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

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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.

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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.
California
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.
Colorado
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.
Washington
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.
Arizona
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.
Maine
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.
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