It turns out it’s complicated to tax a commodity that used to be illegal.

States looking to legalize recreational marijuana might believe they're going after easy money.

Think again. States that have legalized recreational cannabis are finding that it's not always the cash cow they envisioned. And there are plenty of other complicated issues to confront as they try to create and manage a legal market for a product long considered taboo.

Eleven states and the District of Columbia have given the green light to recreational cannabis, starting with Colorado and Washington state in 2012, with sales already underway in seven states. In those states, bringing marijuana into the legitimate economy was often sold to officials and the public as a way to raise new tax revenue from sales and production and funnel it into areas like education, mental health and law enforcement.

So what have those states experienced? Tax revenue that has largely fallen short of expectations and a growing recognition that taxing marijuana is pretty complicated.

It’s not just that states have struggled in projecting the size of a legal marijuana market and deciding how to best tax and regulate it. In a lot of ways, states are also grappling with their central goal of bringing cannabis out of the black market.

Advocates for legalization in California originally envisioned legalized pot raising $1 billion a year. As it turns out, the state raised not even a third of that in fiscal 2018-19, the first full year since recreational sales began. Massachusetts had projected it would bring in $63 million in revenue for its first year of recreational pot, which ended in June, and didn’t even get half of that.

Experts say that making those projections is getting easier, as state budget analysts lean more on hard data from states that have already legalized instead of on independent surveys of drug use for which respondents might not want to admit to breaking the law.

But at the same time, analysts warn that legalized marijuana is an inherently volatile market that will also change as consumer preferences evolve, neighboring states legalize and the federal government potentially considers changes to cannabis policy.

“Forecasts probably will become more reliable because they have extra data to work with,” said Alexandria Zhang of the Pew Charitable Trusts, one of the authors of a recently released study on marijuana revenue. “But marijuana revenues are reliant on consumer behavior, so it’s really hard to say if consumer preferences would dramatically shift in the long term.”

Then there’s the problem of figuring out the right level of taxation, including how much to tax purchases and whether or how much to tax growers.

The backlash to California’s taxing regime was so severe that Democratic officials there, including the state treasurer, supported eventually unsuccessful legislation this year that would have temporarily cut taxes on the marijuana industry.

But other issues might be at play as well. Analysts who defend California’s high taxes on cannabis point out that Washington state’s legal market is thriving even with an aggressive taxing regime, and put more of the blame on the state’s licensing requirements.

“Why are you legalizing marijuana? Are you battling the black market? Are you dealing with equity issues within criminal justice? Are you trying to maximize revenues?” asks Richard Auxier of the Urban-Brookings Tax Policy Center, which is run by a senior Treasury official from the Obama administration. “Different priorities will lead you to different policies.”

“No matter how sophisticated the economic model, there are crucial inputs on which everyone is basically just guessing,” said Jared Walczak of the conservative-leaning Tax Foundation, who himself wondered how much marijuana use would grow as it faced less of a stigma and how much of a revenue boost early adopters have gotten from marijuana tourism.

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Also see

1. Legalizing cannabis will reduce crime and raise Tax revenue...
2. Cannabis and Tax Revenues! Still a Failed Promise – But the Cost of Harms Continues to Rise! (This is not an experiment we want in Oz)
3. Legalize cannabis and a veritable cornucopia will emerge.
4. Cannabis Industry Can't Compete with Continuing Illegal Markets
5. Cannabis Black Market Thrives Despite Legalization 
6. And Then There Were Three – Marijuana Markets
7. Will Cannabis Commercialization be Followed by Increased Psychosis - JAMA