Colorado’s Pot Revenue Goes Up in Smoke

Experts predicted the state’s newly legal recreational marijuana market would yield more than $70 million in taxes, fueling a huge tax rebate for residents. That didn’t happen.

02.12.15 10:50 AM ET

Colorado’s recreational marijuana program is underperforming.

It’s a grim fact but an important one, somehow lost in a flurry of sensational media stories claiming the state sold so much pot it’s showering citizens in refunds.

The truth is less exciting. According to the Colorado Department of Revenue, the state collected $44 million in taxes from recreational marijuana in 2014, $25 million less than predicted. Recreational marijuana sales didn’t merely fail to surpass expectations, they failed to meet them.

In the absence of these facts, the it’s-raining-pot-refunds-in-Colorado concept took off.

The mess began with a local Associated Press article, which mentioned a state tax refund, then failed to clarify that it wasn’t related to marijuana revenues, said Tim Hoover, spokesman for the Colorado Fiscal Institute. Shortly after the story ran, High Times ran a piece under the headline Pot Is Making Colorado So Much Money They Literally Have to Give Some Back to Residents.

In a matter of days, the story went global. From The Huffington Post to Rolling Stone, MarketWatch to the BBC, the “doobie dividend” saga won the day. Reports that the inaugural year was “too successfulled to claims that the state would be doling out anywhere from $30 million to $100 million in tax refunds.

The claims were false. “Pot sales have nothing to do with this refund,” Hoover told The Daily Beast. “Pot sales were less than expected.” The CFI spokesman, who has seen the false narrative make its way from TV pundits to the Dow Jones newswire to local news in Asia, says he is frustrated at how far the lie has traveled. “There was no bonanza,” he said.

Part of the problem with the pot refund story is that a small part of it—the refund—is true. In a state with one of the strictest tax and expenditure limitations in the country, Colorado operates under a Taxpayer Bill of Rights called TABOR. According to the bill, refunds are to be considered when state tax revenues don’t match up to the state estimates. This year, owing to a slight rise in the economy, the overall revenue was higher.

“These refunds are being caused by a little-known provision and the economy,” said Hoover, whose organization, CFI, provides independent analysis of fiscal and economic issues facing Colorado. “All we’re concerned about is making sure the story about why the refunds are occurring gets told properly. It’s gotten mangled.”

Art Way, state director for the Drug Policy Alliance’s Colorado chapter, says he can see why the saga made waves. “It’s a feel-good story,” he told The Daily Beast. “Tax rebates outside of income tax is a novel idea and rare occurrence for most people—and when coupled with the history made here to legalize marijuana, you have an intriguing story.”

So why did recreational marijuana sales in Colorado fall short?

In July, the Denver Business Journal showed analysts’ estimates for the yearly total of recreational pot tax revenue to be somewhere from $60 million to $70 million. The Denver Post called Gov. John Hickenlooper “bullish” about the potential tax revenue streams, which he estimated would exceed $100 million.

Those numbers may simply be a reflection of exceptionally high estimates, says Way. “The Colorado Center on Law and Policy provided the most accurate prediction well before the election,” he said. “Why the governor and the legislature’s predictions were so high is unknown to me. Maybe they felt the need to show a huge tax benefit to justify their involvement.”

High predictions or not, the fact remains that Coloradoans bought less recreational marijuana than they could have—which means either they stopped using it or bought it somewhere else. With one in eight Coloradoans smoking marijuana in the last month, the latter seems more likely.

Looking at the taxes on cannabis in the state, it’s not hard to see why. Pot taxes in Colorado are steep. In Denver, for example, an eighth of cannabis can come with four taxes: an excise tax, regular sales tax, special sales tax (for pot retailers), and a special city tax. That equals a markup of roughly 30 percent.

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Hoover’s theory is that many pot aficionados looked at the numbers and decided to stick with their medical marijuana programs or their other dealers. While not tax free, medical marijuana in Colorado is not subject to any special sales taxes, making it cheaper than recreational. Plus, the personalized service given to medical marijuana patients at each dispensary makes the process easier and more fun. Hoover likens it to a premier level flyer or club membership.

If the taxes undermined the appeal of buying legal weed at a Starbucks-like store, that will be a learning experience for the state. Way says it’s the transformations that result from legalization, not the money itself, that matters. “What’s important is the change in government priorities due to no longer engaging in blanket marijuana prohibition,” he said. “The tax aspect should not be the overarching concern. The heart of marijuana legalization is criminal justice reform.”

Hoover is also focused on looking forward—and he insists there is much more to come in Colorado’s brave new world of legalized weed. “There’s at least a yardstick now, but the state is still in for a wild ride on a lot of this stuff,” he said. “No one really knows what is going to happen.”