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Illinois, other states banking on recreational cannabis tax revenue

(The Center Square) – In the November election, four more states joined Illinois in allowing recreational marijuana use in hopes of closing budget gaps, but how reliable is the tax revenue?

Policymakers in these states lobbied for legal pot in part to bring in revenue. For example, New Jersey’s governor said the money would help fund education and infrastructure.

A report by The Pew Charitable Trusts said tax revenue from marijuana has proved uncertain in normal times, and economic hardships from the COVID-19 pandemic and consumer behavior shifts will only add to the uncertainty.

“Marijuana revenue is unpredictable, mainly that there is not a lot of historical data to base projections on,” said Adam Levin, spokesman for The Pew Charitable Trusts.

In addition, Levin said state’s experiences so far suggest that the initial years may be the most volatile as supply tries to meet demand. Recreational pot may provide a burst of revenue upon introduction, but lawmakers should not expect consistent growth over the long term.

The latest sales figures released by the Illinois Department of Financial and Professional Regulation showed Illinois’ adult-use cannabis dispensaries have sold more than $582 million worth of the drug, generating over $150 million in tax revenue since legalizing cannabis on Jan. 1.

Illinois recreational marijuana is taxed at multiple layers, including a 7% wholesale tax, and an excise tax of 10% to 25% depending on the THC level. There also is a 6.25% state sales tax and a variety of local taxes. Some worry that Illinois’ high taxes on marijuana, among the highest in the country, will keep the black market thriving.

The Illinois Department of Revue uses the tax revenue to pay for the direct and indirect costs of the Cannabis Regulation and Tax Act, which covers functions across several state departments. Twenty-five percent goes to the Criminal Justice Information Projects Fund, 20% to the Department of Human Services Community Services Fund, 10% to the budget Stabilization Fund, and 35%, or the remaining balance goes to the General Revenue Fund.

The Pew report suggests policymakers hedge against the uncertainty and volatility of marijuana revenue by budgeting it cautiously. If states are considering using the funds for ongoing spending priorities that require sustainable revenue streams, they should tread lightly when relying on marijuana taxes.

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