scenic picture from Washington state
MRSC In Focus › Finance Advisor June 2014
 
Finance Advisor Logo

MRSC has joined with Tracey Dunlap, Director of Finance & Administration at the City of Kirkland, Mike Bailey, Finance Director, City of Redmond, Glenn Olson, Deputy County Administrator, Clark County, and Angie Sanchez, Principal, FCS GROUP, to bring you the "Finance Advisor" column. The "Finance Advisor" will feature a new article each month with timely local government finance information and advice you can use.*


The Uncharted Fiscal Waters of Legalizing Marijuana in Washington State

June 2014

By Timothy Wood, FCS Group

In November 2012, Washington and Colorado voters both passed statewide initiatives allowing marijuana to be grown, processed, and sold for adult recreational usage, setting those states on course for uncharted fiscal territory. Seventeen other states are now considering similar initiatives1 . However, since the sale of marijuana is still a violation of federal law, most banks will not do business with marijuana related enterprises2. Strict regulatory and permitting guidelines established by the Washington State Liquor Control Board force producers, processors and retailers to abide by all local and state regulations, along with most federal regulations. For example, recreational marijuana businesses can only locate in areas outside a 1,000-foot buffer from schools, parks, and daycare operations3 .

In Washington, the potential economic and fiscal impacts of Initiative 502 will be measurable. The Initiative 502 Financial Impact Statement issued by the Washington Office of Financial Management estimated that state revenues could reach $1.9 billion over 5 years. This includes up to $1.6 billion in the Dedicated Marijuana Fund and $349 million in state sales & use taxes and business & occupancy taxes. Provisions related to driving under the influence are estimated to result in state revenue of $4.3 million, and agency cost savings of $2.8 million over 5 years. State, county and city governments are also expected to experience decreased law enforcement costs resulting from fewer marijuana-related arrests, prosecutions, and incarcerations4 .

Initiative 502 creates a special excise tax of 25% on the selling price at each transaction: processor to wholesaler; wholesaler to retailer; and retailer to consumer. In addition, general state and local sales and use taxes apply, with state tax revenue deposited into the State General Fund. Revenues from excise taxes are directed into the Dedicated Marijuana Fund. These funds are to be distributed to various state funds and programs: to Washington's Basic Health Plan (50%); the State General Fund (19.07%); Department of Social and Health Services (15%); and the Department of Health, specifically for education on marijuana (10%)5.

Local governments will not directly receive "pass through" funding from the Dedicated Marijuana Fund; but local sales and use taxes on recreational marijuana and locally imposed business and occupancy taxes paid by marijuana-related businesses can be levied6 and could generate measurable increases in local tax revenues. For example, based on early results from Colorado, annual retail sales revenues average about $3 million per establishment. In a city which charges the maximum one penny per dollar local sales tax, local excise tax revenues would increase by $30,000 per establishment, (with 85% of this amount retained by the local municipality and 15% given to the local county government, as mandated by state law7 ). Cities and counties would have latitude to utilize the funds for any intended purpose within local, state and federal guidelines. Cities may also see increased business and occupancy revenues and licensing incomes, if applied in that municipality.

In Oregon (pop. 3.8 million) state economist Mark McMullen predicts that tax revenues from recreational marijuana sales would probably amount to $25 million in annual revenue for the state8 . A drop in the bucket compared with the $8.5 billion annualized state budget.

Early results from Colorado offer insight into actual monetary accounts. Colorado, a state with 5 million residents (34% less than Washington), was the first to allow recreational marijuana sales in the U.S. generating about $14 million in recreational marijuana sales during January 2014 with 59 establishments reporting earnings. Colorado collected about $1.9 million in January 2014 from its special 10% sales tax, 2.9% general sales tax, and wholesale excise taxes9 . Colorado anticipates significant revenues as their system matures with 167 stores operating in the near future. Governor John Hickenlooper estimates that state marijuana industry sales could exceed $1 billion in 2015, with recreational sales accounting for 61% of the total10 .

As an example of local impacts, Pueblo County, Colorado was the first to announce tax revenues from their two marijuana establishments netting over $1 million in sales during January, resulting in $56,000 in local tax revenue. At this pace, the county expects a total of $670,000 in new tax revenue in 2014 for recreational marijuana sales. For some perspective, Pueblo County's total budget is about $165 million a year11 .

In spite of added local and state regulation, concerns persist regarding broader marijuana use. While not considered as addictive as many other substances, marijuana still has an addiction rate of about 9% according to the National Institute of Drug Abuse12 . Additionally, some argue that the legalization of marijuana may send a message to children that its use is acceptable. This is especially concerning since recent studies of adolescent marijuana use has indicated that brain connectivity is diminished greatly for those who start using marijuana in their teens. Some believe that broader use of marijuana by those over 21 will lead to an overall loss of worker productivity which could reduce earning potential for individuals.

Another hurdle for legalized use of recreational marijuana is the uncertain federal regulatory framework. Recent U.S. Department of Justice and U.S. Treasury Department guidelines require financial institutions to thoroughly vet any marijuana related enterprises that they wish to do business with. Financial institutions must continually ensure marijuana related businesses are in compliance with requirements such as permitting and legalized operations. The onerous task of researching these complex issues may be enough to convince most financial institutions to walk away from doing business with marijuana related enterprises. Furthermore, these are guidelines, not law, which means that a change in leadership within one of these departments could institute a more or less permissive regime over time for banks and credit unions13 .

While it is too early to know how Initiative 502 will impact Washington's cities and counties, local governments such as the city of Spokane have been inundated with applications for their allotted production, processing and retail licenses. Significant levels of redevelopment interest by investors could result in increased assessed valuation levels as older buildings are redeveloped for newly allowed uses. Other economic and fiscal benefits from increased tourism and visitation will also be measurable as has been the case throughout Colorado.

The question remains: will increased social costs from recreational marijuana use outweigh the fiscal and economic benefits? It may take years to find out as Washington navigates into new and unfamiliar waters.

 

1 Lyman, Rick. "Pivotal Point is Seen as More States Consider Legalizing Marijuana." New York Times 26 Kovaleski, Serge. "Banks Say No to Marijuana Money, Legal or Not." New York Times 11 Jan. 2014: n. pag. Print.b. 2014: n. pag. Print.

2 Kovaleski, Serge. "Banks Say No to Marijuana Money, Legal or Not." New York Times 11 Jan. 2014: n. pag. Print.

3 "FAQs on I-502 ." Washington State Liquor Control Board, n.d. Web. 2 May 2014.

4 "I-502 - Fiscal Impact Statement." State of Washington, n.d. Web. 2 May 2014.

5 "FAQ on the Marijuana Initiative, I-502." The Association of Washington Cities, n.d. Web. 2 May 2014. ,

6 "Initiative 502." Initiative 502. Washington State Department of Revenue, n.d. Web. 30 May 2014.

7 "A Revenue Guide for Washington Cities and Towns:" n. pag. Municipal Research and Services Center. Web. 30 May 2014,

8 Gaston, Christian. "If marijuana legalization comes to Oregon, don't fear the kicker." The Oregonian 27 Feb. 2014: n. pag. Print.

9 Ingold, John. "Colorado saw $2 million in recreational marijuana taxes in January." Denver Post 10 Mar. 2014: n. pag. Print.

10 Ingold, John. "Hickenlooper expects marijuana tax money to exceed prior expectations." Denver Post 19 Feb. 2014: n. pag. Print

11 Wyatt, Kristen. "First Colorado county reports pot taxes." Denver Post 25 Feb. 2014: n. pag. Print.

12 "Topics in Brief: Marijuana." Marijuana. National Institute on Drug Abuse, 1 Dec. 2011. Web. 2 May 2014.

13 Roehm, Victor. "Federal Guidance Leaves Uncertainty." Daily Journal of Commerce 14 Mar. 2014: 4. Print.


Finance Advisor Logo

Mike Bailey is currently the Finance Director for the city of Redmond. Previously he worked as Administrator of Finance and Information Services for the city of Renton and as the Director of Finance for the city of Lynnwood. Mr. Bailey also served as president of the Washington Finance Officers Association and is the Vice Chair of the GFOA Budget Committee. An experienced CPA and GFOA budget reviewer, Mr. Bailey co-founded the annual Budget and Fiscal Management Workshops held each summer. Mr. Bailey conducts numerous workshops and has authored various articles on local government finance, including Effective Budgeting in Washington State Cities published by the Association of Washington Cities.


Tracey Dunlap, P.E. is the Director of Finance & Administration at the City of Kirkland. Prior to joining Kirkland in 2006, she was a principal and shareholder in FCS Group, a regional financial and management consulting firm (14 years). An industrial engineer registered in the state of Washington, she has worked with jurisdictions throughout the Northwest to develop and implement cost recovery and fee strategies, set utility rates, and improve organizational efficiency and effectiveness. Tracey's experience also includes working for a large defense contractor (5 years) and a major financial institution (3 years). She has presented on a wide array of topics for organizations including WFOA, APWA, APA, WABO, and AWC.


Glenn Olson is the Deputy County Administrator for Clark County. He has been in Clark County since 1997, serving in various leadership positions during his tenure there. Previously Mr. Olson served 15 years in the Governors Office of Financial Management overseeing budget forecasts. Mr. Olson chaired the Washington State Public Works Board for Governor Locke. Currently he is the gubernatorial appointee representing local governments on the Select Committee for Pension Policy and on the Law Enforcement Officers and Fire Fighters Plan 2 (LEOFF2) Board, and he is the president of the Washington County Administrators Association.


FCS LogoAngie Sanchez Virnoche is a principal and shareholder at FCS GROUP, a consulting firm specializing in public sector financial, economic and management consulting. Angie has provided financial utility business advisory services to municipalities since 1993 for water, sewer, solid waste, storm water and electric utilities. Her project work includes multi-year financial planning, cost of service studies, conservation based rate design development, capital/infrastructure planning, funding alternatives, cost benefit analysis, and community education and involvement. Angie has presented at numerous conferences and workshops throughout her career on topics related to financial management and rate-setting including WFOA, ERWOW, WAPUD, NWPPA, WOW, AWWA, PWC, WASWD.

*The Articles appearing in the "Finance Advisor" column represent the opinions of the authors and do not necessarily reflect those of the Municipal Research and Services Center.

Need more information?

Feel free to Ask MRSC. Washington cities, counties, and our contract partners can call or email MRSC for more information and advice - free of charge.