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How much green would recreational cannabis bring?

Verdes customer service representative Andrea Chavez loads vials of product into drawers as she restocks the dispensary before the start of business Tuesday. (Jim Thompson/Albuquerque Journal)

ALBUQUERQUE, N.M. — During a legislative session where funds are expected to be at a premium, state lawmakers may look seriously at raising revenue through a controversial source: recreational cannabis.

However, lawmakers and industry advocates disagree on just how much the industry might bring to New Mexico. Some see a potential windfall for a state looking to diversify its economy, an industry that could generate up to $800 million in sales annually.

Cannabis at an R. Greenleaf & Associates facility in Southeast Albuquerque. (Roberto E. Rosales/Albuquerque Journal)

“No other state in the entire country is better postured, better positioned to succeed at legalization than New Mexico,” said Duke Rodriguez, founder of Ultra Health, the largest chain of dispensaries in the state.

But putting a price tag on a long-illegal industry is notoriously difficult, and some lawmakers – including Sen. Bill Tallman, D-Albuquerque – are concerned that the industry may produce less revenue than expected, while requiring funding for education, enforcement and other challenges that come along with legalization.

“I get a little bothered by people who promote this thing as a revenue generator,” Tallman said.

Seeing green

Proposals to legalize cannabis for recreational use have stalled in the state Senate in the past two years, but advocates of a recreational program are more hopeful this time around, partly because of the money and jobs such a program could generate.

Sales of recreational cannabis have grown quickly in states that have opted to legalize, but those states have found it challenging to project how much revenue the industry would generate.

A 2019 report from the Pew Charitable Trusts notes it can be challenging to determine a potential user base, given how unreliable surveys can be when measuring illicit drug use. Projecting how many users will transition to the recreational market from the black market can be challenging as well.

Kelly O’Donnell, an economist and research professor with the University of New Mexico’s School of Public Administration, began estimating a few years ago how much money an adult-use program could generate in New Mexico. Looking at the state’s 21-and-over population in conjunction with data from the National Survey on Drug Use and Health, she came up with an estimate of around $600 million in sales at the time.

“It’s a pretty standard good in terms of production cost and economies of scale,” O’Donnell told the Journal.

However, O’Donnell said she now believes she underestimated, thanks to a growing recognition of the importance of cross-border sales from Texans and a huge spike in sales in recreational markets in 2020.

O’Donnell said she now believes that if New Mexico were to legalize cannabis, a mature, properly regulated market could generate between $650 million and $850 million in sales annually. This, in turn, could generate around 15,000 full- and part-time jobs in areas ranging from agriculture to sales.

“I think, across the board, states have underestimated what this market is going to look like,” O’Donnell said.

While transporting cannabis across state lines remains illegal under federal law, Rodriguez and O’Donnell agreed that Texans would likely make up a significant customer base for New Mexico recreational cannabis.

Rodriguez said that Texas has more adults living within 200 miles of the New Mexico border than New Mexico has adults statewide and that visitors could account for around 40% of a potential market for New Mexico cannabis.

“Think about those Texans who spend their money in Angel Fire, in Red River, in Ruidoso, in Silver City,” Rodriguez said. “It isn’t about advocating illegal interstate transport of cannabis; it’s about buying, enjoying and spending money in New Mexico.”

Additionally, sales of recreational cannabis have spiked this year in states with established legal markets, as lockdowns associated with the pandemic have changed consumption patterns and made it more difficult to access black-market or cross-border supply.

Oregon, which legalized cannabis for recreational use in 2014, exceeded $1 billion in sales for the first time in 2020.

Thanks to a record-breaking summer, Colorado is on pace to exceed $2 billion in sales.

Officials in both states were reluctant to attribute the spike exclusively to the pandemic and said they hope the growth will continue once the virus abates.

Adjusting Colorado’s projected market for New Mexico’s population could produce sales of around $800 million in the Land of Enchantment, Rodriguez said.

“This is not going to be a purely localized success,” Rodriguez said. “I think it’s going to be a broader, statewide kind of impact.”

What to watch for

However, these numbers come with caveats. O’Donnell said such projections don’t factor in what figures to be a lengthy ramp-up period to make sure New Mexico has enough cannabis to satisfy both the medical and recreational markets.

Rodriguez and O’Donnell also agreed that tight restrictions on how much cannabis recreational customers would be allowed to purchase could cause the industry to fall well short of those lofty projections.

“If the recreational program were to be administered in a fashion that in any way resembles the medical program, we would not have a $600 million market,” O’Donnell said.

If Texas were to legalize recreational cannabis, or if cannabis were legalized at the federal level, that would cut into revenue projections in New Mexico as well, O’Donnell said.

And how much of that money would return to the state to fund government programs remains an open question.

At a 20% tax rate, as recommended by O’Donnell, her projection would lead to between $130 and $170 million in tax revenue. However, projections from prior bills focused on legalization fall well short of that figure.

Rep. Javier Martínez, D-Albuquerque, a co-sponsor of the Cannabis Regulation Act earlier this year, said revenue estimates hadn’t changed but noted it came from Legislative Finance Committee analysts rather than industry experts. Martínez said $800 million is a reasonable revenue target if New Mexico legalizes soon.

Tallman said he believes the state’s first priority shouldn’t be revenue, but rather ensuring there is sufficient funding to meet the state’s mental health challenges and educate New Mexicans about cannabis. He said he wouldn’t support a legalization bill without a significant focus on those issues, to avoid exacerbating the state’s existing mental health problems.

Although Tallman said he was optimistic that there would still be tax revenue left over to fund other programs once those needs are met, he said he still doesn’t believe the focus should be on collecting as much revenue as possible.

“To push this thing as a money generator, I think, is wrong,” Tallman said.

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