Connecticut never recovered from the Great Recession. Employment recovery stopped 17,000 jobs shy of its previous peak; the value of gross state output (GSP, similar to national GDP) fell for years, contracting 9.1%, before a modest recovery. In February 2020 it was still about six percent below its previous peak. In sum, Connecticut had the worst economic performance of any state.
That dismal record translated into increasing fiscal challenges. Even the latest revenue projections for OPM and OFA, which rely on optimistic growth assumptions, an unrealistic assumption of no growth in discretionary expenditures, and full use of a now robust rainy-day fund anticipate massive deficits beyond FY 24. No credible set of tax reforms or expenditure adjustments will by themselves meet the fiscal challenges: Connecticut must chart a new trajectory.
Legalizing recreational marijuana would contribute significantly to creating that positive path.
UConn’s Connecticut Center for Economic Analysis (CCEA) which I direct, has completed a dynamic economic analysis of how legalization would drive significant job creation, net new growth in state GSP, and additional tax revenue in the hundreds of millions over the first six years following legalization —one year for startup, then five years of operation.
The CCEA study looked at various possible tax rates and how the state could utilize the new revenues. Depending on those tax rates and how the state spends or saves the new revenues, the analysis projected job preservation and creation in the range 5,669-7,418 in the first year of operation, 10,424-17,462 in year five. This includes direct employment with growers, processors, and retailers, as well as indirect jobs for lawyers, accountants, construction, security, logistics, and other necessary collaborating businesses, and then induced employment from expanded demand in the state for goods and services those direct and indirect jobs drive. Measured in terms of the growth in GSP, the analysis projects an added $1.7 billion by year five of operation.
Of critical consideration is how legalization will help cut projected future deficits. New tax revenues from legalized cannabis would range from $784 million to $952 million over the course of five years. In year five alone, Connecticut can anticipate $188 to $223 million in direct cannabis tax revenues, in addition to $21 million in local taxes. In aggregate, total new venues could approach $1 billion.
The CCEA study considered two tax systems to establish a range of likely economic impacts and fiscal outcomes: a mixed tax policy based on Gov. Lamont’s 2020 legalization bill and an alternate, percentage tax policy. Gov. Lamont’s bill proposes a $1.25 per gram tax on cannabis flower, along with the state’s standard 6.35% sales taxes, and a 3% local tax. The alternative percentage-based tax would total 29.35% at the point of sale, including the 3% local tax. Both proposed tax rates are within the range imposed by other states. Washington state cannabis taxes total 43.5%, excluding local taxes; neighboring Oregon imposes 20%. CCEA projected growth in sales using Colorado’s growth rate, adjusted for Connecticut’s population.
CCEA then considered two scenarios of how the State utilizes the new tax revenues to project possible outcomes. The first assumed the State chooses to save all new revenues, spending nothing on new state services or maintenance of current services, thus minimizing impacts in employment and GSP. The second assumes the state chooses to spend all new revenues on expanded state services or for preserving services that would otherwise be cut, thereby maximizing economic impacts. CCEA then used the dynamic REMI state economic model—since 1993, the accepted standard in Connecticut—to generate the range of employment, GSP, and revenue impacts over first six years from legalization.
The CCEA analysis reveals that no matter which tax regime the State chooses or how the State uses the new revenues, legalization will generate significant job creation, strong growth in GSP, and hundreds of millions in new tax revenues.
When weighing the pros and cons of legalization, lawmakers must be alert to the critical importance of changing Connecticut’s economy trajectory, a change legalization would help drive. Given the rapidity with which other states are now legalizing recreational marijuana, moving now would give the state the opportunity to capture these benefits and even position itself to be competitive when national legalization comes, as has already happened in Canada.
Fred Carstensen is a Professor of Finance and Economics and Director of the Connecticut Center for Economic Analysis at the UConn School of Business.