Analysis: Potential Commercial Cannabis Demand, Sales and Tax Revenue in Vermont
By Andrew Livingston
Aug 12, 2020
The following is an excerpt of a report produced by Vicente Sederberg LLP and published by the Vermont Coalition to Regulate Marijuana. It examines the demand and potential tax revenue associated with S.54, the Vermont bill to regulate and tax cannabis sales. If you're interested in economic analysis or market research, contact us to find out what our team can do for you.
After successfully legalizing possession and cultivation of cannabis for adults 21 and older in 2018, reform advocates in Vermont are working to finish what they started by passing S.54, a bill to regulate and tax cannabis sales.
In considering S.54, which passed the House and Senate in different versions, Vermont policymakers and community stakeholders have an opportunity to establish a commercial licensing and regulatory system for adult-use cannabis. While cannabis is already legal in the Green Mountain State, Vermont will not collect new revenue without a system for taxation and regulated sales. Moreover, the state is facing over $570 million in pandemic-related budget losses through fiscal year 2021, and without federal support and new sources of revenue, community services will likely be reduced. If S.54 were to pass this year — and revisions are made to allow cannabis produced by existing hemp cultivators and medical dispensaries to be sold for adult use beginning in 2021 — this analysis projects the ability to generate over $175 million in cannabis sales taxes through 2025.
Projected Vermont Regulated Adult-use Sales and Tax Revenue (combined total sales and revenue by calendar year through 2025)
While the decision to legalize cannabis sales involves public health and criminal justice considerations beyond tax revenue, Vermont is somewhat unique in that cannabis is already legal. The question is not whether to legalize cannabis or allow for its personal cultivation and use; rather, the question posed by S.54 is exactly how to regulate commercial cannabis and what tax rate and structure to establish. Although this paper does not opine on the optimal regulatory or licensing systems, it does seek to assist policymakers and stakeholders in quantifying Vermont’s cannabis demand and the revenue it could generate. Given the current recession, economic job losses, and need for additional state revenues, this model estimates cannabis sales and taxes assuming a regulatory system that prioritizes licensing an adequate number of cultivators and retailers statewide, and early-start sales by hemp and medical operators to transition existing cannabis consumers to regulated storefronts.
This analysis utilizes a multifaceted demand model to calculate total cannabis demand, regulated sales, and taxes over each of the next five years in Vermont. Because consumption frequency and the likelihood to patronize regulated stores differs for each cannabis consumer group, each cohort is assessed independently. In total, this analysis considers Vermont resident cannabis consumers, Vermont medical cannabis patients, cannabis-consuming Vermont tourists, and consumers living in border states. Demand from medical cannabis patients is subtracted from resident consumer demand as this analysis only considers potential sales and revenue from a regulated adult-use market.
To calculate cannabis consumer demand and sales, the report incorporates data from multiple governmental and peer-reviewed sources including:
- County-level population and age data from the U.S. Census Bureau’s American Community Survey;
- Past-month cannabis consumption statistics and intra-past-month use frequency data from the National Survey on Drug Use and Health (NSDUH);
- Cannabis use underreporting estimates from the RAND Drug Policy Research Center;
- Peer-reviewed research on consumption volume per use day published in the International Journal of Drug Policy;
- Patient information from the Vermont Department of Public Safety Marijuana Registry;
- Benchmark reports from the Vermont Department of Tourism and Marketing;
- Tourist usage data from the 2017 “Market Size and Demand for Marijuana in Colorado,” prepared for the Colorado Department of Revenue;
- Regulated market capture estimates in other states from MPG Consulting, RAND Drug Policy Research Center, and The Boston Globe; and
- Peer-reviewed behavioral economic research on consumer substitution between legal and illegal cannabis published in Addiction.
To project total demand, the model assesses the applicable number of cannabis consumers in each group and then determines their frequency and volume of consumption. Due to limitations in reporting of federal cannabis use data, this model uses methods and assumptions pioneered in previous state-funded and peer-reviewed analyses. Specifically, total consumption and expenditures are determined in pounds of flower equivalent rather than by individually assessing demand for cannabis flower, joints, concentrates, vaporizer pens, edibles, and topical products. These volume-based demand estimates are then converted to total sales by applying a dollars-per-pound value for cannabis sold at retail.
Vermont Regulated Market Demand (pounds per year by consumer group)
As has been demonstrated in other adult-use states, Vermont’s cannabis market will change considerably during the first few years of sales. Growth is projected to come from existing consumers transitioning to legal stores rather than new individuals becoming regular consumers. As new dispensaries open and product supply expands more, consumers will patronize regulated storefronts. This change in consumer behavior will increase “regulated market capture” and the growth of Vermont’s legal cannabis sales. Regulated market capture is defined as the percentage of potential cannabis demand from a specific consumer group that is purchased from licensed, adult-use storefronts.
In addition to changes in regulated market capture, competition will influence the price of legal cannabis. Both wholesale and retail prices will decline as additional storefront locations open and cultivated canopy increases. While this model projects price declines in line with other adult-use markets during the first few years, it predicts Vermont’s small-town rural dynamic will prevent the same degree of retail price competition witnessed in cities like Denver and Seattle.
Vermont Regulated Cannabis Sales (per year by consumer group)
While this model projects greater taxes than the estimates put forward by the Vermont Joint Fiscal Office, their estimates appear to be lower because older data was used to estimate consumer use patterns. Based on the most current analysis of cannabis consumption frequency, average past-month consumers in Vermont are estimated to use approximately 12.02 ounces per year. The state report took older estimates from Colorado, Oregon, and Washington and assumed consumption of five to six ounces per year.
In addition, the Joint Fiscal Office report does not appear to consider border consumers who are likely to contribute significantly to sales in Vermont during the initial years before their states license and open cannabis stores in their own communities.
In total, this analysis projects just under $1 billion in legal cannabis sales and over $175 million in taxes during the first five years of operations. To achieve these sales and taxes, Vermont legislators would need to expedite licensing to start adult-use sales in 2021. Existing medical operators could be provided the ability to begin early adult-use sales of flower as the state establishes licensing for new entrepreneurs. A similar structure has been implemented in Illinois, Nevada, and Oregon, enabling each state to collect millions in taxes during the first year of legalization. To lessen supply constraints during the period of early-start sales, local Vermont hemp permittees could be licensed to cultivate a small quantity of adult-use cannabis for sale to existing medical operators. Although Vermont is small in both size and population, tourism — along with border consumers from New York and New Hampshire — would allow the Green Mountain State to generate significant tax revenue and economic activity from legal cannabis.
Projected Vermont Regulated Adult-use Sales and Tax Revenue - Combined total sales and revenue through 2025
View the full report published by the Vermont Coalition to Regulate Marijuana.
Vicente Sederberg's Economics & Research Department has been developing detailed models to understand cannabis market dynamics since well before the nation's first legal adult cannabis sales. Our team members have spent years researching and shaping medical and adult-use cannabis markets in the U.S. and internationally, earning VS a reputation as a go-to source for businesses, trade associations, governments, and media members seeking reliable information and analysis. If you're interested in economic analysis or market research, contact us to find out what our team can do for you.