Financial Implications of Combining Washington’s Medical and Recreational Markets

Almost 11 months into the legalization of marijuana, data is starting to roll in about Washington state’s progress with the new industry and now the laws that put the industry in play are starting to evolve. In addition to the state’s revenue estimate, the revised law includes proposed amendments to both the taxes of the recreational market and the entire structure of the medical marijuana industry.

As of now, there are essentially three marijuana markets in Washington state: the recreational market, the medical market and the illegal black market. While it is difficult to measure the cost and size of the black market due to its very nature, the prices for marijuana have consistently lowered throughout the past year.

The medical market may be going through the biggest changes, as it was a market that, until now, has been both widely successful and widely unregulated. The proposed medical marijuana law aims to require all dispensaries to obtain licenses by July 2016. The goal of this, according to Seattle Mayor Ed Murray, is ensuring that the same rules apply throughout the marijuana market and “creating safer, more consistent access for those who rely on medicinal products.”

The recreational market, with its current tax structure, has seen success in the state of Washington. According to the June 3, 2015, weekly marijuana report from the Washington State Liquor Control Board, there are average daily sales of $1.3 million and fiscal-year-to-date sales of $215.2 million, garnering a fiscal-year-to-date tax obligation of $53.8 million. The new laws could vastly help this out though, lowering a 75 percent excise tax to a flat 37 percent.

While some may think the lower tax rate would reduce tax revenue, it may actually boost sales, which would increase tax revenue. Speaking at the Marijuana Investor Summit, John Kagia, Director of Industry Analytics at New Frontier Financials, explained that “setting the tax too high has a dramatic effect on demand and so, it’s almost counterintuitive, but the lower you set your tax rates, the larger your market is going to be, the higher the revenue the state is going to earn.”

The lower tax rate also has the potential to pull even more business from the black market. Referencing the recent Legislator Report from New Frontier Financials, Kagia also noted that legislators need to examine how lower tax rates can draw users away from the black market to positively affect demand in the legal market.

While the black market cannot really be measured accurately in Washington, the overall success can partly be seen in the prices of marijuana. In an anonymously crowd-sourced survey, Washington has the second cheapest marijuana prices in the country—something that is actually good to see. As the article noted, when something like marijuana is illegal, the black market booms and prices rise. However, a legal market not only lowers the prices of all parties, but the legitimacy and legality of the product actually turns people away from the unregulated black market product.

As the first year is coming to a close, Steve Lerch, the executive director of the Washington State Economic and Revenue Forecast Council, is tasked with estimating the revenue that will come from Washington’s marijuana market. This presents problems in a few ways though, and even he recognizes that the numbers are not something that should be held as gospel.

While one of the problems in estimating these numbers is due to the fledgling market’s lack of available data, there is a bigger complication in the medical market. The estimates that Lerch is responsible for need to account for the medical market being combined with the recreational market. As this is a brand new addition, there is no way to know exactly how that market will respond to its integration with the recreational market.

Colorado is a good example for the uncertainty of estimation. Colorado expected $70 million in tax revenue in its first year of legal recreational marijuana, but it only ended up with only $44 million. As the year closes in and the laws continue to change, it will be interesting to see how a state system in flux will work with or against itself.

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