U.S.

PUBLIC FINANCE

SECTOR COMMENT State and local government - US

8 May 2018
Recreational marijuana tax revenues are
marginal credit positives
This comment is excerpted from our cross-sector report, For governments and corporates,
marijuana brings possible gains and pressures

Contacts Nine states, plus the District of Columbia (Aa1 stable), have legalized recreational marijuana.
Kenneth Kurtz +1.415.274.1737 The net tax revenues generated by legalization are a marginal credit positive for these states
Senior Vice President and their local governments. The positive benefit is limited because marijuana-related tax
kenneth.kurtz@moodys.com revenues generally represent only a small percentage of annual general fund revenues and,
Timothy Blake +1.212.553.4524 frequently, most of these revenues are earmarked for special programs. In addition, the
MD-Public Finance growth in these revenues is likely to slow as the industries mature and competition increases
timothy.blake@moodys.com
as other states legalize recreational marijuana. Federal enforcement of marijuana laws is also
Alexandra S. Parker +1.212.553.4889
a risk to future revenues.
MD-Public Finance
alexandra.parker@moodys.com
Recreational marijuana has provided a growing source of tax revenues
Grayson Nichols +1.214.979.6851 for states that have legalized
VP-Senior Analyst
grayson.nichols@moodys.com Recreational marijuana sales are generally heavily taxed, similar to alcohol and tobacco.
For states that allow retail sales, the state receives revenue from sales tax, excise tax and
CLIENT SERVICES licensing fees. The states then can choose to distribute some of the state-collected revenue
Americas 1-212-553-1653
to local governments. Two states — Colorado (Aa1 stable) and Washington (Aa1 stable) —
legalized recreational marijuana relatively early, have the most established industries and
Asia Pacific 852-3551-3077
provide examples of how legalization may play out in other states.
Japan 81-3-5408-4100
For states that have legalized, taxes on recreational sales have provided a growing source
EMEA 44-20-7772-5454
of new tax revenue (see Exhibit 1, next page). In Colorado, the state levies various taxes
on medical and recreational marijuana sales including: a 10% special sales tax on retail
recreational sales (raised to 15% beginning in fiscal 2018), a separate 15% excise tax on
retail recreational sales and the state's standard 2.9% sales tax on medical sales. The
standard 2.9% sales tax on recreational sales was collected through fiscal 2017, but has been
eliminated beginning in fiscal 2018. Total state tax revenues from medical and recreational
sales on a cash basis grew by 118% to $223.5 million in fiscal 2017 from $102.4 million in
fiscal 2015, the first full fiscal year of legal recreational sales. The state projects total state
marijuana revenues to grow to $258.6 million (budget basis) in fiscal 2018, although much of
this growth is because of the five percentage point increase in the special sales tax.
 MOODY'S INVESTORS SERVICE U.S. PUBLIC FINANCE

Washington state levies a combination of excise taxes and license fees on marijuana sales. Total state revenues from marijuana sales on
a cash basis grew 69.5% to $314.8 million in fiscal 2017 from $185.7 million in fiscal 2016, the first full fiscal year of recreational sales.
On a budget basis, the state projects that these revenues will increase to $749.0 million in the 2017-19 biennium from $469.0 million
in the 2015-17 biennium.

Exhibit 1
Marijuana revenues grew rapidly in states that legalized early

Colorado Washington
350.0
314.8

300.0
State Marijuana Revenues ($ mill.)

250.0 223.5

200.0 185.7
156.7
150.0
102.4
100.0
64.9

50.0 23.6

0.0
FY 2014 Act FY 2015 Act FY 2016 Act FY 2017 Act

Sources: Colorado Department of Revenue; Washington State Liquor and Cannabis Board.

Marijuana revenues represent a small share of state revenues and most are earmarked for special
programs
Marijuana revenues generally make up only a relatively small share of state general fund revenues, and therefore provide only modest
budget relief. Colorado's gross revenues from recreational and medical sales in fiscal 2017 equaled only 2.0% of total general fund
revenues. Washington state's gross marijuana revenues for the 2015-17 biennium equaled only 1.2% of general fund revenues.

Furthermore, in most states, voters or statute have earmarked most marijuana revenues to special programs and only a small portion
is available for general fund spending. In Colorado, almost half of state fiscal 2018 marijuana revenues are directed to the Marijuana
Tax Cash Fund where they are used for a variety of marijuana-related programs including enforcement, regulation and prevention, as
well as substance abuse programs; 40% is earmarked for K-12 education including capital assistance for school construction; and 7% is
distributed to local governments. Only about 5% is directed to the general fund, representing only 0.1% of state general fund revenues
(see Exhibit 2). In Washington, only about one-third of state marijuana revenues are directed to the state's general fund, representing
only 0.6% of general fund revenues in the 2017-19 biennium.

This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on
www.moodys.com for the most updated credit rating action information and rating history.

2 8 May 2018 State and local government - US: Recreational marijuana tax revenues are marginal credit positives
 MOODY'S INVESTORS SERVICE U.S. PUBLIC FINANCE

Exhibit 2
Colorado allocates only a small share of marijuana revenues to its general fund
Projected Allocation of Colorado Marijuana Revenues, FY 2018

General Fund
5%
BEST Public School Capital Construction
Assistance Fund
16%

Marijuana Tax Cash Fund

48%
Public School Permanent Fund
12%

Public School Fund (K-12 Education)

12%
Local Governments
7%

Source: Colorado Office of State Planning and Budgeting.

Local governments reap marginal credit benefits from marijuana taxes

Local governments in states that have legalized marijuana also experience minimal, but still credit positive, revenue effects. They
receive revenue from the state and from local collections. However, some local governments opt out of licensing retail outlets, in
part because of political reasons and the potential for increased enforcement costs. Any increased law enforcement and public safety
expenditures fall to the local governments.

In addition to the regular sales tax rates for a local government, municipalities can adopt special sales tax rates specifically for medical
and recreational marijuana sales. For example, in Denver, Colorado (Aaa stable), the combined city/county government collects 3.65%
sales tax on all marijuana products and 3.50% additional special sales tax on recreational marijuana sales. Like the state of Colorado as
a whole, Denver's marijuana sales tax collections have grown significantly since the legalization of recreational use in 2014, but it still
remains minimal in comparison to total general fund revenues (see Exhibit 3).

Exhibit 3
Denver's marijuana sales taxes have grown significantly but still remain a small portion of total revenues
Total Marijuana Sales Taxes ($ millions - left) Marijuana Sales Taxes as a % of General Fund Revenues (right)
$40 5%

$35
4%
$30

$25
3%

$20

2%
$15

$10
1%
$5

$- 0%
2014 2015 2016 2017*

*unaudited
Source: City and County of Denver, CO

In fiscal 2016, the city collected $27.6 million in marijuana sales taxes off roughly $504 million in gross sales, which accounted for 2.2%
of its general fund revenue for that year. Unaudited fiscal 2017 collections of $33.3 million represents a significant 21% increase over
the prior year, but still only equates to roughly 2.5% of expected general fund revenues. The revenues easily covered the $9.1 million
and $11 million of additional expenditures related to administration, collection and enforcement practices in fiscal 2016 and 2017,

3 8 May 2018 State and local government - US: Recreational marijuana tax revenues are marginal credit positives
 MOODY'S INVESTORS SERVICE U.S. PUBLIC FINANCE

respectively. Positively, these additional enforcement costs for local governments may stabilize over time and allow entities to use the
proceeds for one-time capital projects and other general government expenses.

Local statutes prohibit recreational marijuana sales in some cities throughout Colorado, including the state's second largest city by
population, Colorado Springs (Aa2). These self-imposed restrictions have allowed smaller, neighboring cities to take advantage of retail
marijuana sales tax revenues off a much broader population and tourism base. In general, a relatively nominal amount of marijuana-
related revenue can prove to be a larger credit positive for some smaller local governments given of the smaller size of annual general
fund revenues.

Future growth in revenues will slow; federal enforcement represents an additional risk
While growth in state and local government marijuana revenues has been relatively strong in the early years following the legalization
of recreational marijuana, this growth is likely to slow. Markets in the states that legalized early are already showing signs of stabilizing;
for Colorado, the projected growth in revenues in fiscal 2018 is primarily because of an increase in the tax rate, rather than an increase
in sales. Also, as more states legalize recreational marijuana, states will face increased competition from their neighbors.

The uncertainty of future federal enforcement of marijuana laws represents an additional uncertainty for state and local governments.
Just the threat of stepped up federal enforcement is limiting investment in the industry in states that have legalized. And aggressive
federal enforcement could result in a dramatic reduction in future sales and tax revenues.

Moody’s related publications

Colorado's Legalized Marijuana Tax Revenues Exceed Expectations, April 2014

Tax Revenues from Legalized Marijuana Will Be Minimal in Washington State, July 2014

4 8 May 2018 State and local government - US: Recreational marijuana tax revenues are marginal credit positives
 MOODY'S INVESTORS SERVICE U.S. PUBLIC FINANCE

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CLIENT SERVICES

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6 8 May 2018 State and local government - US: Recreational marijuana tax revenues are marginal credit positives