The Nov. 8 election can't come quickly enough for some people -- especially for supporters of California's recreational marijuana legalization initiative, Prop 64.
Prop 64 would legalize recreational cannabis for adults aged 21 and up and impose a 15% sales tax at the retail level on consumers. Additionally, growers would be subject to a $9.25 per ounce tax on marijuana flowers, and a $2.75 per ounce tax on cannabis leaves, at the wholesale level. If approved, cannabis research firm New Frontier estimates that marijuana sales in California could jump from $2.76 billion in 2015 (solely from medical cannabis) to $6.46 billion by 2020. This more than doubling in sales could lead to the state of California collecting more than $1 billion in annual tax and licensing revenue as a result.
Early indications would suggest that Prop 64 has a good chance of passing. Nationally, Gallup puts support for marijuana in its poll at 58%, and two recent California polls from the Public Policy Institute and Field Poll/Institute for Government Studies found identical support levels for Prop 64 at 60%.
With an approval looking likely, it's time to consider how California plans to spend this new source of revenue.
Here's how California would spend its $1 billion in marijuana tax revenue
In Colorado, thus far the model state for marijuana legalization, approximately $135 million was collected in taxes and licensing fees on $996 million in legal cannabis sales in 2015. This money was apportioned to build schools, support law enforcement, and fund drug abuse programs. The remainder was put in the state's General Fund.
California plans to do things a bit differently. If we look at the 62-page initiative of the Control, Regulate and Tax Adult Use of Marijuana Act, pages 46 to 51 give away the answer of where the estimated $1 billion in marijuana tax revenue will end up. The italicized sections below are taken directly from the official initiative.
1. Cover regulatory costs
Reasonable costs incurred by the board for administering and collecting the taxes imposed by this part; provided, however; such costs shall not exceed four percent (4%) of tax revenues received.
In other words, the first funds to be distributed upon collection would go to the agencies overseeing the regulation of California's marijuana industry. The initiative goes on to outline specific agencies such as the Department of Consumer Affairs, Department of Food and Agriculture, Department of Fish and Wildlife, the State Auditor, Division of Labor Standards Enforcement and Occupational Safety and Health, and the Legislative Analyst's Office, just to name a few, that would receive funds.
2. University oversight of implementation and regulation
The Controller shall next disburse the sum of ten million dollars ($10,000,000) to a public university or universities in California annually beginning with fiscal year 2018-2019 until fiscal year 2028-2029 to research and evaluate the implementation and effect of the Control, Regulate and Tax Adult Use of Marijuana Act, and shall, if appropriate, make recommendations to the 46 Legislature and Governor regarding possible amendments to the Control, Regulate and Tax Adult Use of Marijuana Act. The recipients of these funds shall publish reports on their findings at a minimum of every two years and shall make the reports available to the public. The Bureau shall select the universities to be funded.
Next, $10 million would be awarded each year for 11 years to California universities to study the impact of legal marijuana on public health, public safety, marijuana market prices, and its statewide economic impact. These university studies would also decipher whether additional protections are needed to prevent monopolistic or oligopolistic business behaviors within the cannabis industry, and would examine the outcomes of changes to the criminal structure with marijuana effectively decriminalized.
3. Law enforcement DWI protocols
The Controller shall next disburse the sum of three million dollars ($3,000,000) annually to the Department of the California Highway Patrol beginning fiscal year 2018-2019 until fiscal year 2022-2023 to establish and adopt protocols to determine whether a driver is operating a vehicle while impaired, including impairment by the use of marijuana or marijuana products, and to establish and adopt protocols setting forth best practices to assist law enforcement agencies.
Third, $3 million would be given annually for five years to the California Highway Patrol to establish protocols as to how to deal with drivers suspected of being impaired by marijuana use. The CHP would be afforded the opportunity to issue grants or fund private research institutions to develop technology capable of determining if a driver is impaired.
It's worth noting that Oakland-based Hound Labs successfully completed field trials recently with its proprietary marijuana breathalyzer, which can detect THC, the psychoactive component of cannabis, if a person has smoked marijuana or consumed it via an edible.
4. Social and medical programs
The Controller shall next disburse the sum of ten million dollars ($10,000,000) beginning fiscal year 2018-2019 and increasing ten million dollars ($10,000,000) each fiscal year thereafter until fiscal year 2022-2023, at which time the disbursement shall be fifty million dollars ($50,000,000) each year thereafter, to the Governor's Office of Business and Economic Development, in consultation with the Labor and Workforce Development Agency and the Department of Social Services, to administer a Community Reinvestments grants program to local health departments and at least fifty-percent to qualified community-based nonprofit organizations to support job placement, mental health treatment, substance use disorder treatment, system navigation services, legal services to address barriers to reentry, and linkages to medical care for communities disproportionately affected by past federal and state drug policies.
Fourth, California plans to apportion $10 million, with an increase of $10 million a year for five years until 2022 when the disbursement will settle at $50 million a year, for various social and medical programs. A good chunk of this money will go toward local health departments and qualifying nonprofit organizations designed to help people find jobs and for the treatment of mental health disorders. Additional funds provided could be funneled to provide medical care in communities that have been adversely affected by federal and state drug policies, as well as substance abuse programs.
5. Medical cannabis research
The Controller shall next disburse the sum of two million dollars ($2,000,000) annually to the University of California San Diego Center for Medicinal Cannabis Research to further the objectives of the Center including the enhanced understanding of the efficacy and adverse effects of marijuana as a pharmacological agent.
With no specific end date set, the University of California, San Diego Center for Medical Cannabis Research will receive $2 million annually to fund medical cannabis research. California was the first state to approve medical cannabis for compassionate use in 1996, so funding additional research only seems fitting.
Medical cannabis has demonstrated efficacy in a number of small university-based studies on various types of cancer, type 2 diabetes, and Alzheimer's disease, to name a few ailments. Larger clinical studies from GW Pharmaceuticals (NASDAQ:GWPH), which uses cannabinoid-based therapies to treat diseases and disorders, have demonstrated encouraging efficacy in certain forms of childhood-onset epilepsy. In March, GW Pharmaceuticals' Epidiolex met its primary endpoint in treating Dravet syndrome, and in June it met its phase 3 primary endpoint for the treatment of Lennox-Gastaut syndrome.
6. Educational and environmental programs
By July 15 of each fiscal year beginning in fiscal year 2018-2019, the Controller shall, after disbursing funds pursuant to subdivisions (a), (b), (c), (d), and (e) [points 1-5 above], disburse funds deposited in the Tax Fund during the prior fiscal year into sub-trust accounts.
Finally, any leftover cannabis tax revenue following these first five channels would head into a General Tax Fund within the state that would be distributed as follows:
- 60% of the remaining funds would head into the Youth Education, Prevention, Early Intervention, and Treatment Account, which is designed to educate children about substance abuse disorders, with the ultimate goal of preventing harm on children from substance abuse. The Department of Health and Department of Education would work hand-in-hand with California schools to implement these programs.
- 20% would be deposited in the Environment Restoration and protection account, which would work to clean, restore, and remediate environmental damage caused by the cultivation of cannabis. Funds would also be used to discourage the illegal cultivation of cannabis which could harm the environment.
- 20% would be deposited into the State and Local Government Law Enforcement Account. Some of these funds would be used by the CHP to conduct training programs to enforce DUI and DWI laws, while additional funds could be granted to nonprofit organizations to educate drivers about the dangers of driving while under the influence.
Keep in mind that even if California generated $1 billion in new revenue from taxing marijuana, we're talking about pot covering less than 1% of the state's budget. This added revenue could definitely be a boon in terms of job creation, drug abuse program funding, and law enforcement education, but it's not the game-changer for California's economy that some pundits have forecasted.
With that being said, investment in marijuana is likely to remain hit-and-miss with the drug firmly staying as a schedule 1 substance at the federal level, meaning your best bet is to continue to watch the industry's evolution from the sidelines.
Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.
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