The Washington State marijuana revenue estimate

$500 million a year? I doubt it.

I’m glad I didn’t have the assignment of guessing how much revenue Washington State might reap from legalizing marijuana. And the state Office of Financial Management put an appropriate number of caveats in its analysis: after all, the Feds might just decide to shut the whole thing down.

Still, what everyone will see is the bottom line of more than $500 million a year, which would be about 3% of state revenues. I’m not buying it.

The sales volume estimate is built up from survey data: so many users smoking every year, so many every month, so many every week, so many every day. That’s a reasonable approach. But those estimates of days of use are then multiplied by two grams per use-day to get a quantity estimate. Two grams is roughly 5 joints: not consistent with anything we know about actual patterns of marijuana use, except for the extreme right-hand tail of the distribution. Given that the price estimates assume dispensary-grade sinsemilla rather than lower-potency commercial grade, I’d divide that number by five.

On the other hand, the implicit assumption is that legalization wouldn’t increase consumption at all, which seems grossly implausible. But the assumption of a $12/gram retail price – the same as the current medical-dispensary or illicit-market price for moderately-high-potency pot – seems hard to justify. You’d expect competition to drive down prices. (The AP story says that the 25% retail tax and 10% sales tax would be on top of the $12 estimated retail price; if so, you’d have to expect the illegal market to keep on working, since some consumers would prefer illegal product at $12/gm. to legal product at $16/gm.)

How would I have gone about making such an estimate?

Well, the total national retail cannabis market is about $15B per year. Washington State has 2.2% of the national population. So the current retail market in Washington should be about $330M/yr.

With 25% tax collected up to three times – once from the producer, once from the processor, and once from the retailer, though apparently some growers can do their own processing and skip the tax – plus ordinary sales tax on top of that, Washington State and its localities should wind up collecting something like half of what consumers pay, or about $100M-$150M/yr. if the consumption increase and the price decrease turned out to offset each other.

Of course, the big bonanza for Washington State would be the potential “export” market to the other 49 states, Canada, and even Mexico. But equally of course, that’s exactly what would bring on a federal crackdown.

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Author: Mark Kleiman

Professor of Public Policy at the NYU Marron Institute for Urban Management and editor of the Journal of Drug Policy Analysis. Teaches about the methods of policy analysis about drug abuse control and crime control policy, working out the implications of two principles: that swift and certain sanctions don't have to be severe to be effective, and that well-designed threats usually don't have to be carried out. Books: Drugs and Drug Policy: What Everyone Needs to Know (with Jonathan Caulkins and Angela Hawken) When Brute Force Fails: How to Have Less Crime and Less Punishment (Princeton, 2009; named one of the "books of the year" by The Economist Against Excess: Drug Policy for Results (Basic, 1993) Marijuana: Costs of Abuse, Costs of Control (Greenwood, 1989) UCLA Homepage Curriculum Vitae Contact:

9 thoughts on “The Washington State marijuana revenue estimate”

  1. Agreed.

    RE 2 grams per day parameter.

    1 gram per day of use might be a better guess nationwide today, with a mix that is roughly 80/20 “commercial grade” vs. sinsemilla. (Not that any individual mixes; but nationwide market share of sinsemilla is about 20% — way below what is commonly believed.) If that switches to all sinsemilla in WA at current 10-18% THC, that’s roughly half as many grams per hour of intoxication as is typical nationwide today.

    So I’d divide by 2 X 2 = 4, but 4 vs. 5 is not worth quibbling about; well within uncertainty range for these sorts of calculations.

    Another upside beyond exports & drug tourism would be if edibles (and “drinkables”) became more common. If more people consume their THC in the form of brownies and gummy candies, then that would help pump up dollars spent per hour of intoxication because the tax — at least at retail and probably also the 25% at the “manufacturing” level — would apply to the price of the brownie, not just the component of the brownie’s cost that comes from MJ.

  2. I’m aware of the existence of stoners but as someone who smokes but has no desire to make a lifestyle out of it, I’m kind of shocked by these numbers. I’m open to the idea that I might have unusually high sensitivity and that I’m smoking high potency material than average (possibly at high efficiency than average) but even then I find them surprising.

    If anything I think I smoke a bit too much (2-3 times per week to the point of what in alcohol terms might be called “very tipsy”) and 2 grams would last me literally months.

  3. Mark says: Washington State and its localities should wind up collecting something like half of what consumers pay.

    An effective tax rate of 50% seems likely to keep a sizable black market in place, much as we see for cigarettes.

  4. I think the crucial factor is the elasticity of substitution between commercial grade marijuana and the high potency sinsemilla that could potentially be harvested in Washington.
    This got me thinking and I ran a quick Monte Carlo simulation for the WA market. Using the same Past Month incidence that was used in the Fiscal Impact study and adding the Past Year but not PM users (also including an underreporting factor of between 0% – 40%) and differentiated consumption habits (for PM between 146-153 use days per year at .5 – 1.5 grams per use day, PY 28 -32 used days per year at .28 – .77 grams per use day) I got a potential demand of about 74 Metric Tons per year for the state of Washington (82 if include the idea that minors 12-17 years of age illegally obtain legally grown marihuana).
    I also tried, under some admittedly simplified assumptions, estimating a potential retail price for Washington legally grown sinsemilla, assuming a 20%-50% markup in each level plus the 25% especial taxes in each level and the 10% sales tax I came up with an approximate of about $ 4.7 dollars per gram at retail. So if we combine all this we should expect a market worth about $ 345 million dollars per year and estimated taxation revenue of $ 145 million dollars.
    But of course this heavily relies on the assumption about grams used per use day. As Professor Caulkins notes if currently about 80% of the market uses commercial grade MJ then probably this consumption estimates are based on commercial grade grams per use day. So if marijuana produced in WA is between 2 – 3.6 times more potent than commercial grade it might be the case that users reduce their grams per use day in the same magnitude bringing the potential tax revenue down to between $ 40 – 70$ million dollars per year. This of course without taking into account the demand changes that might be brought over with lower prices and less risk to consumers as a result of legalization.

    1. Interesting BOTHEC Eduardo. Another variable one could consider is that higher THC cannabis such as one would get in a sensimilla-dominated market will produce more dependence in the user population than does the current 80% commercial grade market, and dependent users are the customers who consume the most. It is often argued by people who don’t understand pharmacology that higher-potency users simply titrate their smoking to achieve the some blood level as they would with less potent cannabis but even if this is true, it would still mean increased addictiveness because the speed at which the blood level is achieved is related to reinforcement value and hence likelihood of dependence, even when in absolute terms the blood level achieved is the same.

      1. Keith,
        Thanks for the reply; that is some potentially game changing evidence in my opinion. While I was skeptical myself about a lineal substitution factor I did not even consider the second order conditions that higher THC marijuana could have on consumption especially in such a sensible factor as dependence. In this case I should think that if WA state authorities take the dependence reduction stance it might even be in their interest to regulate and incentivize the production of lower potency marijuana and regulating quality by some sort of THC potency bounds.
        Where I think this might really be a crucial factor is in the competitiveness between WA produced marijuana diverted illegally to other states vs. the commercial grade product available now and produced mainly by Mexican DTOs. How consumers substitute WA Marijuana and Mexican Marijuana will probably be a deciding factor in the market shares that each of these products has post legalization both in WA and in the remaining states. Depending on this, and providing that federal enforcement isn’t able to prevent mj being exported from WA, either Mexican DTOs could lose most of their market share or just lose WA and close by states.

  5. “Another variable one could consider is that higher THC cannabis such as one would get in a sensimilla-dominated market will produce more dependence in the user population than does the current 80% commercial grade market.”

    Keith, can you provide a single real-world example of the phenomenon you describe here? According to figures from the DEA, cocaine, heroin, and methamphetamine have all experienced substantial increases in purity over the last thirty years. I’d be interested in seeing any data which demonstrates that current user populations exhibit greater dependence than did those of previous decades.

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