax profit tins in favor of keeping the product affordable to the sick and the needy.
New Mexico
Medical marijuana legalized? Yes.
Decriminalization: No.
Sources: Private cultivation, plus around two-dozen licensed producers.
Tax rate: Varies by locality.
Revenue: $700,000 annually according to the most optimistic projections, with an important asterisk.

New Mexico’s Medical Cannabis Program is a bit of a mixed bag. State advocates laud the MCP’s discipline and efficiency, though some patients lament that regulators present unnecessary obstacles to those seeking pain relief.

For the first few years following the magic leaf’s introduction in 2007, the state only collected a few thousand dollars from application and license fees. The annual fee on producers grows larger the longer the merchant has been in business, however, beginning at $5,000 for the first year and capping at $30,000 for the third and beyond. These impositions on producers contribute to the bulk of the program’s funding, in addition to around $100,000 a year from tax receipts.

New Mexico also maintains exceptionally tight control over the issuance of cannabis permits. Rather than leaving them to the discretion of physicians, the state requires each potential patient to first provide a doctor’s certification that he or she has one of 15 approved conditions, and then apply to the state agency that reviews the request and decides whether to issue the card.

Prescription: Subtracting the costs of operation, the mid-six-figure revenue from medical marijuana doesn’t even amount to 1% of 1% of the state’s $5 billion in collections last year. If New Mexico is committed to keeping the program a closed system, its main goal ought to be ensuring that every patient has access to the appropriate amount of treatment.
Medical marijuana legalized? Yes.
Decriminalization: Only in Ann Arbor.
Sources: Private cultivation by patients and approved caregivers.
Tax rate: Exempt.
Revenue: Around $9 million, extrapolating from 2011 figures.

According to a 2011 article from Michigan periodical Heritage Newspapers, while “the idea of medical marijuana as a revenue stream in Michigan has been explored among policy makers, it is not an agenda driver.” The current policy regards cannabis production as a “personal caregiver service,” and thus exempt from taxation. Nonetheless, Michigan has managed to put up some impressive figures with license fees for patients and providers both. The state has issued over 125,000 patient IDs since applications opened in April of 2009. The exact obligation on the patient varies according to need, but an average of around $70 per application translates to $9 million over a few years.

In lieu of the more common dispensary system, Michigan allows individuals to register as private caregivers, to grow and sell product to up to a dozen patients. This decentralized network presents a challenge to Lansing if it ever changes its mind about the taxability of marijuana, but the fees are turning a decent profit by themselves. Caregivers must pay $100 for each patient receiving their provisions, up to a cap of five. Some 35,000 caregivers had been registered in Michigan by midway through 2011, earning the state a $4 million net gain in the first half of the 2011 fiscal year.

Prescription: $9 million is nothing to sneeze at, but as is the theme of these examinations, it must be put into the context of the total budget. Compared to the $23 billion in tax revenue the state received in 2011, even the low eight figures would be slightly underachieving. The need for medical marijuana (or “marihuana,” as the state decides to spell it) certainly exists, but it may take a robust dispensary network before the treasury starts to feel any effects.
Medical marijuana legalized? Yes, since 2000!
Decriminalization: Only in Hawaii County, home to about 13% of the state’s population.
Sources: Private cultivation by patients and approved caregivers.
Tax rate: Proposed flat tax, pending approval of dispensaries.
Revenue: Uncertain, estimated low five figures.

The Aloha State welcomed the sticky sanative way back in 2000, permitting patients to maintain private cannabis gardens at a physician’s recommendation. Without any centralized distribution venues, the treasury doesn’t see any green past the initial application fees from its 8,000-plus registered users and approximately 1,000 caregivers. The state senate introduced a bill to open a dispensary on each island and tax sales at $30 per ounce, which in practice would amount to anywhere from $0.08 to $0.25 on the dollar, but the proposal has yet to make it to the governor’s desk.

Prescription: If Hawaii wants to follow in the footsteps of successful mainlanders, the first move would be to allow each caregiver to provide for more than a single patient, as stipulated in the current code, while also increasing the annual licensing fees.
Medical marijuana legalized? Yes.
Decriminalization: Don’t count on it.
Sources: Private cultivation by patients and licensed caregivers.
Tax rate: Only application fees.
Revenue: At least $500,000 a year

Democrats in the Big Sky Country have defended against dozens of attempts by Republican legislators and former governor Tim Pawlenty to cripple or repeal the medical marijuana legislation, even after voters embraced herbal remedies with a healthy 62% to 38% vote in 2004. The small application and renewal fees on patients and producers have still been bringing in over $500,000 every 12 months, despite additional opposition on the national level.

The federal government remains firmly opposed to medical marijuana in Montana, as evidenced by the DEA’s crackdown on state-legal dispensaries earlier this year. The persistent schism in Helena has made passing any additive measures difficult, with no excises beyond the license fee likely to apply in the near future.

Prescription: The half-a-mil the program brings in would be nothing to write home about in absolute terms, but as the smallest economy on this list, ($2.3 billion in tax revenue in 2011) Montana is keeping up with the average.
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