How Much Tax Revenue Do Legal Cannabis Sales Generate?

Countless times I’ve heard people from all around the world argue that “Keeping weed illegal is a big business,” surrendering themselves to the notion of legalization being nothing but a distant pipe dream. Depending on where they live, they’d point to private correctional facilities that benefit from the sentencing of cannabis users, producers, and distributors; to unscrupulous public servants who are not squeamish about taking bribes; to pharmaceutical companies that produce highly addictive and expensive drugs that could be easily replaced with cannabis and its derivatives.

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However, legal cannabis is also big business. Beyond the human, social, and economic benefits generated by legalization, cannabis is an extremely profitable commercial enterprise. I’m not just talking about pot sales, but also hundreds of adjacent opportunities that arise from legalization–think lighting companies, agricultural technology, real estate investment trusts, and so many others.

By exploring some of the most relevant data regarding the cannabis industry’s magnitude and potential, we can gain a better understanding of the way the industry works and the benefits it can produce.

Disparities in Legal Cannabis Sales vs. Total Dollars Spent

Total legal cannabis sales in North America hit $6.9 billion in 2016, with the US accounting for $6 billion. While significant, this number represents less than 13 percent of the total dollars spent on cannabis last year.

The ArcView Group has estimated that only 12.3 percent of the total money spent on cannabis in North America last year ($56 billion) went through the legal system. This means that we’re missing out on taxing more than $49 billion in cannabis transactions, which would translate into roughly $12 billion in new tax revenue.

“Cannabis is a major industry already, but most of the trade is happening in illicit channels that are not being taxed and are not being regulated yet,” Tom Adams, editor-in-cheif of Arcview Market Research, said.

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In addition to highlighting the costs of processing arrests for cannabis possession or distribution, Leslie Bocskor, investment banker and president of advisory firm Electrum Partners, commented, “Imagine how much wealth will be staying in our country [the US], which is currently exiting, going to [drug] cartels in other countries, leaving our economy.”

Colorado, Washington, and Oregon Are Making Big Bucks

According to ArcView’s latest report, medical and adult-use cannabis sales in Colorado, Washington, and Oregon alone generated more than $500.8 million in taxes throughout 2016.

Some perspective: Assuming that the inflation-adjusted median cost of building a school in the US stands at roughly $17.6 million for an elementary school, $28.7 for a middle school, and $48.7 million for a high school, these states could have used the $500.8 million to build approximately:

  • 28 elementary schools, or
  • 17 middle schools, or
  • 10 high schools

If, instead of building schools, these states wanted to feed their inhabitants, they could have provided between 5 billion and 10 billion full meals. A budget of such magnitude would have been enough to provide all of the people living in those three states one full meal for every day of the year. Furthermore, the money left over after feeding everybody would have sufficed to build about nine elementary schools.

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“And that’s with Colorado just barely getting started and Washington having really capped the growth of this business with incredibly high tax rates–37 percent,” Adams pointed out.

Legal Cannabis Sales Are Expected to Reach at Least $20.8 Billion per Year by 2021

And that’s just a conservative estimate that does not contemplate the prospect of cannabis being legalized in several states in the near future. Projections aside, cannabis has proven to be one of the–if not the–fastest growing industries in the world, with sales up 30 percent over 2016 versus 2015. Furthermore, going forward, the growth rate is anticipated to hover around 26 percent per year over the next five years, ArcView revealed. Even in this conservative scenario, the cannabis industry would match the size of the craft beer industry or the entire chocolate market by the beginning of the next decade.

Based on even lower sales estimates, research firm New Frontier Data projected tax revenue of $1.8 billion by 2020. And, this growth (and growth potential) does not only translate into taxes, but also into new jobs and an explosion among industries related to cannabis production and distribution, like lighting, security, software, and agricultural technology.

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“We don’t have sales estimates for cannabis verticals and ancillaries like lighting or software yet, but we believe it’s several multiples of the $6.9 billion in cannabis sales seen in 2016. So, I’d say somewhere in excess of $10 billion, at the very minimum,” ArcView’s Adams added.

If Federally Legal, the Cannabis Market Could Surpass $100 Billion per Year

A few months ago, Viridian Capital Advisors’ founder and president, Scott Greiper, went even further and told me that, according to statistics from Bloomberg, if federally legal, the cannabis industry in the US (including ancillary services) could surpass $100 billion per year, more than doubling the size of the entire wine industry.

To make this figure comprehensible, let’s establish some comparison. $100 billion is comparable to:

  • The combined sales of Coca-Cola Co. and PepsiCo products all around the world
  • Every transaction made via Amazon.com last year
  • Five times the money Starbucks made in 2016
  • 27 times what Donald Trump is worth (meaning all he owns), and about 33 times what Oprah Winfrey is worth

The Cannabis Stock Index Is Rapidly Gaining

Viridian’s Cannabis Stock index, which tracks most of the main companies in the space–including related businesses–gained 236.1 percent last year. Although the performance of the stocks in the index was very mixed, what this shows is that Wall Street is increasingly realizing how valuable the legal cannabis opportunity really is, Viridian’s Scott Greiper and Harrison Philips told us.

Again, some context: shares of Wall Street darling, Apple, rose only 32.4 percent over 2016. This means cannabis stocks did seven times better than Apple’s–although, of course, the risk implied was very different.

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Also supporting the view that Wall Street is getting behind cannabis were the more than $1.2 billion in investments made in the space. Cultivation and retail companies alone raised almost half a billion dollars from individual investors and funds, while biotech and pharma firms raised almost $350 million, Viridian revealed in January.

“As more states and countries around the world legalize cannabis, there is an ‘Industrial Revolution’ occurring, bringing advanced technologies and new companies into an industry that is just emerging from the shadows,” Greiper concluded. “This is driving opportunities for entrepreneurs and investors to participate across key business segments of the cannabis marketplace, from real estate to biotech and agtech. The cannabis industry is evolving from a social cause to a large, global business.”



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