This fall, voters in five states, Michigan, Missouri, North Dakota, Oklahoma, and Utah, will decide whether to welcome another source of revenue into their state budgets: new taxes on marijuana sales. My home state of Michigan legalized medical marijuana in 2008, and now voters will consider whether to allow sales of recreational, or “adult-use” marijuana. 

Should Michigan’s ballot measure pass—and it’s “widely assumed” that it will—marijuana retailers would pay an excise tax of 10 percent on sales that the state would allocate to local governments and to the state’s school and transportation funds. Consumers also would pay Michigan’s 6 percent sales tax on purchases of recreational weed.

Taxing marijuana can produce a fairly large pot of money, and Michigan’s new governor, also to be chosen this fall, could modify the current marijuana tax plan. What should he or she consider? I hate to be a buzz kill, but, much like tax revenues from newly legalized sports betting, legal adult-use marijuana taxes may not give Michigan the revenue high that some politicians crave.

Nine states have legalized adult-use marijuana. In Washington State and Colorado, sales began in 2014. Washington collected $315 million in marijuana excise tax revenue in 2017, or about 1.76 percent of total state tax revenues. Colorado has received over $700 million in marijuana tax revenue since 2014. In 2017, it represented 2 percent of state revenue. 

Nevada began legal sales just last year and in six months collected $30 million in taxes. Around the country, marijuana tax revenues have funded public safety, health care and social service programs, research, and even a rainy day fund. 

The Michigan Marijuana Legalization Initiative would allow adults age 21 or older to use or possess marijuana as long as they’re not using it in public or driving under its influence. Municipalities could limit or even ban marijuana sales within their jurisdictions. The state would begin accepting recreational marijuana business applications in December 2019, but for the first two years only firms that currently have licenses to operate a medical marijuana facility could apply. This would certainly slow business growth and corresponding revenues.

Three of Michigan’s many gubernatorial candidates already have described how they’d spend pot tax revenue once it started flowing in. One would return 80 percent to taxpayers through a tax credit. Another would add an excise tax of 15 percent on pot and invest the first year’s estimated revenue of $60 million into a “transit infrastructure bank” for maintenance and construction. And the third would split the pot tax revenues in half between “infrastructure and public education.” 

Are these ideas workable and sustainable? Here’s some food for thought. 

If Michigan legalizes recreational marijuana, will the state be able to avoid the implementation problems Massachusetts has faced? It legalized pot sales in 2016 with the goal of getting its adult-use market off the ground by July 1 of this year. But one month in, the state has licensed only one retailer and no pot shops have opened. This means it will likely miss its 2018 tax revenue target of $63 million.

Writing for Forbes, cannabis investor Kris Krane explains how delays in licensing sellers—and collecting subsequent tax revenues—are the results of choices made by Massachusetts legislators and regulators. Michigan’s GOP-led legislature has opposed allowing the sale of recreational marijuana. How will it respond if voters approve legalization and taxation? Will the legislature help expedite licensing and other conditions needed to get the marijuana industry off to a solid start? Or will it instead create obstacles?

Even if states can get their recreational marijuana businesses up and running, they shouldn’t count on the taxes as a primary source of funding programs. According to a recent report from the Pew Charitable Trusts and the Nelson A. Rockefeller Institute of Government, sin taxes on products such as recreational marijuana are not a terribly reliable or stable source of revenue. Marijuana tax revenue in particular is not easy to forecast, since markets are evolving and states are refining their tax systems for regulating the drug. 

The report concludes that taxes “can be effective in raising revenue in the short term,” but “states should carefully assess the sustainability of these revenue sources in the long term, especially for funding ongoing budget commitments…” In other words, don’t use an unsteady tax to fund projects that need a steady source of revenue, like a bond for roads and schools. In part, much like state-sponsored lotteries, as more states legalize and tax marijuana early windfalls might shrink.

And definitely don’t make it the only stream of money that supports a project. My TPC colleagues Richard Auxier and John Iselin made this case in March about tying Philadelphia’s tax on sugary drinks to Pre-K and community schools programs:

“Soda tax revenue is not easily predicted and more importantly may not increase over time. In contrast, education spending tends to go up… and is subject to demographic and economic factors outside policymakers’ control… [Soda tax revenue] should not be the sole revenue source… or as the gap between revenue and spending continues to grow, more and more students will miss out on these educational opportunities.”

Granted, a soda tax has a two-part goal: Raise revenue and curb consumption. Maybe instead of higher-priced soda, people will drink more free water and revenues will come in below expectations. 

But like taxes on liquor, taxes on adult use marijuana are intended to be money trees, pure and simple. The trick is to not set the tax rate too high. After all, there’s a substitute for legal pot in a state, and it’s not water. It’s cheaper pot—purchased in other states or in the illegal market.

Maybe it’s best for a state’s policymakers to think of adult-use marijuana tax revenue as “found money,” or tax revenue that could have just as easily been earned by accident. Why not be very frugal with the revenue for the first year or two, and develop policy and programs as if the money largely isn’t there? Why not wait and see how the marijuana market develops? 

Of course, that’s easy for me to say. I’m not running for office.

The Tax Hound, publishing the first Wednesday of every month (or the day before a Wednesday holiday), helps make sense of tax policy for those outside the tax world and connects tax issues to everyday concerns. Need help or have an idea? Post a comment, or send Renu an email.