The coming of 2017 will bring many changes to the nation, including dropping cannabis costs in states that have legalized a recreational market. This news may be cheered by cannabis users, but it heralds the beginning of an enduring budgetary concern for states that tax legal marijuana sales based entirely cost.

The rationale is illustrated by new data from one legalization state. Colorado’s Department of Revenue uses this info to compute the value of the state’s 15% tax on weed generation and determines the going price for cannabis every six months. The progression of cannabis prices over time in Colorado absolutely parallels the pattern in Washington after that state legalized: Prices briefly spiked as a result of first supply deficits, but then started falling as the cannabis industry grown and developed. Wholesale costs in Colorado tumbled 24.5% over the previous year to $1,471 per pound.

The noticeable descent of post- legalization prices was called by the majority of marijuana policy specialists. Nothing increases the cost of a commodity like making its production, use and sale prohibited, and that’s the reason why a simple-to-grow plant like cannabis managed to control wholesale prices of $5,000/pound or more under prohibition. However, as a walk down the aisle of your neighborhood grocery store will convince you, plant products that are legal – be they almonds, corn, allspice or red roses – don’t sell for anything near that sum, and legalized pot won’t either. Truly some analysts believe that after a fully developed legal marketplace is set up, the natural wholesale area for marijuana could drop to less than $50 a pound.

Colorado, like Washington, Oregon, Nevada, Massachusetts and Maine, taxes marijuana as a percentage of the drug’s price. For these six states, slumping prices translate automatically into slumping tax revenue per sale. In Colorado’s scenario, the 24.5% fall in marijuana’s price brings the sum of tax per unit of marijuana down by precisely the same percentage. The state will begin 2017 evaluating a tax of just 15 cents per typical-sized joint. The state’s tax revenue per unit of marijuana sold is definitely going to be lower in 2018 and still lower after that, even if wholesale costs fall much less than what most analysts project in the forthcoming years.

This places Colorado along with the other states with price-linked taxes in a bind. The only way to accumulate the same quantity of revenue from year to year when taxes collected per sold unit are rapidly declining is to have significantly increased sales volume. For instance, in the case of Colorado, unless the state’s quantity of consumption increases by 1/3 in 2017, it will take in less marijuana tax revenue than it did the past year. With each succeeding fall in cannabis prices, another compensating upsurge in consumption would be required to prevent tax revenue from withering.

However an explosion in the population’s marijuana consumption could incur other costs, such as more auto accidents by motorists that are stoned, a rise in heavy cannabis users dropping out of school, and so forth. It will by definition lose tax revenue, possibly making the recreational pot system unable to cover its own regulatory costs in case the state embraces measures to cut soaring consumption. This will definitely infuriate voters who presumed legalization wouldn’t just cover business regulation but would likewise finance schools, health-care programs and so on.

This dilemma is avoided by two states with legal recreational marijuana. Cannabis is taxed by Alaska at $50 per ounce irrespective of its present price. California determines both a sales tax predicated on price|cost along with a grower tax that, like Alaska’s, is a flat sum per ounce. By coupling a price-based sales tax with an invariant tax per ounce on growers, California puts a strong floor under its cannabis tax revenue no matter how far weed’s price drops.

The six legalization states with taxes based completely on marijuana’s price have political and financial challenges ahead of them. Any other states that legalize would be a good idea to contemplate what cannabis specialist Pat Oglesby calls California’s “belt and suspenders” strategy to marijuana tax, which insulates a state from the danger of needing to subsidize an industry whose formation was designed to alleviate taxpayer’s burden instead of increase it.