Budget & Finance

High Tax Rates Blunt Efforts to Use Marijuana Revenue for Schools

By Holly Kurtz — April 20, 2015 3 min read
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Campaign promises to funnel $40 million in recreational marijuana taxes to Colorado school construction have largely gone up in smoke, according to a preliminary analysis coincidentally presented Monday 4/20, the unofficial holiday of cannibas enthusiasts.

Instead, the 2014 legalization of recreational marijuana generated just $13.3 million for school construction last year, according to an American Educational Research Association annual conference presentation by Brooke Midkiff, a University of North Carolina Chapel Hill doctoral student and Eric Houck, an associate education professor at the same school. That’s the equivalent of $14.96 per pupil, or about 8 percent of average per pupil revenue for school construction in the state. Midkiff and Houck project recreational marijuana taxes revenue will fall short of the $40 million mark again this year, amounting to $20.4 million or about $22.94 per pupil.

Medical marijuana has been legal in some form in Colorado since 2000. But it wasn’t until November 2012 that Colorado and Washington became the first states in the nation to legalize recreational marijuana. A year later, Colorado voters approved Proposition AA, which taxed recreational marijuana at nearly triple the rate of medical marijuana by imposing a 15 percent excise tax and a 10 percent sales tax.

“Proposition AA radically increased the tax rate for recreational marijuana, suppressing growth in that market by likely encouraging some users to remain in the medical or black market,” wrote Midkiff and Houck. “Additionally, localities were allowed to add additional taxes to the state’s special sales tax on marijuana, and they were also allowed to opt out of allowing the sale of recreational marijuana. These local decisions may have impacted the growth of the recreational marijuana market as well, and therefore depressed revenues generated by the excise tax earmarked for school construction.”

Additionally, a loophole in the state’s marijuana taxation system has reduced school construction revenue by about $3 million annually.

“Projecting revenue collections from recreational marijuana was an inexact science since the situation was unprecedented,” said Carol Hedges, executive director of the Colorado Fiscal Institute, a Denver-based non-profit that supportsadequate, equitable and stable education funding.”

She added: “Trying to determine consumer migration to the recreational market from the medical market was just one of the multitude of complexities faced by revenue estimators. It is merely speculation to imply the role of voter-approved tax rates on consumers moving from medical to recreational marijuana purchases caused the revenue collections to be lower than estimates.”

Even if recreational marijuana had generated $40 million annually, this would have amounted to about 1.5 percent of the $2.7 billion in total school construction-related revenues generated in 2013. In this way, Colorado’s marijuana taxes resemble another strain of “sin tax,” namely revenues generated by state lotteries, which Midkiff noted nearly always help fund schools. If recreational marijuana taxes follow the same path as lottery taxes, they will replace (rather than supplement) existing state funding, according to Midkiff and Houck.

“My concerns are that it’s a state responsibility and finding one-off taxes to pay for state buildings is not a systematic way to solve the problem,” said Kathleen Gebhardt, executive director of Children’s Voices, a Boulder, Colo.-based non-profit law firm, and a member of the board of Building Excellent Schools Today, a state program that provides school construction grants.

Added Hedges: “One thing is for sure, legalizing and taxing the sale and use of recreational [marijuana] is not a panacea for the structural revenue problems facing states today.”

Interestingly, Colorado lottery revenue dedicated to school construction declined by half the year after the recreational marijuana tax took effect, the analysis found. Houck theorized that this could be part of the long-term tendency of state lottery revenue to decline over time. Or maybe, he quipped, the state’s residents maxed out their sin budgets on cannabis and had less to spend on gambling.

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A version of this news article first appeared in the Inside School Research blog.