Don’t bank on pot revenues just yet, new study warns lawmakers

States that have legalized marijuana before Illinois have seen actual revenues that vary wildly from projections — although some have exceeded expectations.

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When Illinois lawmakers debated whether to legalize recreational weed, the potential funding from taxing sales was presented as a new way to address the state’s buzzkill of a budget.

But a new study released Monday by the Pew Charitable Trusts urges pro-pot states to tread lightly when estimating revenues for recreational marijuana sales. The report, which analyzes the 10 states that have already legalized recreational pot, warns that programs relying on funding from recreational cannabis could suffer if budgeting projections fall flat.

As a result, states are advised to use the tax revenue for savings or put the money in the bank before budgeting it the following year.

“The hurdles of forecasting recreational marijuana revenue will persist,” according to the report. “Given how unpredictable the marijuana market is, states should exercise caution in budget planning to ensure that the money strengthens, rather than weakens, their long-term fiscal position.”

With recreational legalization seemingly sweeping across the country, issues with forecasting and budgeting will likely become more widespread, the report claims.

In his budget proposal in February, Gov. J.B. Pritzker estimated that recreational legalization could bring in $170 million in dispensary licensing fees in the fiscal year that started July 1. But Pritzker’s $40 billion state budget, signed in June, doesn’t account for potential revenue from recreational sales.

Those tax dollars will be used to cover a range of services and expenditures: administrative costs; a sweeping expungement initiative; public education and safety campaigns; local prevention and law enforcement training programs; mental health and substance abuse services and unpaid bills. But the bulk of the pot money will go to the state’s general revenue fund and a program that benefits communities adversely affected by the drug war.

Initial revenue projections have proved volatile in some states. The report notes that Nevada’s revenues for the first six month of sales outpaced projections by 40%, while California’s were 45% lower than expected.

“It’s hard to say how reliable revenue will be in the first year,” Pew research officer Alex Zhang said during a presentation of the findings.

A key issue with handicapping pot revenues is a lack of data to base projections on, according to the report. Unlike projections for alcohol or cigarettes, which draw on decades of data, the amount of tax money drummed up by pot sales is tougher to pin down because the drug remains illegal in most states and across the country.

Determining the level of cannabis use, changes in demand and pricing and the amount of time it will take a program to start running smoothly can also affect these calculations, according to the report. Issues can also arise when states attempt to gauge sales to visitors and tourists — something that will certainly factor into Illinois’ industry.

“In tourism-heavy Alaska and Nevada, sightseers contribute to surging recreational marijuana sales. Alaska’s capital, Juneau, welcomes multiple cruise ships each day and has three recreational marijuana stores,” the report reads. “But the state still needs more data showing to what extent tourists will drive future revenues.”

Having an adjacent state with legal pot could also cause problems and create competing markets, the report claims. Though none of Illinois’ direct neighbors have lifted the prohibition on recreational marijuana, nearby Michigan has legalized the drug for adult use and will likely kick off sales at some point next year.

Nevertheless, five legal states with available data — Colorado, Washington, Oregon, Alaska and Nevada — have all seen an early jump in tax collections, according to the report.

And while the $420 million Washington counted in marijuana taxes in fiscal year 2018 topped revenues for both liquor and tobacco, the rate of growth has slowed dramatically there and in Colorado, the study warns.

“States should be careful to distinguish between marijuana revenue’s short-term growth and long-term sustainability,” the report states. “While these new dollars can fill immediate budget needs, they may prove unreliable for ongoing spending demands.”

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