Recreational cannabis could raise hundreds of millions in new revenue

Stock photo of cannabis from Getty Images.

In November of last year, Arizona, Montana, New Jersey, and South Dakota all legalized recreational use of cannabis. While reasoning for legalization of recreational cannabis range from racial justice to economic growth, one benefit that has many state legislators interested is tax revenue.

Last year, each state that had legalized recreational cannabis raised at least $20 million in revenue from state taxes, with California’s haul topping $1 billion. If Ohio’s state revenue as a function of its total population were in line with other states, Ohio would have brought in about $300 million in recreational cannabis revenue in 2020.

There is a range of revenues being raised by states, though. While Illinois’s 13 million people raised about $52 million in revenue, Washington’s 8 million people raised $470 million. Ohio’s revenue could range from $50 million to $600 million depending on the size of the market for cannabis consumption and the size of the tax.

In FY2020, the state raised a little over $100 million in alcohol and liquor gallonage taxes and over $900 million in cigarette taxes. The $50 million to $600 million range seems reasonable given the range of revenues being raised for similar taxes right now.

Let’s say the state could raise $300 million with legalized recreational cannabis. What could we buy with $300 million?

According to the Legislative Service Commission, we could fund 37 state agencies for a year for $300 million. Alternatively, we could spend it all on large agencies, like funding the entire public works commission or both the Development Services Agency and the Department of Natural Resources with one budget line item.

This line item would only amount to a little over 1% of the state budget, so it’s not like the state could build its budget on the back of Mary Jane. But that is not such a bad thing: Excise taxes like those on cannabis can be quite volatile, so planning a state budget around an item like this could be setting a state up for corrections along the way and difficult fiscal planning.

Additionally, adding a new revenue line item can make the entire revenue picture more predictable. This is why we diversify investments: The more sources that function different from one another we have, the more we can stabilize our overall financial picture.

Cannabis revenue could even help during a recession. If cannabis sales are strong during a recession, as some analysts believe they are likely to be, then cannabis revenues could help cushion the blow during a recession, which is a period where state revenues are hit especially hard.

There are reasons to worry about cannabis as a revenue source. Besides volatility, excise taxes tend to be regressive, so they can be counterproductive toward the goal of reducing inequality. This means that a new excise tax might be well paired with an earned income tax credit expansion or some other low-income benefit to offset this regressivity the way the 2019 gasoline tax expansion was offset.

Revenue is only one in many considerations policymakers must weigh when deciding whether to legalize recreational cannabis. While public health and safety considerations must be weighed as well, raising hundreds of millions of dollars is not a bad bonus benefit.

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Rob Moore
Rob Moore is the principal for Scioto Analysis, a public policy analysis firm based in Columbus. Moore has worked as an analyst in the public and nonprofit sectors and has analyzed diverse issue areas such as economic development, environment, education, and public health. He holds a Master of Public Policy from the University of California Berkeley’s Goldman School of Public Policy and a Bachelor of Arts in Philosophy from Denison University.