A customer counts out cash for a marijuana purchase at Native Roots in unincorporated Boulder County on July 15, 2016. (Matthew Jonas, Longmont Times-Call file)

Colorado looks to marijuana tax as budget fix, stretching the limits of what voters approved

In last-minute negotiations between Colorado lawmakers on a major spending bill, a dubious budget fixer has emerged: marijuana taxes.

The tentative legislation unveiled this week seeks to extract additional money from Colorado’s burgeoning cannabis industry by raising the recreational marijuana special sales tax from 10 percent to the maximum 15 percent rate.

The new dollars are earmarked for rural schools and a tax break for business owners on personal property — two purposes that diverge from the original intent of voters who in 2013 approved Proposition AA imposing taxes on recreational marijuana.

The little-noticed but significant shift in how Colorado spends marijuana tax dollars is tucked inside a far-reaching measure to eliminate budget cuts for hospitals and generate $1.8 billion for road construction with the sale of state buildings.

The move is generating concern in the marijuana industry as it raises questions about increasing illegal sales and links core state expenses to a uniquely volatile industry.

“You would think if they are going to go jack up the marijuana taxes it would be for some marijuana-related purpose and not because there’s no leadership at the Capitol to talk about any other revenue source other than sin taxes and pot taxes — they are spineless,” said former state Sen. Pat Steadman, a longtime Democrat budget writer.

But House Majority Leader KC Becker, a Boulder Democrat and bill sponsor, defended how the state would spend the new pot tax revenues.

“I think that a lot of people think that marijuana taxes are just a budget solver for the entire state of Colorado,” she said. “I think a lot of people in Colorado who are involved in small businesses think that the business personal property tax is cumbersome and confusing. So I think this is a good marriage between meeting a lot of needs and expectations.”

The current tax rates for recreational marijuana at dispensaries in Colorado are the second highest in the nation among those with a legalized industry, according to a 2016 Tax Foundation study.

The state’s cannabis consumers pay the standard 2.9 percent state sales tax plus a special 10 percent marijuana sales tax. A 15 percent excise tax applied on wholesale transfers is baked into the cost of sale.

Under the legislative proposal, the increase to the 15 percent special sales tax rate is paired with the elimination of the 2.9 percent regular sales tax. So the move amounts to a 2.1 percentage-point tax hike for consumers. The shift moves all recreational marijuana tax collections outside the Taxpayer’s Bill of Rights revenue calculations.

Each percentage point increase in marijuana taxes equates to about a $10 million increase in tax revenue for the state, said Chris Stiffler, an economist at the Colorado Fiscal Institute. For the consumer, this type of increase would result in a $20 pack of edibles costing $21, he added.

What did voters intend?

How the state spends marijuana tax dollars has evolved since lawmakers asked voters to bless Proposition AA. The ballot question told voters the money would cover the expense of regulating the new marijuana industry and pay other associated costs, such as programs for youth education and drug treatment.

“There was a lot of discussion in the first few years about what were the voters’ expectations, what voters wanted us to be doing,” recalled Steadman, who helped craft the law. “That scope of purposes has grown in time … as what the voters intended in 2013 matters less and less.”

The money for rural schools — estimated at $10 million a year for three years — probably fits under the current allowable uses, thanks to the leeway built into the law that allows for spending related to “adolescents and school-aged children in school settings.”

But the business tax break represents an entirely new direction.

Senate President Pro Tem Jerry Sonnenberg, the Republican bill sponsor, said the proposed legislation includes an exception to carve out the money for the business tax break.

Mason Tvert, a Marijuana Policy Project spokesman and supporter of Amendment 64, which legalized recreational marijuana, and Proposition AA, questioned the proposed use of tax money.

“Marijuana businesses are already generating hundreds of millions of dollars (in sales),” he said. “It seems unfair to increase taxes on marijuana consumers to cover a tax break for unrelated businesses.”

The black market and volatility

The other concern is the black market. Colorado lawmakers approved a measure in 2016 to lower the special sales tax rate on recreational pot to 8 percent starting July 1, in part citing concerns about illegal sales.

This year, lawmakers are reversing course and moving a bill to keep it at 10 percent but spending more to crack down on illegal sales.

A tax increase probably won’t deter consumers, but it also may not sit well with others, said Paul Seaborn, assistant professor of management at the University of Denver’s Daniels College of Business and instructor of the college’s “Business of Marijuana” course.

“It seems ironic that our state government is counseling consumers to use marijuana responsibly and yet they seem to be moving toward developing some sort of financial dependence,” he said.

On the other hand, the tax measure shows the industry’s maturation.

“It’s probably not fair to the industry, but it goes to show how attractive it is … and our state government now has a particular stake in whether the industry is growing or not,” Seaborn added.

Over the long term, analysis suggests that price volatility and competition from other legal recreational marijuana states could eat away at that revenue stream.

Last year, wholesale marijuana prices tanked as several large-scale cultivation centers expanded and new, less-expensive outdoor grows came online, said Adam Koh, editorial director at Cannabis Benchmarks, which tracks marijuana prices. On the retail level, prices slid but increasing sales and tax collections masked the issue for now.

The spot price of marijuana flower in Colorado dropped as low as $1,352 per pound, after starting the year at $2,151 per pound. This year, that wholesale price is averaging about $1,300, he said.

On a retail level, prices also slid as per-gram averages of flower dropped from $9.13 in January 2016 to $6.64 in December 2016, according to data from BDS Analytics. Prices perked up to start the year at $6.92 per gram in January and have climbed to $7.42 per gram in February.

“I think the fact that prices are going to fall,” Steadman said, “is probably more of a risk to everyone’s grand plans that they are scheming right now.”

Updated May 9, 2017, at 1:30 p.m. The following corrected information has been added to this article: Because of incorrect information from a source, certain product sales data in this story have been updated to reflect the per-gram averages of flower sold in Colorado dispensaries from January 2016 to February 2017.

This story was first published on DenverPost.com