ProjectingEconomicImpactsofLegalizingMarijuana

inConnecticut

ProfessorFredCarstensen

DirectoroftheConnecticutCenterforEconomicAnalysis(CCEA)SchoolofBusiness

UniversityofConnecticut2100HillsideRoad,Unit1240

Storrs,CT06269-1240

September10,2020

i

ExecutiveSummary

Corefindings:CCEAprojects,dependingonwhichtaxregimeConnecticutadoptsandhowthestatechoosestospendthosenewrevenues,legalizationgeneratingdirectstatetaxrevenuesgrowingfromtherangeof$35-$48millioninthefirstyearofoperationsto$188-$223millioninyearfive.Includingindirectandinducedimpacts,CCEApredictstotalstatetaxrevenuesreaching$235-$314millioninthefifthyear.Aggregatenewstatetaxrevenuesoverfiveyearsrangefrom$784to$952million(SeeTable6).Inaddition,directlocaltaxrevenueisprojectedat$71millionoverfiveyears,with$21millioninyearfivealone.Newemploymentexpandsfromtherangeof5,669-7,418inyearoneofoperationsto10,424-17,462inyearfive.Also,inyearfive,stateGDPgrowsbetween$953millionto$1,737million,dependingonthescenario.Higherimpactsresultifthestatechoosestoexpandorpreserveservicesinthefaceofimpendingfiscalchallenges(seeTableE-1below).

Toestablisharangeoflikelyeconomicimpactsandfiscaloutcomes,thisreportconsiderstwotaxsystemsandthenevaluatestwoscenarios:oneinwhichthestatespendsallnewnetrevenuestoexpandorpreservegovernmentservicesthatwouldotherwisebecutinthefaceofimpendingfiscaldeficitsandoneinwhichitsavesallnetnewrevenue(i.e.,putsitintoarainydayfund).

Amultipletaxpolicy(MTP)imposesbothpercentageandperunittaxes;thealternative,apercentagetaxpolicy(PTP),imposesonlypercentageexciseorsalestaxes.Ascurrentlystructured,MTPgeneratesmoregovernmentrevenues.Afterthefirsttwoyears,itwouldresultinhigherpricesthanthePTPapproach,butgiventhetypicalpatternoffallingpricesasmarijuanabecomesmorereadilyavailable,MTPwouldtendtolimitfuturegrowthofthelegalmarijuanamarketandweakenresultingeconomicdevelopment.MTPtaxesbecomehighrelativetothepre-taxprice,forcingrelativelyhighretailprices;thislikelytranslatesintoawidergapbetweenpricesinthelegalmarketversustheillegalone.Consumerswouldbothbelesslikelytobuyin-statelegalmarijuanaandlesslikelytomoveconsumptiontolegalpurchases.

Twoscenariosthenconsiderhowthestatespendsthenewtaxrevenuestoprojecttherangeoflikelyoutcomes.Inonescenario,CCEAassumesthestatechoosestosaveallofthenewrevenues,spendingnothingonnewstateservicesormaintainingcurrentservices,thusminimizingimpactsinemploymentandGDP.Inthesecondscenario,CCEAassumesthestatechoosestospendallnewrevenuesonexpandedstateservices—oronpreservingservicesthatwouldotherwisebecut,therebymaximizingeconomicimpacts.Realistically,thelatterscenarioisclosertothelikelyoutcome,givenlargedeficitsthatConnecticutfacesinthenextfewfiscalyears.Providingbothscenariospermitsfullunderstandingoftherangeofpotentialoutcomesandclearlyestablishesthateventhepessimisticscenarioforlegalization—wherethestateabsorbsallnewrevenues—isasolidchoiceintermsofjobcreation,growthinstateGDP,andbenefitstoConnecticut’sfiscalhealth.

TableE-1summarizestheimpactsoflegalizationundertheMTP,includingfixedtaxespergram.Inyearzero,cannabisbusinesseswouldperformnecessarystart-uppreparations,butcannabisdistributionwouldnotbeginuntilyearone.Thefinallineprovidesannualrevenueimpactsifthestatespendsthenewrevenuestopreserveorcreatenewservices,whichgeneratetheincrementalrevenuesshownonthatline.

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Nomatterwhichtaxregimethestatechoosesandnomatterhowitspendsthenewrevenues,legalizationwillgeneratesignificantjobcreation,stronggrowthinGDP,andhundredsofmillionsinnewtaxrevenues.InthefaceofthechallengeofrecoveringfromtheCOVID-19pandemic,legalizationoffersapathtoastrongerrecovery.

SeethefullreportbelowforadetaileddelineationoftheCCEAanalysis.

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TableE-1:SummaryAnnualEconomicImpactsofConnecticutLegalizingMarijuana,

MTPYearofOperations Start-up 1 2 3 4 5

Employmentimpact(neworpreservedjobs)/years

2021 2022 2023 2024 2025 2026

Governmentsavesallnettaxrevenues*

1,869 5,686 7,212 8,358 8,440 10,424

Governmentspendsalltaxnetrevenue

2,111 7,238 10,242 12,879 14,151 17,462

AddedGDP(MillionsCurrent$)

Governmentsavesallnettaxrevenues

189.9 497.3 620.0 718.3 707.7 953.2

Governmentspendsalltaxnetrevenue

213.7 653.0 932.4 1,197.2 1,327.9 1,737.2

AddedPersonalDisposableIncome(MillionsCurrent$)

Governmentsavesallnettaxrevenues

127 331 432 522 542 729

Governmentspendsalltaxnetrevenue

142 437 653 872 1,015 1,340

FiscalImpactsifRevenueSaved(MillionsCurrent$)

Directstatetaxes 35.20 86.70 139.10 185.10 223.10Indirectstatetaxes 9.01 21.92 27.82 32.77 32.86 47.69Totalstaterevenues 9.01 57.12 114.52 171.87 217.96 270.79Stateexpenditures 1.27 3.99 6.22 8.04 8.98 10.89Netstatesavings 7.74 53.13 108.30 163.83 208.98 259.90Grossfiscalimpactsifrevenueisspent/jobspreserved

10.12 64.42 129.67 195.71 249.74 313.82

Note:*Thesearetaxrevenuesgeneratedbytheprojectnetofanystategovernmentexpendituresrequiredtobringtheinitiativetofruition.Alternatively,thefollowinglineprojectswhatwouldhappenifgovernmentsratherthansavingthesefundsspentthemeitheronnewinitiativesorpreservationofexistingoperationswhichwouldhaveotherwisehadtobecut.

Contents

ExecutiveSummary.......................................................................................................................................i

EconomicImpactsofConnecticutLegalizingMarijuana..............................................................................1

Introduction………………………………………………………………………………………………………………………………………..1

FirstFiveYearsofOperations.......................................................................................................................5

PTPandMTPEmploymentImpacts.........................................................................................................6

RevenuesSpenttoPreserveorExpandProgramsandJobs…………………………………………………………………7IncomeImpacts........................................................................................................................................8

GDP…………………………………………………………………………………………………………………………………………………8DPI........................................................................................................................................................8

FiscalConsiderations..............................................................................................................................10

Conclusion..................................................................................................................................................14

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ProjectingEconomicImpactsofLegalizingMarijuanainConnecticut

IntroductionConnecticutcitizensnowhaveeasyaccesstolegalmarijuanainneighboringstatesaswellasanactiveillicitmarketinthestate;legalizationwouldsignificantlyreframecannabisconsumption,deliveringmultiplebenefits.CCEAprojectsthedynamiceconomicimpactsoflegalizationanddevelopmentofcannabisproductionandretailingwithinConnecticutwill:

• divertillicitpurchasesofmarijuanatolicitmarkets;• transferout-of-statepurchasesintothestate;and• imposequalitycontrolsinmarketsforadultmarijuanaconsumption.

Inthisreport,CCEAexaminestwoapproachestotaxationofadultmarijuanasalesinwholesaleandretailmarkets.Gov.NedLamont’s2020bill,SB16,proposedfixedtaxespergramat$1.25ondryflowerand$0.50ontrim,1inadditiontotheusual6.35%statesalestaxandmunicipaltaxratesof3%.Analternativeapproachisastraightforwardpercentagetaxthatcombinesstatesalestaxwithaspecial20%taxatretailanda3%municipaltaxwheresalesoccur,foranaggregatepercentagetaxof29.35%.Toprojectdynamicsinthecannabismarket(adultconsumptionandmedicalconsumption)ofthetwotaxframeworks,CCEAassumesthatpercapitaConnecticutretailmarketgrowthfromlegalizationoverthenextfiveyearswillgrowatthesamepaceasColorado’smarketsdidfromlegalizationthere.

Proceedingfromthisbase,CCEAdevelopedexpansionpathsofwholesaleandretailsalesfortheseproductsunderthetwodifferingtaxationframeworks.Fixedtaxespergrammeanthateffectivepercentagetaxratesonmarijuanarisewithfallingpricesandviceversa.Thatmeansthatthelowertheprice,thehighertaxburdenthatimpactsconsumerbehavior:itreducesdemandrelativetoasimplepercentagetax.Becausethistaxproposalcontainsamixoffixedandvariabletaxrates,CCEAreferstoitastheMultipleTaxProposal(MTP).

Thealternativetaxstructurewouldimposethesame6.35%stateand3%municipalsalestaxes,supplementedbyafurther20%taxonretailsales.Inthiscase,effectivetaxratesareaconstantshareofretailprices—i.e.,taxesareaconstantrelativeburden.Aswithallsetpercentagesalestaxrates,governmentrevenuesbearthebruntofvariationsinfinalprices.CCEAreferstothistaxsystemasPercentageTaxProposal(PTP).

Inassessingmarketbehaviorsince2014,CCEAdrewuponactualmarketexperienceinColorado.Basically,ConnecticutresidentsareassumedtoparticipateinlicitmarijuanaconsumptionatthesamepaceasColoradoanshavewhileexpectingthesamerateofreductioninpricesasmoreretailoutletsbecomeavailable.Duringthefirstfiveyearsofoperations,

1SB16alsoproposeda$0.28taxpergramofwetcannabis,whichisexcludedfromthisstudyduetodatashortcomings.

2

marketpricesofcannabisdeclinedinColorado;CCEAassumesConnecticutpriceswillfollowthesamedynamic.2

ThetwotaxframeworksonConnecticut’smarijuanamarketoutlinedabovehavedifferentimplicationsforstateandlocalgovernmentrevenuesraiseddirectlyfrommarijuanasales,inadditiontopricingpressuresimposedonconsumers,asnotedinTable1.

Table1:DirectTaxesfromLicitConnecticutMarijuanaSales,Years1-5(MillionsofCurrent$)

YearofOperations 1 2 3 4 5

PTP

Connecticutretailsales,pre-taxes 180.7 336.9 496.6 631.0 713.2

20%advalorem(percentage)tax 36.1 67.4 99.3 126.2 142.6

6.35%salestax 11.5 21.4 31.5 40.1 45.3

Stateexciseandsalestaxrevenues 47.6 88.8 130.9 166.3 187.9

3%localtax 5.4 10.1 14.9 18.9 21.4

Totaldirectcannabistaxrevenue 53.0 98.9 145.8 185.2 209.3

Effectivetotaltaxrate(%) 29.35 29.35 29.35 29.35 29.35

MTP

Connecticutretailsales,pre-taxes 180.7 336.9 496.6 631.0 713.2

Budandtrimexcisetaxrevenues 23.7 65.3 107.6 145.0 177.8

6.35%salestax 11.5 21.4 31.5 40.1 45.3

Stateexciseandsalestaxrevenues 35.2 86.7 139.1 185.1 223.1

3%localtax 5.4 10.1 14.9 18.9 21.4

Totaldirectcannabistaxrevenues 40.6 96.8 154.0 204.0 244.5

Totaleffectivetaxrevenue(%) 22.5 28.7 31.0 32.3 34.3Note:ThistableshowsnoconsumerreactiontohigherpricesintheMTPcaserelativetoPTPafteryeartwo.The

2Colorado’spre-legalizationuseratewaslowerthanthecurrentsituationinConnecticut.Inaddition,ConnecticuthaslargepopulationsnearitsborderswithNewYorkandRhodeIsland,whereadult-usemarijuanaisnotyetlegal.Thus,modelingonthebasisoftheColoradoexperienceisconservativerelativetowhatthesituationislikelytobeduetolargerin-statedemandandmoredemandfromborderresidents.

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literaturesuggeststhatlikelyreactionswouldbe$4,000—toosmalltoshowinthetable.EffectivetaxratesunderthePTPalternativeremainconstantat29.35%ofpre-taxsalesprices.TheMTPsystemresultsinalowereffectivetaxratethefirsttwoyears—thetimewhenlegalcannabispriceshavebeenhighestandwhenconsumersaretransitioningtonewstoresfromtheillicitmarketorout-of-statestores.Afterthat,PTPimposesthelowereffectivetaxrate.Inthefirsttwoyears,theproposedMTPratesarebestpositionedtoencouragemovementofconsumptionfromillicittolicitmarketsordiscourageout-of-statepurchases.Insubsequentyears,PTPholdstheadvantageoverMTPandcanbeexpectedtoresultinfewerout-of-statepurchasesandthusmoreeconomicgrowththanwithMTP.

TheMTPapproachraisesmorerevenuesforthestategovernment,amountingto$139.1millioninyearthreeto$223.1millioninyearfive.Forthemostprice-sensitiveconsumers,thehighertaxratemayresultinmoreout-of-stateorillicitpurchases.

Inadditiontoadultmarijuanaretailsalesaremedicalmarijuanasales,whichswellproducerrevenuesasnotedinTable2,whichincludespre-taxsalesprojectionbyyear.Connecticut’s2021demandformedicalmarijuanaisexpectedtobeslightlyaboveathirdofsalesofitsadultmarijuanaconsumption.Whatqualifiesasmedicalmarijuanaishighlycontrolledbythelegislature,sochangescanoccur.LegalmedicalcannabissalesarealreadyestablishedinConnecticut.BasedonprojectionsfromColorado,whichalsohadamedicalcannabisprogrambeforelegalization,weanticipateaninitialsurgeinmedicalcannabissales,followedbyadecreaseinlateryears.

Table2:Retail,Medical,andConnecticutExpectedPre-TaxSales(MillionsCurrent$)

YearofOperations 1 2 3 4 5

Connecticutadult-usesales 180.7 336.9 496.6 631.0 713.2

Connecticutmedicalsales 119.7 147.7 146.7 148.6 118.6

Totalmarijuanasales 300.4 484.5 643.3 779.7 831.8

CCEA’sanalysislooksatmarketreactionsnotonlydirectlybutalsothroughthegeneraldynamicequilibriummodelREMI(RegionalEconomicModels,Inc.)3provides—onethatprojectsthefutureimpactsfromeachtaxstructure.ThisapproachbroadenstheanalysistoincludeimpactsofConnecticutstart-upcostspriortomarijuanaproductionaswellas

3SeetheAppendixforanexplanationofREMI.

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operationallinkagesthroughouttheConnecticuteconomy.Itis,therefore,abetter,moreholisticapproachuponwhichtobaseemergingpolicies.

ThisanalysisbeginswithestimatesofthecapitalizationoftheindustryinConnecticutfollowedbyoperations.BecausemarijuanaproductionandconsumptionhavebeenlegalizedinCanada,fourlargeproducers,capitalizedatover$18.5billion,aretradedpubliclyontheTorontoStockExchange.Fromtheirpublicinformation,CCEAhasestimatedanindustrycapitaloutputratioof1.2587relativetopre-taxindustrysales.Thisisaconservativeapproachbecauseitonlyincludesinvestmentsbysuccessfulfirmsthathaveexperiencedrapidgrowth.Capitalexpendituresbyotherswhomayhaveinvestedunwiselyandfailedareexcluded.

BasedonthelastlineofTable2andusingtheaboveratio,annualexpectedcapitalizationissignificant,asTable3shows.Conservatively,CCEAhasassumedperfectforesightbyinvestors—thatis,thenewprocessingfacilitiesarefinishedjustintimetomeetexpandingmarketdemands.CCEAallocatedhalfthecapitalizationtoplantsandbuildings,i.e.,“non-residentialconstruction,”andtheotherhalftomachineryandequipment.Becausethenumericallydominatedyearsrefertooperations,yearzero(start-up)referstoinvestmentsmadeduringtheyearpriortoinitialproduction.

Table3:CapitalizationoftheConnecticutMarijuanaIndustry,Years0-5(Millions$)

YearofOperations Start-up 1 2 3 4 5

Non-residentialconstruction 94.5 115.9 99.9 85.8 32.8 133.3

Machineryandequipment 94.5 115.9 99.9 85.8 32.8 133.3

Note:Asidefromthestart-upyear,theabovearesimplyhalfofthecapital/outputratiotimesthepriordifferencesinoutput.Start-upisapproximatedbyhalftheinitialyear’soutput,implyingthattheotherhalfhasalreadybeeninvested.Investmentinthefifthyearisbasedondemandexpandingduringthesixthyearattheannualaveragecompoundrateinthepreviousfiveyears.

Similarly,Table4delineatesthedirectimpactsintotheREMImodeloperation.Thistabletracestheimmediatesectorimpactsofmarijuanaconsumptionineachcase.BecausemanufacturingandprocessingofmarijuanahasnotyetbeenintegratedasanindustryinREMI,CCEAapproximatesthoseactivitiesasamixtureofexistingindustries:

• Electricitypowergeneration(15%)• Soybeanandotherprocessing(9%)• Pharmaceuticalpreparations(14%)• Greenhouse,nursery,andfloricultureoperations(18%)• Professional,technical,andscientificservices(16%)

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• Wholesalemargins(18%)• Otherretailmargins(10%)

InConnecticut,pharmaceuticalsdominatethechemicalindustry,soparallelswithmarijuanaarestrongertherethantheywouldbeinstateswithsignificantfossilfuelrefining.

Table4:SectorAllocationofMarijuanaIndustryOperationsExpenditures(Millions$)

YearofOperations 1 2 3 4 5

PTP

Utilities 45.1 72.7 96.5 116.9 124.8

Manufacturingandprocessing 123.2 198.7 263.8 319.7 341.0

Professionalandtechnicalservices 48.1 77.5 102.9 124.7 133.1

Retailmargins 54.1 87.2 115.8 140.3 149.7

Wholesalemargins 30.0 48.5 64.3 78.0 83.2

Total 300.4 484.5 643.3 779.7 831.8

Stateandlocalgovernmentcannabistaxrevenue—PTP

53.0 98.9 145.8 185.2 209.3

Stateandlocalgovernmentcannabistaxrevenue—MTP

40.4 96.4 153.1 204.0 244.5

Stateandlocalrevenuesarethedirectwholesaleanddirectretailtaxes,aswellas,intheMTPcase,perunitchargesaccruingdirectlytothestateandlocalgovernments.TheydonotincludeanyindirectandinducedimpactsgeneratedlaterinREMI.Becauseretailemployeeshavespecialproductknowledge,theyenjoywagesbetterthanmostothersinretail.Toaccommodatethisreality,theCCEAanalysisassumeda12%incrementtotheiraveragewages.

TotalannualgovernmentrevenuesarehigherintheMTPcaseduetothehigherlevelsoftaxation—theamountspaidbyconsumers.Priortohighertaxes,theoppositeistrueofrevenuesaccruingtobothmanufacturingandprocessingandretailmarginsbecausethemodelingtakesintoaccountthecontractionofdemandcausedbythehighertaxes.

FirstFiveYearsofOperationsThissectionutilizesthemostrecentversionofCCEA’sforecastingmodelofConnecticut,REMIv.2.4.1,toestablishtotaleconomicimpactsonthestateunderbothPTPandMTPwithaparallelvariationoneachscenario.UsageofthisversionofREMIassumesasnapbackrecovery

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withintwoyears.CCEA’sownoutlookforaslowerrecoveryover10yearswouldallowmoreroominConnecticutforslightlylargerimpactsandimpliesthatalargernumberofthejobsgeneratedbythestatespendingitsincrementalrevenueswouldpreserveeconomicactivityratherthandestroyitthroughotherwisenecessaryexpenditurecuts.ThisagainunderlinestheconservativenatureoftheCCEAprojections.

Coloradohassetaninterestingprecedentbyearmarkingcertainmarijuanarevenuesforspecificexpendituressuchasbuildingschools.WithoutpresumingashiftinhowtheConnecticutLegislaturemightspendthesenewrevenues,CCEArantwoscenariostoestablishthefullrangeofpossibleimpacts—asituationwherethestatesavesallofitsnewrevenuesandthemorelikelysituationwherethestatespendsallitsincrementalrevenuesforneworpreservedservicesthatwouldotherwisebeeliminatedbybudgetcuts.CCEAbasedstatepreservedexpenditurepatternsonitscurrentannualshares.

Thissectionisorganizedtopresentthedifferencesbetweenthetwotaxsystems—PTPandMTP—asifallnewrevenuesaresavedandnonearespentonservices,oralternativelywhererevenuesarespentoneithernewservicesorservicespreservedfrombeingcutwereitnotforthecannabistaxrevenue.ThefirstoftheseisthemostconservativesetofscenariosthatCCEAdeveloped.

PTPandMTPEmploymentImpacts:RevenuesSavedJobopportunitiesinthemarijuanaindustry,itssupplychain,andinduceddemandsfromimprovedincomesarecapturedforbothresidentsofConnecticutandnon-residents.Thisdistinctionisimportantbecausenon-residentspaytaxesinthestatebutdemandfewerstateandlocalservicesthandoresidents,aswellashavingdifferentexpenditurepatternsbylocale.Chart1illustratesgrowthinresidentialandtotalemploymentforeachofthecaseswithnoincrementalmatchingofstateandlocalgovernmentexpendituresundereachtaxsystem.Thedifferencesbetweentotalandresidentialemploymentareincrementaljobsfilledbynon-residents.

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Chart1:IncrementalJobs,ResidentialandTotal(#)

ConnecticutjobsunderPTPrisefrom1,825duringstart-upto10,459inthefifthyearofoperations.Ofthesejobs,Connecticutresidentshold1,729duringtheinitialyearofstart-uppreparationsand9,830inthefifthyearofoperations.Duringthefirsttwooperatingyears,taxesaregenerallymoreonerousunderthePTPsystemthantheMTPsystem,whileoverthelastthreeyears,theoppositeistrue.Thisexplainswhytheemploymentimpactsareslightlydissimilarbetweenthetwotaxationsystems,evenifgovernmentssaveratherthanspendtheadditionalrevenues.

RevenuesSpenttoPreserveorExpandProgramsandJobsShouldConnecticutfollowColorado’spatternandspendsomeorallofitsincrementaltaxrevenuesaccruingfromthemarijuanaindustryandtrade,jobimpactscouldbeconsiderablylarger.Chart2revealstheimplicationsofspendingallincrementalstaterevenues.

1,869

5,686

7,212

8,358 8,440

10,424

1,825

5,669

7,199

8,348 8,433

10,459

1,782

5,360

6,764

7,827 7,891

9,786

1,729

5,3456,751

7,818 7,884

9,830

'-

2,750

5,500

8,250

11,000

2021 2022 2023 2024 2025 2026

TotalJobsMixedTaxPolicy TotalJobsPercentageTaxPolicies

ResidentJobsMixedTaxPolicy ResidentJobsPercentageTaxPolicy

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Chart2:TotalJobImpactsWithandWithoutStateandLocalGovernmentMatchingExpenditures(#)

InthePTPcase,by2026therewouldbeanadditional16,002jobsintheConnecticuteconomy,wellabovethe10,459withoutmatchingspending.BecausestaterevenuesfromtheMTPcasearehigher,spendingthoserevenueshasalargernewandpreservedjobimpactthaninthePTPcase—from10,244jobsifnotspentto17,462jobswithspendingallincremental(thesumofnewandpreserved)revenues.Spendingalltheadditionalrevenueillustratestheimportanceofcommittingsomestateandlocalgovernmentexpendituresfromthoserevenuesgeneratedbyshiftingfromtheillicittolicitmarijuanatrade.Theresultsarebasedontheexpansionofgeneralgovernmentexpendituresor,morelikely,asmallercontractionofexpendituresthanwouldotherwisebenecessitatedduetofallingstaterevenueandthusbudgetcuts.Itispossibletotailorthoseexpenditurestoencouragefurthergrowthoftheeconomy.

IncomeImpactsEconomistsuseseveralmetricstomeasureincomeimpacts.GrossDomesticProduct(GDP)measureseconomicgrowthpriortodepreciation.Becauseonlythesumofthevalueaddedateachstageinthesupplychainthroughtofinalpurchaseisincluded,itavoidsdoublecounting.Itisnotaperfectmeasurebecauseenvironmentalcostsorbenefitsarefrequentlyoverlooked.Growthinpersonalincomemeasureshowindividualsinsocietyarefaring,andnetofpersonalincomepresentsameasureoftheincreasedfreedomofconsumersgeneratedbygrowth.

GDPChart3capturesincrementalimpactsoncurrent-dollarGDP.By2025,impactsintheMTPcasenearlydoublefromstateandlocalgovernmentsmatchingspendingwiththeirmarijuanatradetaxcollections.Overtime,annualGDPincreasesaredisproportionatetoemploymentbecause

1,869

5,6867,212

8,358 8,440

10,424

1,825

5,6697,199

8,348 8,433

10,459

2,111

7,238

10,242

12,87914,151

17,462

2,068

7,418

10,026

12,27913,140

16,002

'-

4,500

9,000

13,500

18,000

22,500

2021 2022 2023 2024 2025 2026

TotalJobsMixedTaxPolicyNoMatching TotalJobsPercentageTaxPoliciesNoMatchingTotalJobsMixedTaxPolicyMatching TotalJobsPercentageTaxPoliciesMatching

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ofongoinginflationandimprovinglaborproductivity.Thegainsaresignificant,reaching$953to$957millionin2026withoutmatchingand$1,574to$1,737millionwithmatchingexpenditures.Inallbutthefirstyearofoperations,withspendingoftherevenuesbythestategovernment,current-dollarannualGDPimpactsexceed$900million.BecausetheMTPraisesmoretaxesthanthepercentagetaxpolicycase,matchingspendingdeliversmoreimpactssothatthelargerGDPimpactscomefromtheMTPcaseratherthanthepercentagetaxscenario.

Chart3:GDPImpactswithandwithoutMatchingStateandLocalGovernmentExpenditures(MillionsCurrent$)

DPIBecausedisposablepersonalincome(DPI)isasubsetofpersonalincome(PI)andPIisasubsetofGDP,theirincrementsaresmallerthanthoseinGDP,andDPIissmallerthanPI,withthedifferencebeingpersonalincometaxes.Forpurposesofthisstudy,DPIistherelevantnumberbecauseitprovidesthebasisforincrementalhouseholdconsumption.IfConnecticutsavesthenewtaxrevenueinsteadofspendingit,thelegalizationofmarijuanaisprojectedtoresultinanincreaseindisposablepersonalincomeof$722to$729millionin2026dependingonthetax

DPImorethandoublesresultsfromthefirstyearofoperations.Legalizingmarijuanamethod.addsnotonlytochoicesconcerningitsconsumptionbutalsogenerallyexpandsconsumerchoicebyasmuchas0.3%in2025,inclusiveofmatchinggovernmentexpenditures. Withgovernmentusingthesefundstopreserveitsexpendituresby2026,annualDPIimpactsswellto$1,209millionto$1,340million—overabilliondollarsayearforConnecticutcitizenstoexercisefreedomofchoiceovertheirexpenditures.

$190

$497$620

$718 $708

$953

$186$496

$619$718 $707

$957

$214

$653

$932

$1,197$1,328

$1,737

$210 $671 $910 $1,134 $1,218 $1,574'-

450.0

900.0

1,350.0

1,800.0

2,250.0

2021 2022 2023 2024 2025 2026

MixedTaxPolicyNoMatching PercentageTaxPolicyNoMatching

MixedTaxPolicyMatching PercentageTaxPolicyMatching

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Chart4:DisposablePersonalIncomeImpactswithandwithoutMatchingStateandLocalGovernmentExpenditures(MillionsCurrent$)

FiscalConsiderationsAsChart5indicates,by2026legalizationofmarijuanawillgenerateadditionalincometaxesof$29to$55milliontothestatedependingonthechosentaxstructureandwhetherornotmoneygeneratedfromthosenewrevenuesarespentbygovernments.Ofthepersonalincometaxesraised,23.5%gotothestategovernmentandtheremaindergoestothefederalgovernment.

$127 $331 $432 $522 $542 $729$132

$330$431

$521 $542

$722

$142 $437 $653 $872 $1,015 $1,340$148

$449

$639

$829$936

$1,209

0

350

700

1050

1400

1750

2021 2022 2023 2024 2025 2026MixedTaxPolicyNoMatchingPercentageTaxPolicyNoMatchingMixedTaxPolicyMatchingPercentageTaxPolicyMatching

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Chart5:MarijuanaImpactsonPersonalStateIncomeTaxes(MillionsCurrent$)

Inadditiontopersonalincometaxrevenues,CCEAhasalsoestimatedincreasedsalestaxrevenuesarisingfromincrementalpersonalconsumptionandotherincrementalstatetaxesaccruingfromheightenedproductiontomeetcannabissales,4summarizedinTable5.Personalincometaxesinthistablepertaintothoseaccruingfromearningsofanexpandedlaborforceandincreasedoutputattributabletoincreasedeconomicactivity.Similarly,salestaxesexcludethosecollectedonmarijuanabutincludethemonpersonalconsumptionfromincrementalwagesbeingearnedbytheexpandedlaborforce.

4Inpreviouswork,CCEAestablishedthatratherthanputtingselecteditemsundersalestaxa3.9%rateonpersonalconsumptionwouldraiseanequalamountofrevenues,sothatratewasappliedtoincrementalpersonalconsumption,identifiedinREMItoestimatedstatesalestaxes.Thetwomainsourcesofstaterevenuesaccountfor66.6%ofrevenuesraisedbythestate,sothatinformationwasusedtoestimateincrementalstaterevenues.

$5 $13 $17 $20 $21 $30

$5

$13$17

$20 $21

$29

$6 $17 $26 $34 $39 $55

$6

$18

$25

$32$36

$49

0

15

30

45

60

2021 2022 2023 2024 2025 2026

MixedTaxPolicyNoMatchingPercentageTaxPolicyNoMatchingMixedTaxPolicyMatchingPercentageTaxPolicyMatching

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Table5:IncrementalIndirectStateRevenuesAccruingfromCannabisProduction(MillionsCurrent$)

MTP 2021 2022 2023 2024 2025 2026

Savedsurpluses

Personalincometax 5.18 13.06 16.95 20.19 20.58 29.52

Salestaxesfromadditionalconsumption 0.85 1.62 1.69 1.77 1.43 2.43

Otherstaterevenues 2.97 7.23 9.18 10.81 10.84 15.74

Totalstaterevenues 9.01 21.92 27.82 32.77 32.86 47.69

Spentsurplus

Personalincometax 5.82 17.25 25.72 34.03 39.09 54.76

Salestaxesfromadditionalconsumption 0.96 2.32 3.07 3.90 4.22 6.02

Otherstaterevenues 3.34 9.64 14.18 18.68 21.33 29.94

Totalstaterevenues 10.12 29.22 42.97 56.61 64.64 90.72

PTP

Savedsurpluses

Personalincometax 5.40 13.02 16.92 20.16 20.56 29.22

Salestaxesfromadditionalconsumption 0.80 1.62 1.68 1.76 1.42 2.49

Otherstaterevenues 3.05 7.21 9.16 10.80 10.83 15.62

Totalstaterevenues 9.25 21.86 27.76 32.72 32.81 47.33

Spentsurplus

Personalincometax 6.04 17.74 25.15 32.28 35.94 49.28

Salestaxesfromadditionalconsumption 0.91 2.41 2.97 3.62 3.74 5.34

Otherstaterevenues 3.42 9.92 13.85 17.68 19.54 26.90

Totalstaterevenues 10.37 30.07 41.97 53.59 59.22 81.52

Note:REMI-basedestimatesexcludingdirecttaxesonmarijuanagrowthandconsumption.

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CombiningtheinformationondirecttaxespaidbytheintegratedmarijuanaindustryinTable1andtheincrementalstaterevenuesestimatedinREMI,yieldstotalincrementalstaterevenuesinTable6.Whilethetaxregimesabovehavelittleimpactoncomparativeimpactspriortospendingthesurpluses,expendituresofthesurplusesdohaveanimpactbecauseinclusionofthetaxescollectedundereachtaxregimedodiffer.

Table6:IncrementalStateRevenuesAccruingDirectlyandIndirectlyfromCannabisSales(MillionsCurrent$)

2021Start-Up

2022Year1

2023Year2

2024Year3

2025Year4

2026Year5

TotalYears1-5

MTP Direct 35.20 86.70 139.10 185.10 223.10 667.60Indirectwithoutspendingsurplus

9.01 21.92 27.82 32.77 32.86 47.69 163.06

Total 9.01 57.12 114.52 171.87 217.96 270.79 830.66 Indirectw/spendingsurplus

10.12 29.22 42.97 56.61 64.64 90.72 284.15

Total 10.12 64.42 129.67 195.71 249.74 313.82 951.75

PTP Direct 47.6 88.8 130.9 166.3 187.9 621.50

Indirectwithoutspendingsurplus

9.25 21.86 27.76 32.72 32.81 47.33 162.48

Total 9.25 69.46 116.56 163.62 199.11 235.23 783.98 Indirectw/spendingsurplus

10.37 30.07 41.97 53.59 59.22 81.52 266.37

Total 10.37 77.67 130.77 184.49 225.52 269.42 887.87 Legalizingmarijuanageneratessignificantadditionalstaterevenuesannuallynomatterwhichscenarioorvariationischosen.Aggregatestaterevenueswillvarydependingonthetaxregimeadoptedandwhetherinitialsurplusesarespentorsavedtopaydebtdown.Spendingalloftheadditionalrevenueswillstimulatemoregrowth,increasingtotalemploymentandincomesinthestate.Ataminimum,inyearfiveofoperationsincrementalstaterevenueswillreach$235millionbutcouldreach$314million.

Table7containsthenetsurplusesgeneratedundereachtaxschemepriortoanydecisiontospendthem.Inthefifthyearofoperations,thesenetrevenuesreachbetween$224and$260

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million.Whenthoserevenuesarespent,annualsurplusesremainingoverandabovethedirecttaxespaidbytheindustryaregenerallypositivebutunder$4million.

Table7:StateSurpluses(MillionsCurrent$)

2021 2022 2023 2024 2025 2026

MTP

Increasedrevenues 9.01 56.92 114.12 170.87 217.96 270.79

Increasedexpenditures 1.27 3.99 6.22 8.04 8.98 10.89

Surplus 7.74 52.93 107.90 162.83 208.98 259.90

PTP

Increasedrevenues 9.25 69.46 116.56 163.62 199.11 235.23

Increasedexpenditures 1.25 3.97 6.21 8.02 8.97 10.90

Surplus 8.00 65.48 110.36 155.60 190.15 224.34

Overtheinitialstart-upyearandthefirstfiveyearsofoperations,theintegratedmarijuanaindustrywillgenerate$622to$669millionindirecttaxrevenueforthestate,dependingonthetaxregime.Addinginadditionalrevenuefrominducedandindirectactivitiesraisesaggregatestaterevenuesoverthesixyearsto$793to$840million.IfthestateeitherusesthesenewrevenuestoexpandservicesortocurtailfuturecutbacksarisingfromextraordinaryexpendituresduringCOVID-19,CCEAestimatesthetotalstaterevenueimpactsforthesesixyearswillreach$898to$962million.

ConclusionThisanalysisshowsthatlegalizationofmarijuanawilldeliversignificantbenefitstoConnecticutintermsofjobs,householdincome,andbothstateandlocalrevenues.TheanalysisisalsoconservativeasCCEAworkedonthebasisofmodestassumptionsaboutthelikelypatternofgrowth.Further,thestudydoesnotincludeotherbenefitssuchasthosethatwouldresultfrombringinganillicitbusiness,includingqualitycontroloverconsumables,withinthepurviewofthestate.InthefaceofthestaggeringdisruptiontheCOVID-19pandemichascaused,thisnewindustrywouldalsoenhancethepathtoeconomicrecovery.

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Appendix: Regional Economic Models Inc. (REMI) TheConnecticutCenterforEconomicAnalysisutilizesREMI’sgeneralequilibriummodeloftheConnecticuteconomy,PI+.Thatmodelsimulatesthecurrenteconomyagainstwhichagentsofchange,suchasthisinitiative,impactConnecticut’seconomyandgeneratepolicyinsightsthrough,realisticyear-by-yearestimatesofstatewideregionaleffects.AwiderangeofpolicyvariablesallowsCCEAtorepresentthepolicytobeevaluated,whiletheexplicitstructureinthemodelhelpstheusertointerpretthepredictedeconomicanddemographiceffects.PI+isusedbygovernmentagencies(includingmostU.S.stategovernments),consultingfirms,non-profitinstitutions,universities,andpublicutilities.ItisConnecticut’sstandardforassessingdevelopmentprojects.Modelsimulationsestimatecomprehensiveeconomicanddemographiceffectsinwide-ranginginitiatives,suchas:economicimpactanalysis;policiesandprogramsforeconomicdevelopment,infrastructure,environment,energyandnaturalresources;andstateandlocaltaxchanges.Articlesaboutthemodelequationsandresearchfindingshavebeenpublishedinprofessionalnationaljournals,includingtheAmericanEconomicReview,TheReviewofEconomicStatistics,theJournalofRegionalScience,andtheInternationalRegionalScienceReview.