Marijuana economic impact of $22.6 million may not play out in Arkansas

A study released by the personal finance website NerdWallet says if marijuana were legalized in the state of Arkansas, the economic and tax revenue impacts for the state could be substantial. But two local economists said expectations of windfalls may not hold true should Arkansas ever vote to allow the use of the drug.

The study released by NerdWallet estimated that there are more than 70,000 individuals age 25 and older in Arkansas who smoke marijuana. The data for determining the number of pot smokers was derived from the Substance Abuse and Mental Health Services Administration, using the number of individuals from Arkansas the agency reported as users and multiplying the percentage total by the census estimate of residents over the age of 25.

After determining the population of pot smokers, the website took an estimate of $14 billion in marijuana-related business nationwide and broke that figure up proportionally for each state. Using those figures, NerdWallet estimated that the total size of the marijuana market in Arkansas was $93.466 million and further asserted that the state could see upwards of $22.609 million in additional annual tax revenue from weed sales in the state.

The tax was based on sales tax estimates for each state provided by the non-partisan Tax Foundation and then adding a 15% excise tax, which is Colorado's tax rate on marijuana (one of two states where recreational marijuana purchases are legal, the other being Washington).

Organizers of efforts to get medical marijuana on the Arkansas ballot in Nov. 2014 could not gather the required number of signatures before a state deadline for ballot questions. A similar issue in 2012 narrowly lost by a vote of 51.44% to 48.56% statewide. In the typically conservative areas of Northwest Arkansas and Fort Smith the outcome was different. Combined, the proposal to allow medical marijuana was supported by 51.5% of voters in Northwest Arkansas and the Fort Smith area (Benton, Crawford, Sebastian and Washington counties). The measure failed in Benton County (47.4% for, 52.2% against) and Crawford County (47.7% for, 52.6% against). The proposal failed to pass statewide.

Kathy Deck, director of the Center for Business and Economic Research at the University of Arkansas' Walton College of Business, said even though the figures presented look promising on paper, the reality could vary greatly should marijuana become legalized either for medicinal or recreational use in Arkansas.

For one, she said the study's market size based on population could be flawed.

"What I really don't know about this is how dependable the size of the market estimates are," she said. "They basically used a variety of sources to determine the size of the market potential. And since it's not legal, it's not like you can look up the size of the market.”

And while the study uses tax estimates from Colorado to paint the picture of a potential windfall for Arkansas with legalized weed (the state collected $25.307 million in marijuana-related taxes during the first six months of this year and expect to take in $78.158 million by June 2015), Deck said Colorado is likely drawing out of state dollars due to being one of two states to have recreational marijuana legalized for the masses. With time, as presumably more states legalize marijuana, the economic and tax revenue impact could be greatly reduced.

"Take the lottery, for example. People would travel and go (where there was a lottery) to spend money in the lottery. (Arkansas) being one of the last states (to have a lottery) means no tourism dollars. You keep more of your state's dollars closer to home," she said. "Right now in Washington and Colorado, they're generating tourism dollars from their tourism industries. If it was legalized across the U.S., there would be less of an impact.”

With less impact, Deck said it is likely the numbers presented could be greatly reduced.

Dr. Greg Hamilton, senior research economist at the University of Arkansas at Little Rock, said a bigger issue could also be the black market for marijuana.

In Colorado, the price per ounce of weed has risen drastically due to the demand for the drug. With the price going up, that means the taxes tacked onto a marijuana purchase increase, as well. As a result, an underground market could still be alive and well in Colorado and Hamilton said it would likely happen in Arkansas as people attempt to avoid any government involvement or taxation in weed sales.

Hamilton also said that while marijuana sales are strong in Colorado, there is not yet any information on the impact legalization has had on the youths looking to experiment with drugs and the impact on the overall business community.

"The interesting thing from my perspective is what is the impact on youth and development and does it have any impact upon the attractiveness of Colorado to attract people and industry? Has it been harmful to the state?”

If the numbers were to hold true, before any local or state government started seeing green, Deck said regulatory issues could eat up a substantial portion of the tax revenues generated.

"This (study) just looks at (revenue generated). It doesn't say that we're going to tax the heck out of it or spend money on rehab for people who over-consume. Or spend dollars for DUI (driving under the influence) enforcement.”

And even though there is some dispute on whether the numbers provided truly reflect the economic impact on Arkansas, Deck said there is one thing not in dispute when it comes to marijuana and the economy.

"There is certainly an economic advantage to being a first mover in this. There's tourism dollars from folks traveling from other places and bringing new money to your economy. And as far as the economic impact of selling new products (like legalized marijuana), someone has to grow it, market it and sell it.”