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Marijuana's Putting the 'Pot' in Jackpot

January 20, 2018

Chances are if you’ve driven through Colorado or Washington state recently you’ve seen small, retail-looking shops scattered throughout the streets, each with opaque windows emitting a sense of mystery. These shops are typically outfitted with green awnings, lettering, or electric signage. The stores seem to be popping up like weeds throughout the two states’ major cities and are now sprouting in rural areas as well. Most people by now have discovered what they are. For those who have been living under a rock for the last six years, however, the stores may come across as just the new Starbucks or McDonald’s.

 

So, what are these dark and mysterious shops? They’re marijuana dispensaries, which sell marijuana legally for either recreational or medicinal purposes, or both. What many people fail to realize, however, is just how much green is associated with the green that is being sold in these shops.

 

At the time of publication, 29 states, in addition to Washington D.C., have some form of law legalizing marijuana use for medicinal purposes. Of these, eight states have also legalized the use of marijuana for recreational purposes. Of the states allowing recreational use, six of them are in the western United States (California, Washington, Nevada, Colorado, Oregon, Alaska) while just two are in the east (Maine and Massachusetts-July 2018). Laws can and do vary dramatically between states so be sure to check your state's local laws prior to engaging in any related activity.

 

As the first states to legalize recreational marijuana back in 2012, Colorado and Washington have been seen as test subjects for the rest of the nation. Many states are keeping a keen eye on the two states to see how the legalization affects not only the inner-workings of society, but also the states’ revenue. The legalization of marijuana has had a profound impact on both states’ annual revenue (see table below).

 

 

Marijuana related income has passed (and by passed we mean blown away) the amount of income generated through alcohol taxes, licenses, and fees in each state. Like any business in the early stages of development, growth will initially be very rapid, but as the industry matures, the growth should slow and start to normalize. It looks as though the rapid growth is here to stay, however, at least for the foreseeable future as additional states legalize the drug.

 

In 2017, marijuana revenue accounted for roughly 1.8% of Colorado’s total state income. Financial Fixation forecasts that in 2018 the revenue from marijuana will hit 2% of the state’s total revenue received. This equates to total marijuana related revenue for the state of nearly $300 million.

 

So, what are these states doing with all of this income? Each year the first $40 million of the Colorado excise tax, which is currently 15% on all retail marijuana, goes to the school system through grants, which build new facilities and also help to improve existing facilities. Once $40 million is achieved, the portion above this goes to The Public School Fund, which assists in running all of Colorado’s public schools. While in 2016 this amounted to only $2.5 million, in 2017 it contributed a whopping $31.5 million. If Financial Fixation’s forecasts for 2018 are accurate, this fund could see an annual contribution of nearly $40 million. These numbers are no longer small enough to ignore.

 

In addition to the excise tax, the state also taxes retail marijuana at 10%. A portion of this goes to help local governments. In 2016 this amounted to just over $10 million, and in 2017 the total was just under $15 million. The rest of the revenue generated is free to be spent however the state best sees fit. This fund also includes fees collected regarding licenses and also the state’s 2.9% sales tax. Currently the state is allocating a significant portion of this to develop educational programs for its residents. In prior years there was even a vote to decide if excess revenue should be returned to residents in the form of a refund (hello future basic income source?).

 

Washington is spending its several hundred million dollars from marijuana in a different manner. It’s earmarking over 60% of its revenue to public health programs, including Medicaid, substance abuse programs, and also community health centers. Roughly 5% of the total will go to assist local governments, and another very small share will go toward the state’s Alcohol and Cannabis Board. The remaining 30% or so can be spent however the state best sees fit, most likely on the school system. Although Colorado and Washington are spending their millions in different ways, most will agree that each state is bettering their situation through their allocation process.

 

How much could your state benefit by legalizing marijuana if it hasn’t already done so? Below is a table showing how much revenue each state could bring in if it legalized both recreational and medical marijuana. States that have legalized it are included below as well, with the exceptions of Colorado and Washington, as they are forecast above. All numbers are estimates using a proprietary Financial Fixation algorithm to depict annual revenue per state in the FIFTH YEAR after legalizing marijuana. 

 

 

 

 

As mentioned earlier, the share of marijuana revenue relative to a state’s total income may seem small, but that money can still have a lasting impact, especially for those states which run an annual deficit.

 

Considering the industry as a whole, including the manufacturers, distributors, and retailers, the state’s cut is really just a small amount of the overall impact to the economy. Industry analysts are forecasting a compound annual growth rate of about 25% over the next four years. Not a bad growth rate for even the newest of start-ups. Clearly the industry is providing a cash infusion into the economy, but what about job creation? According to a Forbes article in early 2017, the marijuana industry is projected to create more jobs for the economy by 2020 than the manufacturing industry. Granted, these jobs won’t always be welcomed with open arms, in a world where autonomy is feared to take jobs away though, these newly created jobs could be seen as life-preservers for thousands.

 

With so much money flowing into the marijuana industry on an annual basis, how can individual investors profit? You could always take an active approach and try to open up your own dispensary. Perhaps even try to get your side hustle on as a QA Analyst within the industry. A more sensible way for most investors would be to try to get in early on some public equity (stocks) from players within the industry. Many companies are touching the industry either through their whole operations or just generating a portion of their revenue from the industry. In a future post we’ll analyze the best investment options going forward, including a look at some of the first marijuana exchange traded funds available.

 

Most articles linking marijuana and revenue completely ignore the fact that marijuana is still a drug, and as such, may impair a person’s motor skills. Regardless of how much money is brought in, if legalizing the drug has an increased rate of traffic accidents or violence, all benefits from increased revenue can quickly be thrown out the window. With that being said we looked at data regarding traffic accidents and deaths by state in 2016. Both Colorado and Washington remain better than the national average in terms of traffic deaths per 100,000 people, which is fascinating especially considering the fact that both states are mountainous, are subject to snow and ice, and have experienced large population growth over the past several years. As the table below would imply, both states have maintained a high (no pun intended) priority on keeping their residents safe.

 

 

 

 

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