(Reuters) - Colorado, the first state to tax legalized recreational marijuana sales, expects to bring in an estimated $98 million in revenue this year, exceeding the state’s original expectations by 40 percent.

The state began levying sales and excise taxes on recreational marijuana on January 1, 2014. Moody’s Investors Service, in a report released Friday, said legal sales in Colorado will reduce the size of the black market and revenue from legal sales will mean more tax payments flowing into state coffers.

The funds are slated for treatment, school construction and deterring young people from using the drug. School districts will likely get $40 million, or nearly 30 percent, of the projected $134 million in total marijuana tax revenues. New revenues will only make up 1.4 percent of the state’s available general fund.

“There’s been a lot of buzz around legalization,” said Andrea Unsworth, a Moody’s analyst. But she cautioned that tax revenues were “still a very small fraction of the state’s overall budget. It’s not going to sway things too much in one way or another.”

Colorado imposed a 15 percent excise tax on wholesale marijuana and a 10 percent sales tax on retail sales. That’s in addition to a pre-existing 2.9 percent tax on medical marijuana. Local governments will keep 15 percent of sales tax revenue, while the rest of the money will stay with the state.

Tax collections started off slowly this year, only totaling $7.5 million or $45 million if amortized to the full year. But Moody’s said the new revenues are likely significantly understated in the long term because only a limited number of retail facilities had opened, growers had not yet met buyers’ demand, and many local jurisdictions had yet to issue licenses.

Moody’s projected that the decriminalization of marijuana would likely reduce policing costs, although other enforcement expenditures might also arise. The net effect is uncertain.

In March, the Colorado Association of Chiefs of Police asked the governor for 10 percent to 15 percent of marijuana’s total tax revenues, citing the need to police unlicensed sales of the drug, diversion to other states, and drivers under the influence of marijuana, among other costs, the report noted.

The only other state to legalize recreational marijuana, Washington, will begin marijuana sales in June.