Click Here for PDF
Newly elected Illinois Governor JB Pritzker recently proposed a budget for fiscal year 2020 that relies on $170 million in revenue from the sale of recreational cannabis licenses. He further commented that he believes legal cannabis sales in Illinois could eventually generate $1 billion in annual tax revenue. And based on an article published last week in the Chicago Sun Times, Governor Pritzker is not the only Illinois politician with eye-opening estimates for revenue from recreational marijuana. A study commissioned by state Rep. Kelly Cassidy and state Sen. Heather Steans touts that “Illinois could produce $440 million to $676 million in annual tax revenue.”
Illinois politicians should proceed cautiously before presuming legalized cannabis sales will alleviate the state’s significant budget ailments. For one, recreational cannabis is not yet legal in Illinois (an issue that Pritzker and many others see as a formality), and the legislature has not formed a consensus on how recreational cannabis will be licensed and taxed.
But more importantly, the presumptions underlying these figures may prove optimistic. The details of the Cassidy-Steans study reveal that to hit the projected revenue figures, “Illinois would have to produce 350,000 to 550,000 pounds in dried cannabis plants each year to meet expected demand…but the state’s existing industry could supply only 35 percent to 54 percent of that amount.” Further, as California has learned the hard way and as we previously discussed here, even if the state’s licensed cannabis growers could meet demand there is no guarantee that consumers will seek out legal cannabis. Cannabis’s black market has a significant head start over whatever marketplace will be created if and when Illinois legalizes cannabis. While some cannabis consumers will immediately embrace the legalized cannabis marketplace, other consumers are likely to remain in the black market if legalized cannabis prices are markedly higher than the black-market alternative due to high tax rates. Indeed, it was recently reported that California’s total 2018 marijuana tax revenue only reached $345.2 million, which fell short of budgeted revenue by nearly $300 million. Illinois politicians are seeking to generate annual revenue of nearly $100 million to $605 million more than that amount from a population one-third the size of California’s. While there is reason for optimism, the empirical evidence suggests such optimism should be tempered quite a bit.
Further, Pritzker and others trumpet the savings that will occur from reduced enforcement costs once law enforcement no longer needs to concern itself with the illegal sale or consumption of cannabis, but this too has yet to be proven. It is true that if Illinois were to legalize the sale and consumption of recreational cannabis that would eliminate a sector of activities that law enforcement currently concerns itself with, but it would also create a whole host of new issues that law enforcement would need to be prepared to encounter. By way of example, studies have found that “high driving” incidents have increased in states where cannabis has been legalized, and enforcement efforts to keep the roads safe will no doubt lead to increased law enforcement expenditures. Another issue that few state legislatures appear to have considered in their efforts to quickly legalize cannabis is the cost associated with protecting the investment of the licensed sellers and growers. Licenses to grow, distribute or sell recreational cannabis (licenses Illinois plans to issue to the tune of $170 million) have little value if there is no deterrent to illegal growth, distribution, and sales. As we previously noted, California has recently taken steps to crack down on the illegal growth and sale of cannabis within its borders in an effort to protect and expand the legal cannabis marketplace. These efforts have come at a cost that was previously unanticipated when cannabis was first legalized.
Illinois and Governor Pritzker should not be scared away from the benefits of legalized cannabis. It will no doubt be a boost to Illinois tax revenue. However, Illinois should look to the states that have already legalized and use caution to ensure it avoids falling victim to the same mistakes and pitfalls that hampered those states. If handled correctly the rollout of legalized recreational cannabis could be a boon to the Illinois economy and budget.