Marijuana and sports betting. Both issues have received lip service in the run-up to the November election in Texas. But how much revenue could Texans expect from each?
Both represent solutions to social concerns
Candidates like Beto O’Rourke have presented recreational pot and, to a lesser extent, sports betting as plausible solutions to calls for reform.
An education fund, property tax reductions, health insurance relief–all of these potential social reforms could be aided by revenue from both sports betting and recreational marijuana.
So, in a state that passed a $251.5 billion budget in February for the next two years, what could Texas residents expect in tax revenue from both sports betting and recreational marijuana?
Caveats and limiting factors
Social pressures around “vices” vary greatly by state. Often, states with similar populations produce widely-different tax revenue, making a narrow projection difficult.
For example, Arizona and Washington have similar populations, but Washington produces nearly four times as much tax revenue from recreational marijuana as Arizona.
Partly, this is because a progressive state like Washington fosters a positive public image around marijuana. In contrast, Arizona, a conservative-leaning state, maintains a less-favorable image of pot.
Tax rates in these two states reflect opposite ends of the taxation spectrum as well. Arizona places a 16% excise tax on recreational marijuana, which is average. Washington levies a whopping 37% tax, the highest in the country.
Adam Hoffer, director of excise tax policy at the Tax Foundation, spoke with PlayTexas about projecting marijuana tax revenue.
“Projecting tax revenue based on per capita dollars is useful when extrapolating to other states. Obviously, the tax collections will vary based on the local demand and the tax rate. A well-designed tax would raise around $20 per capita, though some greedy legislators could easily get two to three times that revenue from punitive rates that are set too high.”
Our projection will base its total on a $20 per capita number to capture a fair and plausible revenue value for the state.
Sports betting, much like marijuana, receives varied public support. The sports and gambling landscape in the state (if any) contribute greatly to this, as does ease of use of the market.
Texas’ stringent anti-gambling laws and lack of any current legal sports betting options create a challenge when developing a sound projection.
As such, our projection will be based on an EKG study cited by the Sports Betting Alliance, which calculated the handle (total money spent on sports betting) taken in by offshore books in 2021 as its baseline for determining legal sports betting tax revenue.
PlayTexas acknowledges that projecting based around an illegal market has its limitations. One of them being that naturally more people would bet if sports betting were legal. Despite that, we believe offshore revenue will provide Texans with a sense of what the low end of the tax revenue threshold could be.
Recreational marijuana tax revenue projections
Legal recreational marijuana sales may still be a few years away in The Lone Star State. However, if O’Rourke wins the governorship, that timeframe could be shortened. Still, the highly-conservative Texas Senate will play the largest part in deciding the fate of recreational marijuana.
For the sake of comparison though, we will assume marijuana is legalized and launched in 2025. We chose this date as it is the earliest possible year Texans could expect both legal recreational marijuana and sports betting to launch.
Using the Centers for Disease Control & Prevention’s population tracker tool, Texas’s projected population for 2024 will be roughly 30.8 million people.
By factoring in $20 per capita revenue for recreational marijuana use, Texans could expect marijuana tax revenue in the neighborhood of $616 million in its first year.
That total assumes a Jan. 1, 2025, launch.
Sports betting tax revenue projections
Sports betting legislation has a better chance of passing through the Texas Senate and landing on the 2023 ballot.
Our projection will also assume a Jan. 1, 2025, launch date.
The EKG study data found that the offshore handle in 2021 stood at $5 billion. The study expects that number to rise to $8.7 billion in 2022.
By 2025, the illegal market alone could be over $14 billion.
Using the above handle data, factoring in a 7.3% hold (the national average), and applying a 10% tax rate (in line with what current Texas sports betting legislation stipulates), Texans can expect sports betting tax revenue in 2025 to be between $105-$120 million, as a low estimate.
Marijuana revenue is massive
A glance at the totals shows that legal recreational marijuana has a greater fiscal impact than sports betting.
- Legal marijuana annual tax revenue: $616 million
- Sports betting annual tax revenue: $105-$120 million
In Texas, that comes out to roughly 560% more tax revenue for legal marijuana than sports betting. In states like Colorado and Michigan with established sports betting and recreational marijuana markets, that number is even higher.
Not quite a drop in the bucket
While Texas can expect sports betting and marijuana tax revenue in the high hundred millions, the state’s $251.5 billion budget puts it into perspective.
Marijuana and sports betting revenue can surely ease some financial burdens. Take public education as a possible funding outlet. In 2021, in response to learning loss from the pandemic, the state allocated $11.2 billion in federal funds to public education.
Even if every penny of tax revenue from sports betting and recreational marijuana were funneled into education, it would only amount to 6% of what the state provided via federal funding in 2021 dollars.
While not insignificant, it gives an idea of just what people mean when they say “everything’s bigger in Texas.”
The addition of these two new revenue streams is certainly not a drop in the bucket. Politicians, like state Comptroller Glenn Hegar, who have used this excuse to argue against legalization, are clearly posturing. However, Texans should see these totals in context to set appropriate expectations for how their tax money works.