Nevadans groused about state marijuana revenue heading to the Rainy Day serve fund in 2017, and elected officials cheered when they passed a bill this year sending it directly to the state’s main education account.
But tying marijuana tax dollars directly to essential school expenses may not be the most prudent policy, according to a new report from the Pew Charitable Trusts. The organization released a study Monday underscoring how difficult it can be to predict how marijuana revenue will perform, and what trends will shape it going forward.
“Nevada implemented a good practice by directing their retail excise tax revenue to the Rainy Day Fund,” Alex Zhang, a research officer at the Pew Charitable Trusts, said in an interview. “Generally, we’d like policymakers to think about using that revenue in cautious ways and being careful about dedicating the revenue to ongoing spending.”
Chief among the concerns about predicting tax revenue is a lack of reliable historical data on marijuana usage trends. Nevada used data from the federal government’s National Survey on Drug Use and Health to determine its revenue forecasts, which ended up being more conservative than actual returns.
But those surveys can be inaccurate; respondents may not always be forthright about their use of a drug that remains illegal on the federal level and stigmatized in other contexts.
“A lot of the surveys out there asked about marijuana use when it was still illegal. [We’re] concerned that respondents might have misrepresented their usage,” Zhang said. “Obviously those were the best starting points available at the time. Going forward, states have talked about getting more state-specific information.”
Nevada has an outsized tourism market, which state officials told Pew likely helped it exceed early predictions on marijuana revenue. But the visitor market could also be a double-edged sword.
“The state had above-forecasted revenue collections and they attributed that in part to stronger-than-anticipated tourist sales in Las Vegas,” Zhang said. “And that of course created uncertainty in the first year and there’s still limited information and also a note of caution how those tourist numbers will change over time.”
Another variable is how many users who have been buying marijuana in the black market will start buying in the legal market — or vice versa. The high costs of regulation and testing of marijuana can make legal products less competitive against illegal ones; Marijuana Business Daily estimates $50 billion to $60 billion in sales happen through the black market each year, or more than five times as much volume as in the legal market.
One example is in California, where cannabis regulators found that the legal market was not effectively competing with a robust black market in the first year of sales. The state recently scaled back its predictions of annual marijuana revenue by $223 million.
“There’s just very little information out there about the scope of the black market in each state, as well as kind of the various factors that influence conversion,” Zhang said.
There’s also the question of how much any consumer will buy. Cannabis products vary widely by type and potency.
“When we talked to Nevada, they also mentioned the heavy user versus light user dimension to it and how that’s also uncertain and hard to measure,” Zhang said.
At the end of the day, Pew researchers concluded that with the many unknowns in the marijuana world, it’s best for policymakers not to get carried away about a new source of tax money and play it safe to avoid hurting essential programs should trends shift.
“These challenges have consequences: If tax collections come in below forecasted amounts, for example, programs that are funded by these dollars could suffer,” the report says. “Treating it like other volatile or nonrecurring sources will reduce the chance of a budget imbalance if reality does not meet expectations.”