Legal cannabis is filling the treasuries of US states such as Colorado, with high taxes delivering a fiscal boost
Cannabis is proving a big revenue raiser for some US states, with cashed-up athletes and business titans flocking to invest in this new growth industry. Can this be replicated in Australia?
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In June this year Colorado hit the magic number: $US1 billion in taxation revenues flowing from the sales of legal cannabis.
Considering that this is a product which is still illegal at a federal level in the US, and has only been legal in Colorado for recreational use since January 1, 2014, it’s a staggering figure.
There is a revolution going on in the cannabis field worldwide. After decades of prohibition, governments, at the state level in the US, and at the national level in Canada, are seeing the value, from a public health, but also increasingly also an economic perspective, of making cannabis legal, and reaping a tax windfall in the process.
When it comes to cannabis “entrepreneurship”, we might picture a bleary-eyed university student or heavily tattooed outlaw motorcycle gang member here in Australia.
But in the US the growing legal cannabis industry has rapidly become the playground of cashed-up athletes, venture capital companies, and the world’s largest alcohol firms.
This legendary former NFL quarterback Joe Montana, along with music mogul Jay-Z invested in a Californian company, Caliva, which said it would use the money to grow develop a farm, a retail store, distribution centre and a delivery service.
That company will now home deliver anything from smokable cannabis, to vape oil containing the active ingredient THC, to edible “gummies” and even a “the first-ever craft cannabis and hops sparking beverage”, made by craft brewer Lagunitas.
Montana, the former San Francisco 49ers star said his venture capital firm was investing in an industry he believes “can provide relief to many people and can make a serious impact on opioid use or addiction.”
Former Yahoo! Inc. chief executive officer Carol Bartz also participated in the investment and is now on the board of directors.
Bartz, 70, said at the time the Caliva investment indicated the growing mainstream acceptance of marijuana, which can be legally consumed by adults in 11 states and can be used by patients with doctors’ recommendations in 33 states.
“I wasn’t a reefer head when I was in college,” Bartz was reported as saying.
Until the middle of 2018, Bartz said she had no interest in marijuana or the industry. Then the wife of a fellow Cisco Systems board member told her to try cannabis cream to treat pain caused by a knee replacement and almost overnight, she said she became marijuana’s best salesperson.
“People are discovering there are better ways to clamp down on pain than over-drugging yourself,” she said. Bartz said she doesn’t smoke or consume edible marijuana, but uses cannabis-based creams and tinctures.
In August last year Constellation Brands – one of the world’s largest wine, beer and spirits companies which owns brands such as Corona, invested $US4 billion in Canadian company Canopy Growth.
“This investment, the largest to date in the cannabis space, will provide funds which Canopy Growth will deploy to strategically build and/or acquire key assets needed to establish global scale in the nearly 30 countries pursuing a federally permissible medical cannabis program, while also rapidly laying the global foundation needed for new recreational cannabis markets,’’ Constellation said at the time.
Cannabis purchases in Colorado are taxed at the normal 2.9 per cent state sales tax, plus a 15 per cent marijuana sales tax.
The tax is then distributed, with 90 per cent going to a capital expenditure fund for schools, and the other 10 per cent going to the local government area the cannabis is sold in.
It has been a boon for the Colorado state coffers, and globally, the industry is just in its early stages.
A report from market research company Arcview and BDS Analytics, forecasts that cannabis revenues worldwide will grow 36 per cent in 2019 to $US14.9 billion, and to hit $US40 billion by 2024.
In Canada, where marijuana was made legal countrywide in late 2017, spending more than doubled last year from $US569 million (medical only) to $US1.2 billion.
Arcview estimated that the legal market for cannabis is about 10 times as large as the medical use market.
“For example, the US had 1.9 million medical patients in 2017 but 21 million monthly cannabis users overall,’’ Arcview’s 6th edition of The State of legal Marijuana Markets report says.
“In level 1 states where adult recreational consumption is approved and available, 32 per cent of adults are consumers.
“The growth in the number of consumers coincides with a dramatic expansion in the types of cannabis products available in legal states.’’
Examining the Canadian market, Deloitte estimates the total market - medical, legal and illicit - to be worth up to $US7.17 billion this year. And it’s expected to rock the alcohol market.
“Many liquor boards across Canada will be playing a prominent role as distributors and retailers. They may soon discover such sales are affecting their traditional lines of business, because our survey suggests that cannabis may serve a larger role as a substitute for beer, spirits, and wine,’’ Deloitte says.
Just like going to the bottle-o
Cannabis terroir is a thing. No, seriously – taking a leaf (yeah, I went there) out of the wine industry’s playbook, the cannabis industry in the US has rapidly moved away from the image of a street-corner dealer selling bags of weed.
Now you are more likely to be asked by a dispensary assistant what sort of high you’re after – energetic or soothing, or hydroponic or soil-grown.
Dispensaries in Colorado, where recreational cannabis use has been legal since 2014, stock a wide variety or products.
At the Green Dragon dispensaries, the cannabis “buds” which are traditionally what is smoked in Australia, come packed in plastic bags filled with nitrogen, so the quality doesn’t deteriorate.
Also on offer are lollipops, edible gummies, drinks and fluids which can be vaped, all claiming to contain a specific amount of the psychoactive agent THC, so users know what they’re getting into.
The buying process is simple – you have to show ID when you enter and prove you’re of age (21), but otherwise it’s quite similar to buying a bottle of wine.
The flood of money which the industry has been trying to capture has meant that vast amounts of investor dollars have been attracted to cannabis, with Green Dragon a vertically integrated business which grows, packs and sells it own products.
There’s even a loyalty program, and the company was the official sponsor of the Denver BBQ Festival this year, which seems a highly aligned marketing strategy.
The Australian situation
So what would happen, from a taxation perspective, if cannabis was to be legalised in Australia? While politically that seems a long way off, numbers put together by the Federal Parliamentary Budget Office show the numbers are impressive.
At a steeper, 25 per cent tax rate, a proposal put forward by The Greens, legalisation would raise just more than $3.5 billion over a four-year period.
“This proposal would be expected to increase the fiscal balance by $3582 million and increase the underlying cash balance by $3382 million over the 2017-18 Budget forward estimates,’’ the office says.
Those figures include the cost of setting up a new regulatory body, the Australian Cannabis Agency.
There are also expected to be savings for the Australian Federal Police, due to the need for less enforcement actions, but overall “there is a high level of uncertainty in this costing’’.
It is also expected that should cannabis be legalised, consumption and demand would increase.
Whether this is something Australia, and its politicians, are ready to accept, remains to be seen.
cameron.england@news.com.au