Recreational marijuana taxation is a hot policy issue in the US. Many states have elected to regulate and taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. legal marijuana sales and consumption, despite the ongoing federal prohibition. In December, President Trump signed an executive order directing the Attorney General to expedite the reclassification of marijuana from a Schedule I to a Schedule III drug under the Controlled Substances Act.
Today’s map shows states that have nullified the federal prohibition to establish a legal recreational cannabis market subject to an excise taxAn excise tax is a tax imposed on a specific good or activity. Excise taxes are commonly levied on cigarettes, alcoholic beverages, soda, gasoline, insurance premiums, amusement activities, and betting, and typically make up a relatively small and volatile portion of state and local and, to a lesser extent, federal tax collections.. Legalization shifts consumers to safer legal markets while generating tax revenue for state programs. Harms associated with recreational marijuana are still somewhat understudied, but as more states allow legal markets and potential federal rescheduling enables medical study, more information will be available to optimize tax design.
Approaches to tax structure vary significantly across states. Some states tax by weight, some by price, and others by THC content. Ad valorem taxes are simpler but are associated with greater revenue volatility and do not target any specific harm-causing element. Ad quantum taxes on weight or quantity produce more stable revenues and better target the harm-causing element, but do not account for potency. Ad quantum taxes based on THC content most directly target the harm-causing element, but this adds complexity to the tax, and the technology to measure THC content can be so expensive that constant THC testing makes compliance costs unreasonable.
Disparate structures render state-by-state comparisons of rates or overall tax burden difficult. With federal prohibition still in effect, interstate commerce remains illegal, which creates a siloed market within each legalized state. Possible federal legalization may encourage harmony between state systems. When states legalize marijuana, taxes on legal product should be low enough to allow legal markets to compete with illicit markets, thereby reducing individual and societal harm while generating more revenues.
Data compiled by Jacob Macumber-Rosin , Adam Hoffer
Data compiled by Adam Hoffer, Jacob Macumber-Rosin
Data compiled by Adam Hoffer, Jacob Macumber-Rosin
Data compiled by
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Data compiled by Janelle Fritts
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Data compiled by Janelle Fritts
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Data compiled by Katherine Loughead , Morgan Scarboro
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Data compiled by Morgan Scarboro
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Nearly half of US states regulate and tax recreational markets, and only 10 states still lack a comprehensive medical marijuana program. A few states have decriminalized possession but have not allowed for the cultivation or sale of marijuana, sometimes due to gubernatorial vetoes or court rulings blocking legalization.
Many states that have not yet legalized marijuana seem to be moving toward legalization, but challenges clearly remain. This year is set to be another eventful year for drug policy ballot initiatives, which may shift the marijuana tax landscape further. Legislative efforts are ongoing in many states, such as Virginia, New Hampshire, and Pennsylvania. Efforts seem to be underway for federal rescheduling of marijuana, which has some tax implications, but would not change the federal prohibition of recreational marijuana. More comprehensive federal reforms like the STATES 2.0 Act would be required to actually legalize marijuana.
Under the existing federal prohibition, businesses that operate in states that have nullified the federal policy to establish quasi-legal markets remain burdened by the inability to participate in interstate commerce. These businesses also have difficulty doing business with banking institutions and face struggles associated with the unique legal framework.
Many states have been facing budget shortfalls and/or a struggling legal marijuana industry, which has prompted several changes to marijuana tax policy. The tax in California increased briefly from 15 to 19 percent before that increase was reverted and delayed to give some relief to the industry. The new Michigan wholesale tax on adult-use marijuana was prompted by transportation revenue needs, with revenues from the new tax dedicated to the neighborhood road fund. Minnesota budget woes spurred the marijuana tax increase from 10 to 15 percent before legal sales even began.
Excise taxes on recreational marijuana are ill-suited for filling gaps in general revenue or shortfalls in unrelated spending programs. Squeezing the legal marijuana industry for revenue unnecessarily burdens a growing industry and encourages consumers to stick to established illicit markets. States should not go through all the trouble of nullifying federal marijuana prohibition, administering licensure and regulations, and fostering a legal market only to overburden that market with taxes that render it unable to compete with illicit purveyors.
A significant majority of marijuana consumption already occurs via illicit markets, even as more states legalize sales. States that impose excessive taxes, require expensive or limited licensure, or otherwise hinder their legal markets may not experience significant reductions in illicit consumption. If prices in legal markets are kept higher than illicit market prices, consumers will not be incentivized to switch to safer legal products. Properly designed taxes have the potential to generate billions of dollars in revenue for the states, though it may take some time for these revenues to be realized as legal markets develop.
With interstate commerce prohibited, the disparate tax designs across states do not yet create some of the problems that occur in other legal markets. There are no multistate businesses that must comply with varied regulations, and tax arbitrage or double taxationDouble taxation is when taxes are paid twice on the same dollar of income, regardless of whether that’s corporate or individual income. cannot legally occur. However, if interstate commerce is eventually tolerated by the federal government, the significant differences in tax designs may create negative effects and opportunities for tax avoidance. States should prepare to harmonize their tax designs once interstate marijuana business is allowed—and would be better advised to coalesce around best practices now, before systems become more difficult to reform.
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Jacob Macumber-Rosin is an Excise Tax Policy Analyst with the Tax Foundation. Jacob holds a BS in economics (politics and the economy) as well as a BS in civic and economic thought and leadership from Arizona State University.
Adam Hoffer is the Director of Excise Tax Policy at the Tax Foundation. Dr. Hoffer earned his PhD in Economics from West Virginia University and his undergraduate degree from Washington & Jefferson College.
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