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How cannabis is easing budget pain at city and county
Weed is a fiscal bright spot as other revenues decline.

Friday, October 23, 2020
Crain's Chicago Business
by John Pletz

Chicago and Cook County, which together account for more than a quarter of the state's recreational marijuana sales, are beginning to see some welcome tax receipts from weed at a time when other revenue sources are sputtering.

The city and county each charge the maximum 3 percent tax on recreational cannabis sales. According to the Illinois Department of Revenue, Chicago received $240,236 for July, the first month municipalities could charge the taxes. Cook County took in $495,310 because it taxes sales in Chicago as well as other parts of the county.

 

Chicago is on track to surpass its modest revenue goal of $1 million for this year by more than 40 percent. The county, whose fiscal year ends in November and which didn't budget any revenue from marijuana taxes, is on pace to ring up $2.5 million in revenue.

"That is the one industry that has done very, very well in 2020," Chicago Mayor Lori Lightfoot says.

Facing a budgetary squeeze from the coronavirus, the city and county are looking for big increases in weed tax revenue next year. Cook County expects about $14 million, and the city forecasts about $5 million.

Neither the city nor the county can afford to come up short. In a proposed $12.8 billion Chicago budget, $5 million feels like a rounding error until you consider that Lightfoot plans to bump up already unpopular taxes on gasoline and cloud-computing services to raise just $25 million.

The city could hit its goal if cannabis sales increase at the 71 percent rate predicted by New Frontier Data, a research firm based in Washington, D.C.



For Cook County to hit its target, however, marijuana sales across the county would have to rise 132 percent. Chicago-based research firm Brightfield Group says it's possible: The firm predicts the Illinois market will grow 149 percent next year.

"We anticipate the monthly value of collections to increase at a rate that is consistent with the steep monthly increases experienced in Washington and Colorado during their implementations," says Ted Nelson, a county spokesman.

Colorado's marijuana tax revenue rose 134 percent between the first and second years of legalized sales, according to New Frontier.

"We are also expecting additional retailers to be opening over the course of the next year and improved tax compliance to markedly increase cannabis revenue collections in the coming months and over the next fiscal year," Nelson adds.

Cook County has room to grow. Despite having 40 percent of Illinois' population, it had just 27 percent of $60 million in statewide marijuana sales in July. The state doesn't break out numbers for other counties or cities.

Half the retail licenses issued this year were outside the Chicago area, including several in border towns that have seen high traffic volumes. About one-fourth of weed sales come from buyers with out-of-state IDs, according to the Illinois Department of Financial & Professional Regulation.

One of the city's established stores, Mission, was still closed in July from looting. Elsewhere in the county, several large stores in Schaumburg, Skokie and Northbrook have opened since July.

"As more places open, we'll probably see that number even out," says Alyssa Jank, manager of cannabis research at Brightfield.

Overall, marijuana sales in Illinois have been stronger than expected, rising from an average of about $37 million per month in the first quarter to $64 million in the third. Marijuana shops were deemed essential businesses during the initial coronavirus lockdowns, allowing them to stay open.

It's a solid bet that weed sales in Illinois will keep growing, says John Kagia of New Frontier. "New markets always see strong growth."

But there are potential risks ahead, he says.

"Shelter in place and work from home have been positive for retail sales. But it's possible we haven't seen full effects of the COVID recession. We think cannabis is recession proof. An acute recession might not impact overall demand, but it could impact where dollars are spent. If we see major markets turn—a contraction like we saw in 2008—it might push (customers) to lower-priced products or to the illicit markets. That would mean lower revenue."

Lower revenue for licensed retailers would reduce tax receipts for governments. Taxes on weed in Chicago are among the nation's highest at 41 percent, including about 31 percent by the state.

Sen. Jason Barickman, a Republican from downstate Bloomington who criticized some aspects of the state's recreational-marijuana law, argues that lower taxes could increase overall sales. "There's an absolute opportunity to attract more illicit buyers into the regulated market," he says. "If we comprehensively try to reduce the tax burden that exists, I think we'll see an immediate reaction from the marketplace. We could move more of those buyers to the regulated market."




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