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Canna Boom

Legal weed has potential to add big boost to state revenues

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Prop 207, which would legalize recreational marijuana for adult users over 21, could bring an additional $250 million in tax revenue to the state of Arizona, according to state budget experts.

The Joint Legislative Budget Committee recently released its state-mandated fiscal analysis of Prop 207, which noted that the tax revenue would be generated through a 16 percent excise tax on top of the state's 5.6 percent sales tax and various local taxes.

Funds from the excise tax, licensing and registration fees, estimated at $166 million annually, would be administered through the auspices of the Smart and Safe Fund, to be established by the Arizona Department of Revenue. The Department of Health Services would be in charge of licensing and regulating "marijuana establishments, agents and testing facilities."

Additional sales and local taxes would be in the neighborhood of $88 million annually, available for general use in local jurisdictions.

"The JLBC took it very seriously with an accurate, scientific approach, although their analysis was a lot more conservative than ours," said Stacy Pearson, spokesperson for Strategies 360, the political firm handling the Smart and Safe Arizona initiative.

While the JLBC analysis predicts a $250 million yearly boon to Arizona's economy, a study done by advocates for Smart and Safe weighs in at a whopping $300 million annual windfall for the State of Arizona.

"It's the difference between good and great," Pearson said. "So the question is, is $300 million good for Arizona?"

The state study was based on financial analysis from the five western states that have legalized recreational weed—Colorado, Oregon, Washington, Nevada and California—using third-year data from the states where it has been legalized for that amount of time.

Extrapolated to its third year of legal economic activity, the Arizona cannabis industry is projected to reap $1.04 billion in sales, based on $137 spent annually per capita. That figure is based on the average expenditures in other states that range from $125 in Washington and $156 in Colorado, according to the analysis.

The Arizona Office of Economic Opportunity estimates that by 2023, Arizona's population will be near 7.6 million residents.

The three states with more than three years' financial data—Colorado, Oregon and Washington—saw a 20.5 percent growth in sales in year four, while Colorado, the first state to legalize the plant, saw an additional 11.2 percent increase in year five.

As to the number of legal weed dispensaries, distribution of licenses would be based on the number of medicinal dispensaries, not to total more than 10 percent of registered MMJ pharmacies in the state. The JLBC estimates that number to be approximately 130, with an additional 26 allowable under a Social Equity program intended to create more diverse ownership of retail facilities and to help low-income communities establish retail outlets.

"There won't be a permanent cap on licenses, as it's tied to population growth and will continue to grow over time," Pearson said. "We wanted to create more opportunity in Arizona, that's why we have the Social Equity grant program. We wanted rural communities to have access to legalized marijuana. There's a direct connection between the number of dispensaries in a community and the level of opioid abuse. We've found that in communities where there is access to marijuana, there are fewer prescriptions for opioids written by doctors."

Should Smart and Safe pass, an initial one-time transfer of $45 million would be directed from the state's existing Medical Marijuana Fund to be disbursed to various agencies.

Of that sum, $19 million would go to Department of Health Services for various enforcement and social programs; $15 million to the Arizona Teacher's Academy Fund to provide grants for teacher training; $10 million to the Governor's Office of Highway Safety for grants to reduce impaired driving, and $1 million to start the SSAF.

The MMJ fund currently has about $68 million, projected to grow to $91 million by the end of FY 2021. The transfer would reduce the ending balance to an estimated $46 million at the end of that year.

In order to apportion the yearly fiscal pie, the JLBC took into account the potential costs from increased emergency room visits, hospitalizations and substance abuse treatment, as well as savings that could come from reduced arrests, prosecutions and punishment of low-level marijuana offenses.

The initial monies collected into the SSAF would fund administrative costs associated with legalization to the tune of about $5 million a year, although if the Department of Public Safety's cost estimate were taken into account, that number would be far higher.

According to the JLBC analysis, the DHS would require $725,000 the first year for "start-up costs," and $564,000 in subsequent years.

The State Supreme Court estimates its costs at between $200,000 and $800,000 annually and DPS wanted $29 million per year, although JLBC believes that estimate is "substantially overstated."

The Department of Revenue would require $1.3 to $1.7 million annually for the first four years, but the Department did not provide a cost estimate for the analysis.

"For purposes of our analysis, we have assumed the total administrative distributions would be $5 million," the report states. "We think the DPS estimate for the cost of expungements is overstated."

Should the initiative pass, those with low-level cannabis-related charges would be eligible to petition for expungement of their charges beginning July 12, 2021. Those petitions can also come from "the original prosecuting agency or the Attorney General," although "there is no requirement that these individuals submit a petition for expungement."

According to the DPS there are more than 192,000 such charges in existence as of June 2020. The JLBC estimates that if all individuals with such charges petitioned for expungement, it would cost more than $29 million on a one-time basis.

But other states with similar programs "received significantly fewer petitions," and not all charges qualify, as those charged with possession of more than 2.5 ounces would be excluded.

Once money is taken from the yearly tranche for administrative costs, the remainder would be deposited into the SSAF to be distributed as follows:

• 33 percent to community college districts;

• 31.4 percent to municipal police and fire departments to enhance retirement benefits;

• 25.4 percent to the Highway User Revenue Fund

• 10 percent to the Justice Reinvestment Fund, which would be divided between county health departments and the DHS to address public health issues related to cannabis, and

• 0.2 percent to the Attorney General's office for enforcement.

One of the unknown aspects of the analysis is the number of medical marijuana patients who might opt out of their $150 biannual fee and move their purchases to the legalized recreational market. There are approximately 240,000 medical cardholders in Arizona, but there is no way to determine how many of them will cross over. Therefore, the JLBC based its analysis on the "actual revenue experience of other states."

As to the costs the state would incur for additional health care, enforcement and treatment, the JLBC references a study by Colorado Christian University's Centennial Institute—a study that has been largely panned as "junk science" by Colorado weed advocates and policy experts—claiming the societal costs of legalized pot are too high in monetary terms, and that the state of Colorado spends $4.50 for every dollar in tax revenue from cannabis. But the JLBC largely rejects that claim, stating that the total cost to the state would be "marginally lower."

Critics of legalization point out that states with legalized weed have seen a black market explosion that blow any revenue estimates out of the water.

Arizonans for Health and Public Safety Chair Lisa James says the costs are too high and cautions Arizonans should be wary of the proposed outcomes.

"Look at the states where it's legal and you'll see they haven't seen nearly the revenues and the costs are higher than expected," she said. "The black market exceeds the legal market."

She adds that there is also insufficient spending on K-12 education built into the legislation.

But consultant Jim Rounds, whose firm did the fiscal analysis for Strategies 360, says problems with the black market in other states comes down to convoluted regulation on a municipal level and that Smart and Safe is written in a way that would reduce those conflicts.

"We're not anticipating the black market and $400 million after five to six years is reasonable, although the team used $300 million to be conservative," Rounds said. "We feel [the state] did a decent job. They chose to be conservative and they're not being overly optimistic."

Regardless of the financial windfalls or costs to the state—depending on what side of the argument one falls on—cannabis is here to stay and is becoming legal throughout the country, albeit in piecemeal fashion.

"Arizonans don't have to debate the merits of legal marijuana," Pearson said. "We've seen models in other states. The question is: Should it be taxed and regulated? It's not going away and isn't off the table."

As to expungement, Pearson believes that is an invaluable piece of the puzzle and the benefits cannot be ignored.

"How do you value human potential?" she posits. "A felony conviction for a victimless crime can have a devastating effect on that person's contributions to society."

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