On September 16, 2015, recreational marijuana users in Colorado flocked to retail stores to enjoy price reductions. Both the 10% sales tax on marijuana and 15% excise tax marijuana growers pay when they sell to retailors were suspended. But even with the regular statewide 2.9% sales tax and local taxes remaining, there were estimates that the state would lose $3 to $4 million during this one-day “tax holiday.”
Colorado’s tax-holiday on recreational marijuana was instated to comply with the Taxpayer’s Bill of Rights (TABOR), an amendment in Colorado’s State Constitution. To comply with TABOR, Colorado was required to suspend taxes on the sale of marijuana the day after the state’s fiscal year closed on September 15. The TABOR amendment might also require the state to return the $58 million of taxes generated by the first year of legalized marijuana sales.
States contemplating legalizing marijuana are looking to Colorado to assess the potential tax revenue legalization could generate. TABOR’s impact on the distribution of marijuana tax revenue must be observed to avoid any misconceptions.
The Taxpayers Bill of Rights (TABOR)
In 1992, Colorado adopted the TABOR amendment. TABOR is a tax and spending restriction on state and local governments. State and local governments cannot raise tax rates or spend collected revenues if revenues increase more rapidly than the rate of inflation and population growth. When tax revenue in Colorado is higher than expected from a new tax, the extra revenue is returned to the taxpayers in the form of a tax credit.
Colorado has since modified TABOR through several legislative initiatives. Colorado passed Amendment 23 on Education Funding requiring education funding per pupil to keep pace with inflation rates. In 2005, Referendum C suspended the revenue limit in TABOR from 2006 to 2010, and modified it for future years allowing the state to spend a percentage of revenue above the TABOR limit. Despite modifications, over $2 billion in tax revenue has been returned to taxpayers since TABOR’s adoption instead of increasing state spending on primary and secondary education, transportation, public health services and law enforcement.
Once again, the new tax revenue generated by sales and excise tax on marijuana could be returned to the Colorado taxpayers. Under TABOR, Colorado must obtain permission from voters to use the marijuana tax. Colorado planned to use most of the collected taxes for school construction projects. This November, Colorado voters will decide whether Colorado will be able to retain the money.
Marijuana Might Not Generate Tax Money in Colorado
The Marijuana Tax Refund, also known as Proposition BB, will be decided by Colorado voters this November. Proposition BB allows Colorado to retain the tax revenue generated from the sales and excise tax on recreational marijuana.
A “yes” vote on Proposition BB, would allow Colorado to use first-year marijuana tax revenue on education spending. Colorado plans to use $40 million of the $58 million generated revenue on school construction projects. The remaining $18 million would be used for public health initiatives and law enforcement training.
A “no” vote would mean that Colorado would have to return the money to taxpayers and sales tax on marijuana would drop from 10% to 0.1% for six months. Colorado taxpayers would receive a tax credit, a reduction in taxes. The tax credit refund is estimated to be about $8 per taxpayer. Marijuana growers would also be fully refunded for the 15% excise tax paid out in 2014.
Colorado has pioneered the marijuana legalization movement. It is thus imperative to understand this odd Colorado state tax law when thinking about the potential benefits of legalization. This year, the state may not see the revenue-generating benefits that proponents of legalization have promoted.
Authored by Robin Sheehan, LegalMatch Legal Writer