May 2 (Bloomberg) -- Colorado officials are scaling back estimates that the state’s retail marijuana industry will reap $1 billion in sales in the coming fiscal year, saying collections trailed forecasts in January and February.
Colorado collected about $4.2 million in sales and excise taxes on recreational cannabis in the two-month period. That’s less than half of the estimated monthly range of $5.5 million to $8.9 million compiled by state officials last year.
“I don’t think it’s the savior for state budgets,” said Phyllis Resnick, lead economist at the Denver-based Colorado Futures Center of Colorado State University. “It brings in additional revenue, but it also brings in additional costs for administration of the system and regulation and monitoring. It’s not free money.”
As the nation watches marijuana emerge from prohibition in Colorado after a popular vote to legalize the drug in 2012, early tax receipts raise doubts about expectations that the new industry will provide a windfall for cash-strapped local governments. In Washington state, where voters also approved the drug, retail sales will begin around June, and legalization campaigns are under way in Alaska, Oregon, Ohio and Arizona.
An unexpectedly slow licensing and approval process in Colorado and a shortage of supply caused early sales to fall short, state officials said. As a result, lawmakers are scaling back plans to spend cannabis levies.
“There is a great deal of uncertainty in the projections for how much tax revenue marijuana will raise,” state Senator Pat Steadman, vice chairman of the legislature’s Joint Budget Committee said at an April 30 hearing. “There is a concern about starting new programs.”
Colorado voters approved a 10 percent sales tax and a 15 percent excise levy on the wholesale price of recreational cannabis in November. At the retail level, there are local sales taxes and a 2.9 percent state sales tax.
More cannabis users are choosing to remain in the state’s medical marijuana system, where the product is taxed at a lower rate, than are switching to recreational use, Resnick said. Many cities and counties, including Colorado Springs, the state’s second largest city, are not allowing retail pot stores.
“We’re also hearing anecdotally that folks haven’t transitioned from the black market,” Resnick said.
Consumers will be able to shop at additional retail marijuana outlets in coming years. Currently only businesses with medical marijuana licenses can apply to sell recreational pot. State officials will begin reviewing applications from anyone to sell the drug, which remains illegal under federal law, starting July 1.
In the long run, tax revenue from the fledgling industry is likely to mimic other sin levies, such as those on alcohol and cigarettes, which represent just a fraction of the state’s general-fund budget, she said.
Early sales-tax collections may not be representative of sales patterns for the rest of the year, said the Colorado Legislative Council, which provides nonpartisan research to the General Assembly, in a March 18 revenue forecast. Officials licensed about 189 stores statewide through April 1; some may not have received local approval to open.
“January tax collections may be biased downwards because only a limited number of retail stores were open for the entire month,” the report said. “Local jurisdictions had not yet licensed adult-use marijuana stores and the supply of adult-use marijuana was limited because cultivation facilities could not start producing until January.”
The forecast anticipated that sales- and excise-tax revenue from retail cannabis sales in fiscal 2015 would total about $65.3 million. The numbers were based in part on about 502,779, or 12.9 percent, of Colorado adults between the ages of 21 and 90 each using about 3.5 ounces of recreational weed annually.
Analysts in the state’s Revenue Department, which regulates Colorado’s marijuana marketplace, said they will release a report later this month with updated projections.
Lower-than-expected retail marijuana tax receipts prompted lawmakers to offer Governor John Hickenlooper, a Democrat running for re-election, only one-third of the money he initially requested for regulatory enforcement, programs to prevent youth pot use, to provide substance abuse treatment and for research and public education.
Lawmakers are debating a bill in the Senate this week that calls for spending about $24.4 million in marijuana revenue in the budget year starting July 1.
The governor originally requested about $75 million, but scaled back his proposal to $54 million. The uncertainty of the market led the legislature’s budget committee to recommend that the state not spend pot tax levies until the year after they are collected.
Steadman, the vice-chairman of the Joint Budget Committee, said the panel tried to align the marijuana spending proposal with the governor’s requests and is loath to change the bill.
“The governor didn’t get everything he wanted,” Steadman said. “We’re trying to maintain a strong nexus between the tax that’s collected on legal marijuana sales and the expenditures that are being made, in that they are all related to substance use, abuse, prevention and treatment and law enforcement.”