Want to know why states are legalizing recreational marijuana?
Let me give you a hint: It has something to do with the color green. Not the color of the plant, but the color of money.
Because recreational marijuana has now been legal in Colorado and Washington for 18 months and 11 months, respectively, we're finally starting to see just how lucrative the recreational-marijuana business is -- for the record, it's also now legal in Alaska, Washington D.C., and, starting in July, Oregon.
In March alone, consumers in Washington purchased $21.9 million worth of recreational cannabis through legal channels. That was more than twice the amount of the $8.3 million spent on medical marijuana that month.
The rapid ascent of recreational-marijuana sales is nothing short of extraordinary. In July 2014 -- i.e., the inaugural month of recreational sales in Washington -- the handful of stores open at the time sold a mere $2.8 million worth of weed. Over the next eight months, this figure climbed by a factor of 10.
This increase isn't solely a function of demand. When Washington first allowed recreational sales, only a small number of stores in the state were given licenses to do so. Additionally, as The New York Times reported at the time, "Statewide shortages of marijuana constricted things even more, since the law allows stores only to sell marijuana that has been grown in Washington by licensed producers, and the first licensed crop, begun in March, was mostly not ready for harvest." As the rapid ascent in sales volume attests, both of these issues have since been addressed.
The upshot for the state is a rapidly expanding tax roll. If you add together the taxes that Washington receives from both recreational- and medical-marijuana sales, it's creeping up on $4 million a month. And for the record, it may have eclipsed that mark already, given that the latest available data covers just the month of March.
Colorado is experiencing a similar windfall, as it generates even more tax revenue from legal marijuana sales than Washington does. Last month, taxes from the industry came in at $9.6 million. And if you include the $1.1 million in revenue it received from licensing and other types of fees, you get more than $10.6 million.
What are these states doing with all their newfound wealth? While Washington doesn't break out its use of the tax funds, Colorado does. It divides the revenue into three different buckets:
- Local governments that have allowed marijuana sales get 10% of the state sales tax therefrom.
- The 15% excise tax on marijuana production goes toward Colorado's Public School Capital Construction Assistance Fund, which does exactly what its name implies.
- And the rest is allocated to the Marijuana Cash Fund, an overflow facility that is "appropriated as directed by the [Colorado] general assembly."
Here's how the actual dollar figures worked out for the month of May:
There is one catch. Thanks to a strict anti-spending provision in the Colorado state constitution, the state may be obligated to return a portion of its accumulated revenue from marijuana sales back to taxpayers. According to The New York Times, "[t]he complex measure, first approved by voters in 1992, essentially requires that when Colorado collects more money than it anticipated, it has to give some back to taxpayers." In this case, the potential refund amounts to $60 million, or approximately $11 per person, and will depend on an upcoming vote.
Lawmakers on both sides of the aisle in the Centennial State are working to ensure that this doesn't happen. But even if it does, it only underscores the point that a legal marijuana industry can dramatically boost a state's tax rolls.
In short, say what you will about the legalization of marijuana, particularly for recreational sales, but one thing seems certain: As sales and taxes from the industry continue their sharp ascent, it's going to be hard for other states to stand by idly and watch their neighbors get rich.
John Maxfield has no position in any stocks mentioned. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.