Attorney General — and, he hopes, future governor — Mark Herring has proposed that Virginia legalize marijuana. Today, let’s take a closer look at what that would mean in terms of tax revenue.
Ten states (Illinois will make 11 in 2020) and the District of Columbia already have legalized marijuana. Oddly, four of them don’t have any special pot taxes. In the seven that do, annual tax revenues range from $5.2 million in Massachusetts to $319 million in Washington state. Curiously, California is the biggest legal weed state, but not the biggest tax producer. Local press accounts say pot sales in California have been stifled by regulations. As a result, tax revenues there have been disappointing. Other states, though, have seen pot sales — and tax collections — far surpass expectations.
With seven different states, you get seven different ways to disburse the revenue. Even then, there are few simple explanations because there are often multiple taxes with different revenue streams going to different programs. Alaska’s formula is the most straightforward: It puts half of its $11 million in marijuana money in the general fund, and the other half to programs designed to combat recidivism.
The two states that catch our eye the most are Washington and Colorado. Both are close to Virginia in size (we’re 8.5 million, Washington is 7.5 million, Colorado is 5.7 million). Both collect a lot of marijuana taxes — Washington is No. 1 at $319 million, Colorado is No.3 (behind California) at $266.6 million. Both also use their marijuana money in ways that have special applicability to Virginia. There are some details we’ll skip over: Would Virginia impose the same sorts of taxes and the same tax rates? Would Virginians toke up at the same rate as people in those two states? For our purposes here today, let’s assume everything is equal.
Washington dedicates 64% of its pot revenue to health care, with most of that going to Medicaid. This may be of particular interest to Virginia legislators. In 2018, the General Assembly, after years of debate, expanded Medicaid. Medicaid has also turned out to be more expensive than estimated — $202 million more in the current fiscal year and $260 million more in the next fiscal year. Those costs aren't related to expansion — some are due to other factors — but, regardless, it’s costing more. If Virginia replicated either Washington or Colorado, the state would take in more than enough to cover those additional expenses.
Many of those new Medicaid enrollees are concentrated in Southside and Southwest Virginia. If we want to keep them covered — and keep the hospitals there that depend on Medicaid payments open – then suddenly it’s in the interest of rural Virginia to legalize marijuana and tax it. Rural Virginia might have another reason to support legalization — aside from the agricultural aspect that you have to grow the stuff somewhere. That reason lies in Colorado.
Colorado, like Nevada and Oregon, devotes some of its marijuana money to education. Saying the weed tax will go to schools is always a good political sales pitch. Nevada and Oregon dedicate their school-related pot money to education generally — so it’s sort of like the lottery here in Virginia. Yes, the lottery money goes to education, but that doesn’t necessarily mean Virginia schools get more money than they would otherwise. It’s not really “extra” money; it’s basically the regular funding, just with a special label on it.
Colorado, though, dedicates a certain amount of money (we’ll explain that vague adjective soon) to something that’s been in the news here in Virginia: School construction, renovation and maintenance.
That’s a category of school spending that is often orphaned because (a) it’s easy to cut and defer maintenance money to patch budget holes elsewhere and (b) there’s no natural constituency for it the way there is for, say, higher teacher salaries. As a result, we wind up with a lot of old, run-down school buildings. In his inaugural address, Gov. Ralph Northam bemoaned “crumbling schools” and that wasn’t hyperbole: Schools in Richmond and Norfolk really have had pieces of the ceiling come crashing down. Fixing them, though, has proven hard. New schools are expensive; for example, the cost of the new middle school in Pulaski County starts at $47 million. The state doesn’t pay for that, though; each locality has to — and the ones with the greatest needs often have the least ability to pay for new schools. More specifically, that means rural areas and financially-distressed central cities.
The state hasn’t been involved in paying for schools in a significant way since the 1950s. Earlier this year, state Sen. Bill Stanley, R-Franklin County, proposed a $3 billion statewide bond issue to upgrade school buildings. That met with a quick death in Richmond, but the problem remains. The issue isn’t just a cosmetic one, either: It’s hard to teach, say, cybersecurity in buildings constructed when a single electrical outlet per room was considered an extravagance. When Northern Virginia builds state-of-the-art schools, its students get a head start over ones in antiquated rural schools that are patched together with duct tape. Old schools make it harder to develop a 21st century workforce.
Colorado has the same problem, too, and it has tried to use marijuana revenues to fix that. The state has multiple pot taxes. One of those is an excise tax when the crop moves from the grower to the seller. Colorado initially decided to dedicate the first $40 million each year to a fund for school construction. Some wondered if they’d really collect that much; instead, excise tax revenues now top $80 million a year – so Colorado wound up with an extra $40 million to spend on things other than schools. It’s since revised that formula so that schools get 90% of the excise tax revenues. In any case, Colorado has figured out a way to help financially-stressed localities pay for new schools.
Pot’s not the only way Colorado builds new schools, either. It’s cobbled together other dedicated revenue streams to create a fund that since 2008 had awarded more than $1 billion in state matches. A report in 2008 estimated Colorado’s construction backlog at $13.9 million. A report in 2009 put Virginia’s at $18 million. The difference is that Colorado is doing something about its old schools problem, and Virginia isn’t.
There may be good reasons not to legalize marijuana, but if we do, here are two good ways to use the tax revenue it would produce.