In a case that would normally have the IRS in a frenzy of activity, $21.5 million in marijuana taxes has been discovered ‘missing’ in Colorado. But the reason isn’t what you might think. The money isn’t missing because of a theft or someone dipping into the government coffers. Instead, it is because of a mistaken assessment of the marijuana buying public.
Marijuana was legalized in Colorado in 2012. Unlike other states that have legalized marijuana only for medical use, Colorado voters have gone the extra step and made it legal for recreational use as well. One of the driving forces behind the legalization campaign was the millions in dollars that the marijuana industry would generate. In fact, it was estimated that up to $33.5 million would be raised by the middle of 2014.
The problem is that the actual amount of taxes generated fell way short of the estimates. The reason? Users are still purchasing marijuana from the black market rather than from state dispensaries.
When marijuana was legalized in Colorado, it was expected that the state’s population of medical and recreational users would gravitate towards legal channels en masse. Things didn’t quite work out the way they were anticipated however, and it was discovered that a significant percentage of the marijuana buying public–estimated by the Marijuana Policy Group at 40% of marijuana users in the state–continue to purchase pot from illicit sources.
The reason for this is that the taxes and fees associated with legal marijuana actually make it a more expensive option than illegal marijuana. With legal marijuana being taxed in excess of 27%, it is considerably cheaper to purchase marijuana from the black market.
There are other reasons why the state is falling short of its projected tax earnings. Some users purchase pot from medical marijuana users who buy pot legally, but sell it illegally to buyers who don’t pay taxes on the purchase.
Colorado residents over the age of 21 may also grow as much as six cannabis plants for their personal use. When they sell the marijuana illegally, no taxes are paid on the transaction as well.
State policies are just as responsible for the loss of tax revenues. Medical marijuana is subject to much lower taxes than recreational marijuana. With more people opting for medical marijuana than the recreational option, the government misses out on even more taxes.
What it mostly boils down to is that state lawmakers were much too optimistic with regard to the taxes that would be generated by the marijuana industry. Because states are required to return collected taxes in excess of the estimated amounts, lawmakers made more ‘optimistic’ predictions in order to avoid having to provide tax refunds to Colorado tax payers. This was verified by state lawmaker Jonathan Singer.
Many feel that the ‘loss’ of projected taxes is no cause for concern. As in most of the United States, the marijuana industry in Colorado is still in its relative infancy, and many are optimistic that the issue would be resolved as the industry matures.