Despite doubters and detractors, the traction gained by the legal marijuana industry cannot be stopped. A recent study by “the ArcView Group, a cannabis industry investment and research firm based in Oakland, California, found that the U.S. market for legal cannabis grew 74 percent in 2014 to $2.7 billion, up from $1.5 billion in 2013”. The same researchers have also predicted that the marijuana market will grow by 32% in 2015 and "project that by 2019 all of the state-legal marijuana markets combined will make for a potential market worth almost $11 billion annually”. This growth (including the projected growth) is due not only to the increasing legalization of medical marijuana but also to the legalization of marijuana for recreational use. Currently 23 states have legalized marijuana for medical purposes. Four states have legalized recreational use. Two of the four states, Colorado and Washington, already have experience with the taxation and regulation of retail marijuana. Other states are closely watching the programs in these two states with respect to the success of regulation and the tax revenues generated. Learning about the successes and shortcomings of the programs established by the first states to experiment with legalization is important for understanding how best to regulate this new and exciting industry. And one of these first states, Washington, has already made some changes based on its experience in the first year.

Photo by: Econlife

Photo by: Econlife

Washington was the second state to take the momentous leap in legalizing marijuana for recreational use. Retail stores began sales in July 2014. In the first year (July 2014 to June 2015) these shops had more than $257 million in marijuana sales. These sales generated more than $70 million in tax revenue, exceeding the original estimate of $36 million. Although this $70 million is small compared to Washington’s $38 billion two year-budget, the revenue is significant.  As Tom Angell, chairman of the advocacy group Marijuana Majority, points out, “these are real dollars that can now be spent on things like schools, healthcare, and road repair instead of going straight into the pockets of the drug dealers who controlled the marijuana market prior to legalization… And this is only the first year. Expect to see even more revenue generated— and more jobs created— in the next few years”. In contrast, Colorado which had $313 million in retail sales in its first year (the 2014 calendar year) achieved only $44 million in tax revenue. Sales did increase and Colorado’s tax revenue for period from July 2014 to June 2015 (its fiscal year) was approximately the same as Washington’s. 

Given the larger market in Colorado, how was Washington able to achieve greater tax revenue? The answer lies in the stringent tax laws that existed in Washington throughout the first year of its legalization program. While Colorado has a 15% excise tax for large wholesale weed and a 10% retail tax, Washington had a three level tax. During the first year of legalization, the revenue generated by marijuana was "taxed 25 percent each time it move[d] from the growers to the processors to the retailers. That’s been especially tough on retailers, who must pay federal income tax on the marijuana tax they turn over to the state”. Shop owners like James Lathrop, who owns Seattle’s first legal marijuana shop, Cannabis City, criticized this taxation as being superfluous. Mr. Lathrop noted with respect to 2014 that “his estimated federal tax liability was $510,000, on top of the $778,000 he owed the state on $3.1 million in sales.” He feels that he was “basically doing this for free.… Nobody’s gone out of business, but [he is] not driving a new truck either.” And shop owners are not alone. The growers were also critical of the three-level taxing policy. Jeremy Mober, a former black market grower who decided to go legal, operates CannaSol Farms. Reflecting on the first year he finds it “amazing [they] could be so successful and unsuccessful at the same time… [CannaSol Farms is] the No. 9 grower in the state, [but his] bank account just seems to stagnate”. As a result of these shortcomings, Washington has made significant changes to its original tax policy.

On June 30, 2015, Washington’s Governor, Jay Inslee, signed a bill that changed the state’s entire tax structure with respect to the marijuana industry. In July 2015 two new laws took effect. One law regulated and taxed medical marijuana. The other law addressed recreational marijuana, cutting the “three-level excise tax on pot to a single, 37-percent tax”. Instead of a 25% tax at each level of production, this tax is imposed at the customer level. Because the tax is imposed on the customer and not the retailer, the tax amount does not constitute income to the retailer for federal income tax purposes. 

Photo by: Washington Post

Photo by: Washington Post

Despite the first year complaints regarding the high tax rate and the need to make some revisions, Washington officials and those backing legalization feel the program has been a success. One hundred sixty shops currently operating in Washington create $1.4 million a day in revenue. It seems safe to say that the tax revenue numbers, which have blown the roof off initial expectations, speak for themselves and are paving the way for the future success of the cannabis industry. But there are significant benefits to regulation other than the tax revenue. According to Rick Garza, the director of Washington’s Liquor Control Board, legalization and regulation has helped to keep marijuana away from children and criminal organizations.

Photo by: Huffington Post

Photo by: Huffington Post

It is hard to wrap one’s mind around such momentous change, but the truth is that the legal marijuana industry - the fastest-growing industry in the United States - is here to stay. We need to get past years of conditioning and anti-marijuana propaganda and realize that legalizing marijuana will not only add much needed tax revenue to a country still reeling from the recent recession, but will also create jobs, provide medical benefits to sick Americans, and take revenue away from the black market and criminal organizations. According to researchers, “if the trend toward legalization spreads to all 50 states … the total market value of all states legalizing marijuana would top $36.8 billion — more than $3 billion larger than the organic food industry”. Washington, Colorado, and now also Oregon and Alaska, are just the tip of the iceberg for a movement that promises to be one of the largest industries in the country.