The Economic Contribution of Arizona s Regulated Medical Marijuana Dispensary Industry. Timothy D. Hogan, Ph.D. March 19, 2013

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1 The Economic Contribution of Arizona s Regulated Medical Marijuana Dispensary Industry Timothy D. Hogan, Ph.D. March 19, 2013 This report summarizes an analysis of the economic contribution to the Arizona economy of the system of regulated medical marijuana dispensaries that are being established as part of the Arizona Medical Marijuana Program. The analysis was undertaken at the request of the Regulated Dispensaries of Arizona Association. The analysis examines the economic contribution of a mature statewide system of dispensaries, which is assumed to occur by All figures in the report are in terms of current 2013 dollars. The key findings of the analysis are: When the industry reaches maturity, the regulated dispensaries will directly employ more than 1,500 Arizona workers and provide $74 million in income to employee households. The operations of the system of regulated dispensaries will generate $990 million in economic activity, a total of 6,500 jobs across the State and, $315 million in income to Arizona households. The regulated dispensaries will directly contribute more than $36 million per year in sales tax revenues to the State and local governments across Arizona. In addition, the economic activity supported by the dispensaries operations will generate another $43 million per year in tax/license revenues for Arizona state and local governments. The construction and setting up of the regulated dispensaries and associated cultivation facilities will have a one-time economic impact of $81 million for the Arizona economy and will produce nearly $6 million in state and local tax revenues. The Regulated Dispensary Industry in Arizona In November 2010, voters passed the Arizona Medical Marijuana Act. The Act allows for qualifying patients to apply for registry identification cards to obtain medical marijuana for certain debilitating medical conditions. Qualifying patients may obtain medical marijuana from their caregiver, other qualifying patients, or a nonprofit medical marijuana dispensary. With permission from ADHS, qualifying patients or their caregivers may cultivate marijuana if the patient lives more than 25 miles from a dispensary. Arizona s non-profit medical marijuana dispensaries are entities that acquire, possess, cultivate, manufacture, deliver, transfer, transport, supply, sell, and dispense medical marijuana. In order to operate, a dispensary must have a Dispensary Registration Certificate and Approval to Operate from The Arizona Department of Health Services. By law, the maximum number of dispensaries in the State is 126. For the first year of the initial allocation process (2012), dispensary registration certificates were issued based on one dispensary per Community Health Analysis Area (CHAA). If there was more than one dispensary registration certificate application for a CHAA that was complete and in compliance, ADHS issued dispensary registration certificates using a random selection process. The first dispensaries began 1

2 operation in 2012, and it is anticipated that at maturity, there will be about 112 dispensaries statewide one in each CHAA not part of one of Arizona s Native American Reservations.. Direct Economic Impacts The direct economic contributions of the regulated dispensary industry to the Arizona economy will be jobs for Arizona workers, wages and salaries paid to those workers, goods and services purchased by the dispensaries from other Arizona businesses, and taxes and other payments to Arizona state and local governments. In 2016, when the population of qualifying patients eligible to participate in the Arizona Medical Marijuana Program has stabilized and the statewide system of 112 regulated dispensaries has been established, the number of qualifying patients statewide will be approximately 105,000 and total medical marijuana sales in the range of $440 million per year. Focusing initially on the jobs created for Arizona workers and income paid to Arizona households, the regulated dispensaries and their associated cultivation facilities will provide more than 1,500 FTE jobs and pay out $74 million per year in wages and salaries. Indirect Economic Impacts The operations of a system of regulated dispensaries with annual revenues of $440 million will induce substantial additional business activity and employment in the Arizona economy. These indirect impacts will first appear in those sectors supplying goods and services directly to the dispensaries and selling consumer goods and services to employee households. But, over time, the process of re-spending will produce additional demand for other goods and services, demand for additional workers, and additional earnings for local households throughout the State. The induced impacts of these direct expenditures (often referred to as multiplier effects ) have been calculated using the IMPLAN model. The model is widely used for regional economic impact analysis. The IMPLAN model used for this analysis is based on Arizona-specific data and provides estimates of the statewide economic impacts of the dispensary industry. Overall Economic Impacts Accounting for all the direct impacts plus the induced or multiplier effects, it is estimated that the annual operations of the statewide system of regulated dispensaries will support 6,500 jobs for Arizona workers, $315 million in income payments to Arizona households, and $990 million in overall economic activity in the Arizona economy. State and Local Government Revenues An important economic contribution of the regulated dispensary industry is the millions in tax/license revenues paid by the dispensaries to the State and to local governments in Arizona. The operations of the statewide system of dispensaries will generate $36 million per year in direct sales tax revenues and $870,000 per year in payments to the State for dispensary license and dispensary agent cards. 2

3 In addition to the direct sale taxes, other state and local taxes paid by the dispensaries, the state and local taxes paid by their employees, and all the tax revenues generated by the incremental economic activity generated by the dispensaries operations will total $42 million per year. Accounting for both the direct sales tax payments plus all of the other state and local taxes generated by the industry operations, the system of regulated dispensaries will provide a total of $79 million per year in tax/license revenues to Arizona state and local governments. Charitable Contributions by the Arizona Not-for-Profit Regulated Dispensary Industry Regulated dispensaries in Arizona are required to operate on a not-for-profit basis. Net revenues from their operation must be distributed in a manner that maintains their nonprofit character. This provision of the rules governing the industry implies that regulated dispensaries may provide substantial contributions to the charitable/nonprofit organizations in Arizona. For example, for every one percent that total revenues exceed total expenses across the entire industry, $4.4 million per year will be generated. The One-Time Economic Impact of the Construction, Equipment, and Other Expenditures Associated with the Establishment of the Regulated Dispensaries in Arizona In addition to the ongoing economic contributions of the regulated dispensary industry, the process of setting up a statewide system of dispensaries will also produce substantial one-time economic impacts. The construction and setting up of the dispensaries and their associated cultivation facilities will generate $42 million in spending on construction and purchases of equipment and other goods and services. These one-time expenditures will induce additional business activity and employment. The economic impacts of the construction/set up expenditures have been calculated using the IMPLAN model. Accounting for all the direct impacts plus the induced or multiplier effects, it is estimated that the construction/set up of the statewide system of dispensaries will create total additional economic activity of $81 million, 600 person-years of employment over the period, and nearly $6 million in state and local tax revenues. 3

4 METHODOLOGY The analysis is based primarily on information on the regulated dispensary business provided by the client, supplemented by data compiled from public sources. Data Assumptions 1. It is assumed that the statewide system of dispensaries will be operating by the end of However, all dollar-based figures are reported in terms of 2013 levels. Currently, seven dispensaries are operating in Arizona with approximately 50 expected to be in operation by August. 2. The estimate of total annual sales of medical marijuana is based on a population of qualified patients of approximately 105,000 in This estimate is predicated on an incidence of 2 percent of the State s adult (18+) population in 2016 (using the most recent official state population projections). The 2 percent rate is a conservative estimate based on analysis of the medical marijuana programs in Colorado and Oregon the two states with established programs most similar to Arizona s. In Oregon, the patient population is about 1.9 percent of the adult population, and it is 2.5 percent of the adult population in Colorado. 3. Average sales/qualified patient - $350/month. 4. A statewide system of 112 dispensaries and 50 associated cultivation facilities. 5. Average staffing levels of 10 FTE per dispensary and 8 FTE per cultivation facility. 6. Average pay levels of $80,000/year for management personnel and $15/hour for other employees. 7. Compensation of medical director position of $24,000/year per dispensary. Payments are included as part of dispensary payroll in the calculations, but the directors are not counted as dispensary employees. State and Local Tax/License Revenues 1. Direct sales taxes are calculated based on an 8.2 percent tax rate. This is the statewide average rate as computed by the Tax Foundation, excluding the extra 1 percent levy that expires in Annual license revenues are calculated in terms of $1,000 per dispensary and $500/year per employee as specified in current ADHS regulations. 3. Other state and local taxes resulting from the operations of the dispensaries, income earned by dispensary employees/medical directors, and induced economic activity are estimated based on measures of state and local taxes per $ of Gross State Product, as calculated from the latest available data from the U.S Census Bureau, State and Local Government Finances Database (FY2010) and the U.S. Bureau of Economic Analysis. IMPLAN Model The induced impacts (often referred to as multiplier effects ) were calculated using an Arizona-specific version of the IMPLAN model. The IMPLAN model was originally developed by the University of Minnesota and is now updated and maintained by the Minnesota IMPLAN Group, Inc. 4

5 ABOUT THE AUTHOR Timothy D. Hogan is Professor Emeritus of Economics and Senior Research Associate in the L. William Seidman Research Institute in the W. P. Carey School of Business at Arizona State University. He received B.A. and M.A. degrees in Economics from the University of California and his Ph.D. degree in Economics from Virginia Polytechnic Institute and State University. He joined the faculty at Arizona State University in 1970 and retired in Dr. Hogan served as Director of the L. William Seidman Research Institute from 1995 to 2004 and of the ASU Center for Business Research from 1987 to Dr. Hogan s research focuses on applied economic and demographic analysis. He served as principal investigator/ project director/co-investigator on numerous funded research projects for a wide variety of sponsors, including the National Science Foundation, the U.S. Department of Housing and Urban Development, the U.S. Forest Service, the U.S. Department of Transportation, the Indian Health Service, the Arizona-Sonora Commission, the Arizona Governor s Office, the Arizona Legislature, the Arizona Department of Commerce, the Arizona Department of Economic Security, the Arizona Department of Corrections, the Arizona Department of Mines and Mineral Resources, the Arizona Office of Tourism, Maricopa County, Maricopa Association of Governments, Central Arizona Association of Governments, the City of Phoenix, Tempe Elementary School District, the Pew Foundation, Intel, Boeing, Raytheon, Alleghany Energy, Sempra Energy, Allied Signal, Ft. Howard Paper, Salt River Project, Phoenix Newspapers Inc. and the Arizona Hospital and Healthcare Association. He has also served as a consultant for both private and public sector clients on a wide variety of issues. Dr. Hogan has published numerous professional articles and monographs, with his most recent academic research focused on regional economic development, public finance, seasonal migration, and the economics of aging. 5