Marijuana Tax Revenues

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A new study by the Tax Foundation shows that Arizona could generate $113 million in tax revenue if marijuana were legalized and taxed at 15 percent. Arizona State University economist Dennis Hoffman from the W.P. Carey School of Business will discuss the idea.

Ted Simons: A new study by the non-partisan tax foundation shows that Arizona could generate a considerable amount of money should marijuana be legalized and taxed at anywhere between 15% and 25%. Here to talk about the study is Dennis Hoffman, director of ASU's Seidman Research Institute in the W.P. Carey School of Business. Good to see you again.

Dennis Hoffman: Great to be here, Ted.

Ted Simons: Legalizing pot could generate $113 million annually?

Dennis Hoffman: And that's at the low tax rate.

Ted Simons: 15%. Surprise you at all?

Dennis Hoffman: Not really. The numbers come from Colorado and Washington. They've had some experience with this now. They also have far higher tax rates so when you think through these numbers, if the lower tax rate actually brings more of this business up from the shadows, it could actually be bigger than this, frankly. And I don't think the numbers count the commerce, the jobs, the businesses that might spring up, you know, should this --

Ted Simons: Basically, the multiplier effect wouldn't be in effect here?

Dennis Hoffman: Well, this looks to me like these studies are based upon revenue associated with the sale.

Ted Simons: And their sale, yeah.

Dennis Hoffman: And, you know, I would have to dig into it a bit further, get further into the "weeds."

Ted Simons: The study also suggested it would take some time to hit these levels because in Colorado, Washington as well, you've got infrastructure and just people being aware of what's out there?

Dennis Hoffman: I think absolutely, finding it. Now, they've had some tourism, they've had folks going to these states, of course, to consume this product that's illegal in their own state so there is some of that but it clearly has ramped up dramatically, considerably more revenue in Colorado. North of $140 million this year. And it was far less than that the first two years.

Ted Simons: Grand Canyon institute in town did a study recently. They had it at $72 million a year and the campaign now is trying to get this on the ballot. They say their very conservative estimate is $40 million a year. Either or, that's a lot of money!

Dennis Hoffman: It's a lot of money. Now in the grand scheme of things, you know, 100, 150, $200 million, great, if it could be put to good use. People obviously have to balance the issues around the consequences of legalizing marijuana, some folks are not going to be excited about that clearly, Ted. The other thing that when I think about this, though, this is one step towards broadening the sales tax. Let me give you a statistic that's really hit home I think in Arizona briefly. When I moved here some 38 years ago, about 68% of all incomes earned in the state ended up getting spent on things that were in the sales tax base. And now, it's less than 40%. So it's two thirds of the average income dollar, a one third reduction in the take of the sales tax.

Ted Simons: Is that the Internet? What's going on out there?

Dennis Hoffman: This is the Internet, this is the fact that we just consume things differently, we consume far more services today than we did back in the day. Contracting has been a big change. We certainly are not generating taxes from the contracting sector the way we did. Historically in Arizona, the fiscal situation was really very easy. They moved here, we taxed the "bejeebers" out of them, they buy a car, a house, furniture, and then we don't ask for much but we don't have to because guess what? The next one moved here and we just rolled through. We're seeing less of that with the fewer movers.

Ted Simons: The critics of the study, they say that it doesn't take the costs into account, things like treatment, rehab, crime, law enforcement, this sort of business. That's a valid argument?

Dennis Hoffman: It is. There's an argument on the other side, we spend a lot of money in law enforcement chasing down offenders.

Ted Simons: I guess you could also argue that there's treatment and there's rehab and this sort of business going on right now.

Dennis Hoffman: And there is but one should allocate probably if it's, you know -- if it's a certain amount of dollars coming in, I would coo doo it not in amounts but in percent, allocate, 10, 20, 30% to dealing with the potential social repercussions of legalizing this substance.

Ted Simons: So bottom line here, do the benefits outweigh the costs from an economic perspective?

Dennis Hoffman: From an economic perspective, I think the numbers would suggest yes, purely from an economic perspective. And what I calculate, look when I think about this, this is a regulation of a business. Any time you unfetter business, business can grow and this is, you know, you might not like the social consequences here, legalizing gambling or legalizing marijuana in this particular case. It does unfetter business, it brings people out from the shadows. How many drug dealers, marijuana dealers are filing tax returns today? I mean, presumably none.

Ted Simons: That's an interesting question. Let's go out on a limb. It's legalized, we'll say it's 20%. According to the study, 20% is $150 million of revenue every year, provided that people are selling, collecting the tax, reporting the sales, reporting the tax. Does the underground economy for marijuana entirely disappear once it's legalized? I say no.

Dennis Hoffman: Impossible to know, I agree with you. The notion is there will be some migration of those folks but who knows where this business will go? Will there be a craft beer equivalent of legalizing marijuana? Who knows where this will go. The cannabis industry has written extensively on this and who knows? I sound like a proponent, I'm not, I'm very neutral on this issue but I think it's something to think about.

Ted Simons: Four bongs instead of four peaks?

Dennis Hoffman: Indeed.

Ted Simons: Again, the bottom line is there is an economic feasibility at play.

Dennis Hoffman: Absolutely.

Ted Simons: All right. We'll see where this goes. If you tax it at 25%, $188 million! The tax foundation, nonpartisan, correct?

Dennis Hoffman: Oh, absolutely, absolutely.

Ted Simons: No dog in the hunt.

Dennis Hoffman: They actually -- it's kind of interesting that they go this way. On the other hand, it's very libertarian. They are quite libertarian. This is a very libertarian step.

Ted Simons: That makes sense then. Good to have you here.

Dennis Hoffman: Great to be here, Ted.

Dennis Hoffman: Economist from the W.P. Carey School of Business at Arizona State University

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