Washington's Marijuana Tax Revenue Tops Estimates, but Big Problems Still Exist

Source: Flickr user Mark

Opinions regarding marijuana, both recreational and medical, are changing right before our eyes. Whereas a decade ago just a handful of states had legalized the use of marijuana for medicinal purposes, and not a single state had even remotely considered the idea of legalizing cannabis for recreational adult use, today we sit at nearly two-dozen states that have authorized the drug for medicinal purposes and four states that allow the illicit drug to be sold for personal use.

Sizing up Colorado and Washington's first year Colorado and Washington voters in 2012 were the first to overwhelmingly approve the use of legal marijuana across the board in their respective states (with regulations on how much can be purchased at a time, who can grow the product, and how it's tracked).

Source: Flickr user Cannabis Culture

Earlier this year we learned that Colorado's marijuana businesses generated $58 million in revenue from the sale of marijuana. Revenue is generated by a combination of an excise tax as well as a local tax applied by retailers. What's interesting for Colorado, and as we've discussed previously, is the state may ultimately not get to keep the money since voters have the final say regarding where the money goes. It could wind up predominantly funding schools, or voters could choose to refund the full $58 million to marijuana growers and citizens throughout the state.

What's even more interesting is that Washington state recently released its sales and tax revenue data through its first year of sales. Washington's first legal shop opened for business on July 8, 2014, according to Seattle-based KOMO News. Between July 8, 2014 and the beginning of July 2015, Washington generated more than $250 million in legal marijuana sales that yielded just over $70 million in tax revenue, handily trumping Colorado. This included $62 million in excise tax revenue, and another roughly $8 million in sales and local taxes. By comparison, Washington was only estimating that it'd generate $36 million in revenue from marijuana excise taxes last year.

To put this in context, revenue generated from the sale of marijuana represents just 0.37% of the money needed on a per-year basis for Washington state's budget. In other words, marijuana tax revenue isn't going to alleviate a big chunk of Washington's budget gap concerns or give state workers an instant raise. However, marijuana tax revenue could be a boost to Washington's education system and provide select counties and cities with extra revenue that they can use to hire workers or even beef up law enforcement.

Gov. Jay Inslee signing Washington's budget. Source: Facebook

Washington still has big problemsWashington state's marijuana businesses are also seeing welcome tax law changes this month. HB-2136, as it's known, was recently signed into law by Washington's Governor, Jay Inslee (D-Wash.). This new recreational marijuana law removes the previous excise tax structure that taxed growers, processors, and retailers 25% each time the product changed hands and replaces it with a standard 37% excise tax that will be the responsibility of the consumer, thus making it easier for everyone involved, from growers to retailers. More importantly, legal marijuana businesses no longer have to book excise taxes as revenue on their income statement, which means they can avoid paying taxes on those dollars.

Why is this important? Despite $250 million-plus in marijuana sales, the bulk of marijuana businesses in Washington didn't generate much, if any, profits over the trailing 12 months. KOMO News highlighted one such instance. The owner of Seattle's first legal marijuana shop purportedly owed $510,000 in federal taxes and $778,000 in state taxes after just $3.1 million in sales. In other words, it's a business where no one is really making any money -- and that's a potentially big problem. It's possible HB-2136 will change all that, but there are other concerns, too.

Source: Flickr user Stixfigure

For instance, Washington harvested 13.5 million tons of marijuana flowers over the trailing 12-month period that was intended for sale. However, only 10 million of those tons actually wound up being purchased. Although some of the excess marijuana can be used for extract purposes, not all of it can, meaning growers' supply is far outpacing demand at the moment. When supply outpaces demand, prices fall. On a per-gram basis, marijuana prices have fallen about 70% from last summer. For the consumer that's great news, but for business owners, growers, and processors, where it's all about margins and the bottom line, things aren't so good.

I'll give Washington some benefit of the doubt as it is one of four "guinea pig" states in the marijuana expansion experiment, but the inexperience of marijuana businesses, growers, and lawmakers is on full display. Growers aren't quite sure how much to produce, lawmakers are still tinkering with the tax code in an effort to fend off aggressive black market pricing, and retailers that are stuck in the middle are stagnating. Overall, it's not very encouraging if you are, or have been thinking about, investing in the marijuana market.

There are bigger problems, tooHowever, Washington's internal kinks are just the start. Overhanging clouds on a federal level still threaten to squash marijuana's expansion before it really gets started.

To begin with, marijuana remains a schedule 1, or illicit, drug according to the U.S. Drug Enforcement Agency. This scheduling simply means that the federal government currently does not recognize any medical benefits for the product, although new laws from the federal government did lift some of the stringent red tape surrounding research into marijuana-based therapies. Because the government hasn't changed its stance on marijuana, banks around the country, even in legal states, tend to shy away from lending to legal marijuana businesses for fear of prosecution or simply of a federal law override in the future. It's made the prospect of opening a marijuana business or a grow-farm difficult for those with minimal access to financing.

Source: White House on Flickr

Additionally, most lawmakers, including president Obama, remain undecided on marijuana's benefits profile. We can't really blame these regulators since the majority of clinical studies for decades involved looking at marijuana's adverse effects as opposed to its benefits. Studies today are clearly geared at testing marijuana's possible medical benefits, but these studies need time to mature. Until we reach that maturation point politicians will probably walk the middle ground of not wanting to upset a motivated public, but not jump at the idea of changing a long-standing federal law without all the facts. Long story short, marijuana just isn't a big priority right now.

Despite Washington's better-than-expected tax data, I keep boiling down to the same conclusion: the marijuana industry has plenty of potential, but it's just not worthy of investors' money at the moment. Federal overhang looks as if it could stymie something resembling a nationwide approval for years or decades to come, and state-level growers and retailers are probably going to need a few years to "work out all the kinks." While marijuana's expansion does merit close monitoring, this is a work-in-progress industry that's best viewed from the sidelines.

The article Washington's Marijuana Tax Revenue Tops Estimates, but Big Problems Still Exist originally appeared on Fool.com.

Sean Williamshas no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen nameTMFUltraLong, track every pick he makes under the screen nameTrackUltraLong, and check him out on Twitter, where he goes by the handle@TMFUltraLong.The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter servicesfree for 30 days. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.

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