Growing marijuana market could reach nearly $700 million in annual tax revenue

SPRINGFIELD – A fully-matured adult-use marijuana program in Illinois could produce $440 million to $676 million in annual tax revenue, and expected demand would be far greater than the state’s current supply, according to a study released Friday.

The study was conducted by Freedman and Koski, a Colorado consulting firm which advises local governments on marijuana legalization. It was commissioned by state Rep. Kelly Cassidy and state Sen. Heather Steans, both Chicago Democrats, who have worked on legalization efforts for the past two years.

Illinois would have to produce 350,000 to 550,000 pounds in dried cannabis plants each year to meet expected demand, the study said, but the state’s existing industry could supply only 35 percent to 54 percent of that amount. The bill’s sponsors said as the industry expands, minority-owned businesses will increase.

“We’re contemplating additional license categories such as craft cultivation, transportation and processing to ensure that everyone is at the table,” Cassidy said. “These will create space for more innovation and entrepreneurship in the industry, but more importantly, provide opportunity for more diversity in an industry with a pressing need for it.”

Revenue and usage estimates were determined using other states with legalized marijuana as a baseline, while factoring in Illinois’ usage and tourism rates among other demographic factors. Illinois would become the second-largest of the 11 states to legalize adult-use cannabis and the third-largest jurisdiction in the world after Canada and California.

Tax revenue estimates were based on a total mature-market marijuana industry revenue number of $1.69 billion to $2.58 billion, which was determined by medicinal prices and the usage estimates. These revenues, taxed at an assumed rate of 26.5 percent, would produce between $443,690,100 and $676,481,400 annually.

The study’s authors warned that revenue estimates are an inexact science, and it was not clear in the report how much of the assumed tax revenue would be offset by increased costs of state regulation.

“Choices made by Illinois regulators will have significant effects on price and revenue,” according to the study, meaning revenue estimates will be challenging “until such choices are made.”

The estimates could shrink if users grow their own marijuana or purchase it illegally, the study said. This could happen, because illegal marijuana is likely to remain cheaper than what is legally purchased, at least until initial regulatory costs decrease and economies of scale push prices down.

Even if all users bought legally, the study said it would be some time before the large usage and revenue estimates are realized in Illinois.

No sales tax revenues are likely to be realized anytime soon either, as Cassidy said last week the earliest possible implementation date for legalization would be January 2020.

Still, Gov. J.B. Pritzker, a committed legalization supporter, is banking on $170 million in revenue from licensing fees resulting from the legalization program. His office has not said how many licenses that would entail or how much they would cost.

The report released Friday warned against granting too many licenses.

“States like Oregon have faced the challenges of dramatic oversupply, encouraged by too many licensees producing far too much product for the market,” the report said. The result: “significant drops in prices that have caused challenges for businesses’ ability to operate,” according to the study.

Cassidy said she would like to see Illinois’ medicinal market continue to grow as well. From January 2017 to December 2018, the number of registered, qualified patients rose from 15,900 to 52,365, and the number of unique patients served rose from 10,175 to 29,954, according to the report. A recent law allowing cannabis as an alternative to prescribed opioids is expected to increase the market as well.

The bill’s sponsors have also been vocal about including criminal justice reforms in their legalization efforts for those incarcerated for marijuana-related crimes.

“For generations, government policy of mass incarceration increased racial disparities by locking up thousands of individuals for marijuana use or possession,” said state Sen. Toi Hutchinson (D-Chicago Heights), the legislation’s chief co-sponsor in the Senate. “Now, as we are discussing legalization, it is of the utmost importance that we learn from these mistakes and acknowledge the lingering effects these policies continue to have in neighborhoods across this state. No conversation about legalization can happen absent that conversation.”