The Size of the Splash

With just 10 days to go in the session, New Mexico senators are still hashing out the details of a proposal to legalize adult-use cannabis that’s passed the House. To further complicate matters, another bill, born in the Senate and with key differences, will move along to the next committee as well.

No matter which taxation strategy they land on (if they land on one), analysts have varying opinions about how much cash the new law would put into state coffers.

House Bill 12 and Senate Bill 288 had their second discussions Tuesday at the Senate Tax, Business and Transportation Committee and both received do-pass recommendations, moving next to Senate Judiciary.

While the tax committee heard three Senate bills for legalizing cannabis in late February, Sen. Daniel Ivey-Soto, D-Albuquerque, who sponsored the bill referred to as the “industry version,” removed that proposal from consideration; and Sen. Jacob Candelaria, D-Albuquerque, who backed a proposal that was substantially similar to the House-adopted measure, said he was willing to offer amendments to HB 12 rather than move forward with his measure.

The Cannabis Regulation Act envisioned by HB 12 would impose an 8% excise tax on retail sales and allow counties to impose additional excise taxes of up to 4%; gross receipts taxes from the state, cities and counties would pile on top of that (in Santa Fe it’s 8.4375%) for a combined total tax on cannabis of about 20%.

SB 288 from Sen. Cliff Pirtle, R-Roswell, has a lower tax proposal, with a maximum rate of approximately 12%. While Pirtle’s bill formerly proposed to allow counties to opt out of cannabis sales, he said at Tuesday’s hearing that provision had been removed.

The napkin math requires another big answer: How much demand exists for the product? Or in more lay terms: How much cannabis will consumers buy?

Analyst Kelly O’Donnell has been tracking that question for about five years through a demand model she first constructed with the state’s Medical Cannabis Program in mind. Her projections for sales use a national survey of drug use as well as retail performance data from southern Colorado counties that border New Mexico and demographic information about the proximity of New Mexico’s southern counties to would-be shoppers from Texas.

O’Donnell estimates New Mexico’s market for regulated adult-use cannabis at $318 million in the first full year of legalization, growing to $800 million in year four and $1.1 billion by year five.

The same rough number arrives, she explains, if one examines the size of Colorado’s market, $2.2 billion, and multiplies it by the ratio of New Mexico’s population to Colorado’s (2.1 million/5.8 million).

That puts the tax revenue at 20% in the range of $63 million in the first year, spiking to $220 million by the fifth year.

The Legislative Finance Committee, meanwhile, leveled the estimate much lower in its revised March 2 fiscal impact statement, which said the tax revenue in fiscal year 2022 would amount to $20 million and rise to $50 million by the third year.

O’Donnell says the main difference between the two is the estimated market from outside New Mexico.

“One of the differences in the analysis has been, I think, the size of the cross-border sales. I anticipate those being a very significant part of the size of the New Mexico market—just from observing what has happened in Colorado and from observing that we have this very long border with Texas, and Texas is one of the states that has not legalized and is probably not going to do so in the very near future,” she tells SFR in an interview, adding: “Some of the lower estimates that have been floating around basically downplay that potential.”

While earlier versions of HB 12 sought to earmark some of the tax revenue for specific new funds, the current version would instead leave that task for future legislatures.

The LFC report focuses on more than just revenue—it calculates that the proposal to eliminate the GRT on medical cannabis will mean a revenue loss of $9.7 million to state coffers and the Department of Health will still require about $2.75 million in salaries.

Various state agencies also told the LFC they expect cannabis legalization to increase the cost of their operations. That includes $7.6 million in required recurring revenue for licensing, rulemaking and administrative support for the new Cannabis Regulation Division; $7 million in contracts for information technology through the Taxation and Revenue Department for “verification and validation services;” and more than $1 million for the Department of Public Safety for officer training related to DWI and for 10 agents to investigate anticipated illegal cannabis growing operations.

How the illicit market will interact with the regulated one is also part of the calculation on revenue. O’Donnell says her model assumes that at the outset of regulation, illicit sales are likely to continue, but that they’ll taper off over time.

Senators on Tuesday adopted a 16-page amendment to HB 12 presented by the Regulation and Licensing Department, which would oversee the new cannabis division. One big shift is that the amendments include a provision that would allow the department to conduct an analysis and issue a temporary limit on production if an advisory board determines "that the market equilibrium is deficient and threatens the economic viability of the industry," according to RLD Superintendent Linda Trujillo.

Editor’s note: An earlier version of this story had the wrong bill number for Pirtle’s proposal. That’s been corrected.