Legal recreational marijuana sales may raise hundreds of millions of tax dollars for Illinois within five years but the nascent industry isn’t likely to deliver enough of a windfall to solve the budget woes of the worst-rated U.S. state.
Starting Jan. 1, adults who are 21 and older can purchase cannabis as Illinois becomes the 11th state to legalize recreational pot. With nearly 13 million residents and more than 100 million tourists a year, the state will be the largest adult-use market in the Midwest and annual sales could reach $4 billion when the market matures, according to Cresco Labs Inc., the largest cannabis operator by capacity in the state.
The growing industry arrives as Illinois faces $6.7 billion of unpaid bills and $137 billion of pension debt. Tax collections on legal pot are forecast to jump from $34 million in the coming year to $375.5 million in 2024, according to the Illinois Department of Revenue.
Still, rating companies and watchdog groups caution that the revenue can be uncertain. Supply constraints, a persistent illegal market and a patchwork of localities restricting sales may slow development.
“Illinois has had a bad history of claiming various legalization of vices -- video gaming, marijuana or casino expansion -- would provide significant financial windfall,” said Laurence Msall, president of the Civic Federation, a watchdog group that analyzes government finances. “What we have seen is sin taxes are traditionally unreliable sources of revenue.”
Illinois was wise not to use cannabis taxes to balance its fiscal 2020 budget, Msall said. Lack of data on use, demand, price and length of time until market maturity make revenue difficult to project, according to a Civic Federation report released Thursday.
State and local governments should “budget conservatively for cannabis revenues and prepare for much volatility,” according to the report.
Governor J.B. Pritzker, who made legalization a key platform during his campaign, will deliver his second budget address on Feb. 19.
The experience of places like California, which fell short of its initial tax collection forecast for pot sales, suggests that the revenue shouldn’t be relied on as a key fiscal source, said Eric Kim, a Fitch Ratings analyst.
“This is not going to be what saves the state’s budget,” Kim said.