FEATURE | US cities look to marijuana taxes for help

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SOUTH Beloit, Ill. faces steep bills to fund its firefighter and police pensions and repave its cracked streets. Now, Mayor Ted Rehl has a plan to help cover the shortfall: marijuana.

South Beloit, less than a mile from the Wisconsin border, will welcome its first cannabis dispensary later this year. Recreational cannabis became legal in Illinois on Jan. 1 but remains illegal in Wisconsin. The Illinois town hopes to collect roughly $1 million a year in taxes on marijuana purchases, mostly by Wisconsinites.

“If we made that million dollars, we would be able to do streets and we would be able to put a nice amount in the retirement fund,” Mr. Rehl said.

The past decade has been difficult for American cities and states, where tax revenues and public-worker pension funds took massive hits as a result of the 2008 economic crisis. Even when the stock market recovered after the financial crisis, superlow interest rates have also weighed on the pension plans. With recreational canna- bis now legal in 11 states, public officials are looking to marijuana tax revenue to help shore up government finances and address funding shortfalls.

Illinois, where lawmakers are grappling with the highest pension debt of any state, was the first state to legalize retail sales of cannabis through legislation rather than a popular vote. Towns in Illinois and California, facing state-level mandates to increase annual pension payments, are eagerly anticipating revenue from recreational marijuana sales. Cities in several other states, including Oregon, Massachusetts and Alaska, are also collecting cannabis taxes. To be sure, many cities and states are directing portions of their cannabis revenue toward residents or communities that were historic targets of marijuana enforcement. But plugging budget holes remains at the top of many public officials’ to-do lists.

In the aftermath of state cannabis-legalization measures, “you tended to see poorer towns that are not in such good fiscal shape being more welcoming and willing to license dispensaries,” said Roy Bingham, chief executive of BDS Analytics, a Boulder, Colo., cannabis-industry consultant.

California local governments collected a total of $1.86 billion in revenue from cannabis sales during calendar year 2018 and nearly as much in the first three quarters of 2019, according to Brea, Calif.,-based HdL Cos., a consultant to local governments and public agencies.

Cannabis revenue last year helped Port Hueneme, Calif., balance its budget without dipping into reserves for the first time in eight years. Rather than charge a tax, Port Hueneme is requiring its seven retail dispensaries to turn over 5 percent of their gross sales and donate an additional 1 percent to local charities, said police chief and interim city manager Andrew Salinas.

Mr. Salinas said Port Hueneme, which collected $1.8 million from cannabis in 2019, has used cannabis tax revenue to help cover the city’s growing pension payments, to pay for additional police officers and to add recreation programs. The donations, meanwhile, have benefited a local homeless shelter and subsidized a July Fourth fireworks display.

“Cannabis saved the fireworks show,” Mr. Salinas said.

Researchers and analysts expect marijuana revenues, which rely on changing tastes and disposable income levels, to be unpredictable and volatile. California’s cannabis revenue for the first six months of 2018 came in 54 percent below what the state projected, according to the state Legislative Analyst’s Office. Another risk is more widespread legalization. South Beloit’s market advantage, for instance, depends on a continued ban in Wisconsin.

Cities and states also face a delicate balance: Tax marijuana too much and people will stick with the black market, which Moody’s Investors Service pegs at about $40 billion nationwide. BDS Analytics estimates marijuana flowers cost 77 percent more to buy legally than illegally in California.

A cannabis-infused chocolate bar purchased in Illinois’ capital Springfield might cost $25 before taxes. After the state, city and county take a cut, the consumer would pay $33.19.

City officials say they are budgeting conservatively and keeping their expectations low. Springfield plans to use a portion of its marijuana taxes to promote economic development on the city’s blighted East Side and another portion to shore up the city’s police and fire pension funds.

“The cannabis sales is going to be a small piece of it,” said Mayor Jim Langfelder. “But every little bit helps.”

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