Colorado’s Missing Marijuana Tax Revenue

I was talking with some real estate investors from Santa Fe, New Mexico recently. They are thinking about moving to and investing in Colorado. The topic of recreational marijuana came up along with the question: “How much tax revenue is being left on the table?”

Good question.

And it’s a difficult question to answer accurately. To answer we first need to know the size of the marijuana market. Not just the legal market but the entire market.

Thankfully, one group of researchers made such an estimate for the State of Colorado and published their results about a year ago.

The Marijuana Policy Group (MPG) was formed in 2014 as a collaborative effort between the University of Colorado Boulder Business Research Division (www.leeds.colorado.edu/brd) and BBC Research & Consulting (www.bbcresearch.com) in Denver. Both entities have offered custom economic, market, financial and policy research and consulting services for over 40 years. The MPG mission is to apply research methods rooted in economic theory and statistical applications to inform regulatory policy decisions in the rapidly growing legal medical and recreational marijuana markets.

I was pleasantly surprised by the MPG publication’s readability and thorough methodology. My only complaint would be why not put forth an estimate in total dollars? Their final estimate for the size of the Colorado marijuana market is 130.3 metric tons in 2014. Note this estimate is for the adult, 21 years of age and older, market. It does not include any estimate of juvenile consumption.

Okay, how do we estimate the size of the Colorado market in terms of US Dollars?

Let’s start by converting metric tons to ounces. 1 metric ton = 35,273.9619 ounces. So, 130.3 metric tons = 4,596,197.23557 ounces. Let’s keep it simple and conservative and we’ll say 4.5 million ounces.

The MPG study also estimates pricing per ounce to be in the $200-320 per ounce range. Medical marijuana sales are at the lower end of the scale. Retail sales in mountain communities are at the higher end of the scale. I’m guessing most retail purchases are far less than an ounce involving a higher per-ounce rate. Average prices for 1/8 of an ounce are about $40 according to coloradopotguide.com. Again, to keep it simple, let’s take an average of the low/high figures and round down to be conservative. So we’ll say the average price paid is approximately $250 per ounce.

Multiplying we get a total market size estimate of approximately $1.125 Billion (2014).

Righteous bucks, dude.

I think the estimate will prove to be low. In any case, that puts marijuana in the same general ballpark as Colorado’s Aerospace industry.

In 2014 we also know that Colorado reported regulated sales of retail and medical marijuana just shy of $700 million. This means Colorado is capturing approximately 62% of the total estimated marijuana market. Seems pretty good for the first year of legalization.

It also means Colorado is missing out on approximately 38% of the potential revenue from taxes and fees. If we look only at the 10% State tax we’re talking about $70 million collected and $41 million left on the table. And that’s just one piece of the complicated tax puzzle. Millions more in local, excise and other taxes/fees are currently left uncollected with organized crime enjoying a nice slice of the unregulated action.

Colorado needs to find a strategy to completely kill off the black market. Sooner the better.