Cannabis taxes did not solve Colorado’s budget woes. That was never promised, or even implied by supporters of legalization.
But some money is better than no money.
From the earliest days of the 2012 political campaign to legalize cannabis, there was a promise that a certain amount of the tax revenue would go to schools. That has created confusion ever since about the role of marijuana in school funding. A typical – and frequent – question to CPR News goes, “how can schools need more tax money when cannabis businesses are making so much money?”
The short answer is marijuana tax collections are small compared to the state’s education budget.
The state has collected more than $2.3 billion in marijuana taxes since legal recreational sales began in 2014. It’s a large number, but just a fraction of the state’s overall budget. Last year, marijuana tax revenue was just 0.7% of the state budget, and less than 5% of just what the state spends on education.
Still, money is money. Schools do get the largest share of weed tax. Behavioral health programs get millions. Cities have built things like recreation centers with their money.
And it has paid for new school buildings – like one built recently for the Sierra Grande School District in the San Luis Valley, which serves just more than 300 kids. The heavily Hispanic district struggles with poverty, and has some of the cheapest land in the United States, said superintendent Kevin Jones. So the district does not benefit from the property tax growth seen in other parts of Colorado.
State grants, aided by marijuana excise taxes, helped the district build a new facility recently.
“It's top shelf, it's won many awards. It's special for the kids,” Jones said. “It's just an amazing facility, and I encourage people to come by and see it because the taxpayers paid for it, and obviously the marijuana tax paid for it as well.”
But the marijuana gravy train is slowing. The uninterrupted growth in marijuana tax revenue has been interrupted and even reversed.
For years, sales and tax revenue grew fast, peaking during a pandemic boom in sales in the 2020-21 fiscal year. The boom quickly busted as lockdowns ended. And as cannabis sales have fallen so have the tax collections. Last fiscal year, Colorado only got $282 million in tax revenue from cannabis sales, down from $425 million in 2020-21.
How marijuana is taxed is complex. There are two separate marijuana taxes that apply to all recreational purchases: a 15% sales tax and a 15% excise tax.
The excise tax is assessed when marijuana is transferred from a grower to a store, or a processing facility that makes things like vape cartridges or brownies. Money collected from that goes to the BEST fund for school construction grants, like in Sierra Grande. At least the first $40 million of excise tax collections in a given year is constitutionally mandated to go toward school construction.
Why school construction, not operations? It started with the drafting of Amendment 64, which legalized cannabis when approved by voters.
Many people and organizations were involved, said Mason Tvert, with VS Strategies, a marijuana policy firm. Tvert was involved throughout the campaign to legalize cannabis.
Tvert said the idea was floated to use the marijuana tax money for education, but some education groups had reservations about that.
“They expressed concern that if tax revenue was directed toward schools in a way that supported teachers and in-school activities, that it would create this perception that their problems are all solved,” said Tvert.
Also, there was concern that some conservatives may not want to support supposedly liberal agendas in schools. They wanted something with broad appeal, so they landed on funding school construction.
“Keeping the buildings from crumbling on top of people,” Tvert said. “The idea was this: What is an issue where we could make the most people comfortable with raising tax revenue and allocating it toward something? This feels like it's got to be close to the best.”
Despite narrowly defining what the marijuana taxes would be used for, many people still believe that marijuana taxes were meant solve the school funding problem in Colorado.
$149 million … for the “Marijuana Tax Cash Fund.” The money can be spent on specific things outlined by law: regulation of cannabis, education programs, law enforcement, and mental health services. $15 million a year goes to school health professional grants.
$56 million … for school construction grants, distributed through the state’s Building Excellent Schools Today (BEST) program.
$31 million … to the general fund.
$25 million … to the State Public School Fund, that mostly goes toward the state’s share of general school expenses in Colorado.
$22 million … back to any local government that permits marijuana sales. The money local governments receive is proportional to their recreational sales.
Local governments can also tax marijuana on their own. Denver, for instance, has a 5.5% tax on marijuana sales. A portion of that goes to affordable housing programs, and a smaller share goes to supporting small disadvantaged businesses through the Malone Fund.
Denver dedicates the rest of the tax revenue to regulation, enforcement, and youth programs.
Denver is the center of Colorado’s marijuana industry in Colorado. There are 200 storefronts selling cannabis, some with both medical and recreational licenses. Another 181 growhouse locations. All in the city limits.
Taxes and fees collected by the city peaked in 2021 at $73 million, and have fallen sharply with the industry’s downturn. Denver collected $56 million in 2022, a 23% decline, the first annual drop in marijuana tax and fee revenue since 2010. This year marijuana revenues to the city are just $33 million through August.
Denver budget writers anticipate the number will keep falling, estimating that the city will collect $27 million in 2024 from the various local taxes and state collections sent back to the city. $8 million for affordable housing, $3 million for education programs, $2 million for enforcement, $2 million for regulation, about $4 million for small business, and about $8 million for homeless services.
Back in 2018, $3.2 million from marijuana tax proceeds helped the city build the Carla Madison Recreation Center.
But for all the attention marijuana receives, it’s still cigarettes, nicotine and tobacco products that brought in the most state tax revenue last fiscal year.
Perhaps most surprising is alcohol taxes, which account for a tiny portion of revenue. A growing body of research shows that alcohol carries many personal and societal costs, yet makes up just eight percent of revenue from the three major sin taxes.
That leaves many in the marijuana industry feeling like they’re carrying an unfair tax burden.
Many businesses complain that the excise tax is too high, particularly for marijuana growers who grow and sell their own cannabis. In those cases, the state has to come up with an “average market” price for the marijuana so it can apply the 15% rate. Some businesses say that average is too high, said Jean Smith-Gonnell, an attorney at the firm Troutman Pepper, who represents marijuana businesses. She said that often gets passed on to consumers.
Also, no marijuana company can deduct businesses expenses because it’s still federally illegal. And then policymakers are constantly looking to marijuana taxes to fund pet projects.
The industry says there is a limit on how many taxes they can pay, as the market slumps.
“When tax rates are so high, people are going out of business,” Smith-Gonnell said. “And that's not a positive situation for Colorado businesses.”
