With several states considering legalizing recreational marijuana and federal lawmakers starting the state debt relief process, it’s a good time to investigate the tax implications of legalizing. Taxes play a vital role in the success of marijuana reform, as competitive prices in a licensed market are key to converting illicit use to legal market.
Marijuana legalization has gained momentum at the state level in recent years, in part because of the prospect of new tax revenues. In 2021 alone, four states (Connecticut, New Mexico, New York, and Virginia) passed laws to legalize it. So far, nineteen states have passed legislation to license the sale of recreational marijuana and to impose excise taxes. Most of these states also levy their general sales tax on cannabis sales, and some allow communities to levy additional taxes.
While it’s still a relatively new market (Colorado was the first state to legalize cannabis in 2012), past excise tax revenues can help lawmakers get a sense of the revenue potential at different rates and help develop solid marijuana tax policies .
The table below shows the states that impose excise taxes on marijuana. It includes tax structuring, final FY 2020 and estimated FY 2021 earnings, and per capita earnings generated in those same fiscal years. In total, states with licensed markets collected US $ 1.7 billion from state-level excise taxes in FY2020.
Note that these numbers do not include sales tax or local tax revenue from marijuana transactions.
|Collections in states with operational markets in FY 2020 and FY 2021|
|State||Tax structuring||tax rate||Sales FY 2020||Sales per capita FY 2020||Forecast sales FY 2021||Projected per capita sales for the 2021 financial year|
|Alaska||Specific||$ 50 / ounce. ripe flower; $ 25 / ounce. immature flower; $ 15 / oz. trim; $ 1 per clone||$ 24,540,009||$ 33.55||$ 29,051,904||$ 39.71|
|California||Mixed||15% retail excise tax; $ 9.65 / ounce. Flower; $ 2.87 / ounce. Leaves cultivation tax; $ 1.35 / oz cannabis plant||$ 525,943,734||$ 13.31||$ 757,482,335||$ 19.17|
|Colorado||Treasure||15% excise tax (levied in wholesalers by weight at the average market rate); 15% excise tax (retail price)||$ 307,278,327||$ 53.36||$ 410,584,023||$ 71.30|
|Illinois (b)||Power (to value)||7% sales tax at wholesale level; 10% tax on cannabis flowers or products with less tdan 35% tdC; 20% tax on products infused with cannabis, such as edible products; 25% tax on any product with a tdC concentration higher than tdan 35%||$ 52,698,873||$ 4.16||$ 315,645,689||$ 24.91|
|Massachusetts||Treasure||10.75% excise tax (retail price)||$ 51,684,592||$ 7.50||$ 104,428,106||$ 15.15|
|Michigan (c)||Treasure||10% excise tax (retail price)||$ 31,364,000||$ 3.14||$ 75,000,000||$ 7.51|
|Nevada||Treasure||15% excise tax (is levied in wholesalers based on weight at market value); 10% excise tax (retail price)||$ 105,180,947||$ 34.15||$ 153,227,327||$ 49.75|
|Oregon||Treasure||17% excise tax (retail price)||$ 133,150,349||$ 31.57||$ 175,106,330||$ 41.52|
|Washington||Treasure||37% excise tax (retail price)||$ 468.502.946||$ 61.52||N / A||N / A|
(a) Average collections used to project the collections for the whole year. Full FY2021 available in Colorado and Illinois. Data is missing in Nevada and California for the second quarter of 2021. Missing data for June 2021 in Alaska, Oregon, and Massachusetts. For Michigan, the tde forecast is the tde state’s May forecast, as Michigan’s fiscal year runs from October through September. No data available for Washington.
(b) Illinois began collecting taxes in January 2020.
(c) Michigan began collecting taxes in December 2019.
Source: State Revenue Departments, Tax Foundation calculations.
In fiscal 2020, California led the way with the highest marijuana excise tax revenues of $ 526 million, closely followed by Washington and Colorado, which raised $ 469 million and $ 307 million, respectively. While not all of the data is available yet, these three states are also expected to have the largest revenue in FY2021.
Both Washington and Colorado have ad valorem excise taxes on marijuana, which means the tax is based on the value of marijuana. Washington has a 37 percent tax rate on the retail value of marijuana, while Colorado has a 15 percent tax on both wholesale and retail sales. A value tax is offset by a specific tax based on a unitary basis. The California marijuana tax design is mixed, combining an ad valorem tax and specific taxes. It has a 15 percent tax on the retail value of marijuana, taxing flowers at $ 9.65 an ounce, leaves at $ 2.87 an ounce, and fresh plants at $ 1.35 an ounce.
Because these states vary in size, it’s useful to look at the per capita marijuana tax revenue. When adjusted for population size, Washington leads the way with $ 61.52 in marijuana excise tax revenue per inhabitant, followed by Colorado ($ 53.36) and Nevada ($ 34.15). Colorado expects a sharp increase to $ 71.30 per capita in FY2021, but similar estimates are not yet available for Washington.
At the other end of the spectrum, Illinois ($ 4.16 per inhabitant) and Michigan ($ 3.14 per inhabitant) have the lowest per capita marijuana excise tax revenues. Both had no operating market for the full 2020 financial year, so the comparatively low return was to be expected, and both appeared to have seen significant growth in the 2021 financial year. This is especially true for Illinois, which saw excise tax levies rise 600 percent between FY2020 and FY2021.
While most states, including Michigan, levy taxes based on price, Illinois has a value-based tax with three tax brackets that rise with higher concentrations of THC (tetrahydrocannabinol). The Illinois system is a de facto category-based tax system, with flowers generally taxed at 10 percent, edibles at 20 percent, and concentrates at 25 percent.
It is unfortunate that the majority of states rely on price as a tax base, as prices are not linked to the negative externalities (damage) of consumption. However, a change could be underway: New York and Connecticut, both of which passed laws in 2021, introduced taxes based on potency. A potency-based tax better addresses the negative externalities associated with higher THC levels.
Revenues are expected to increase in FY 2021 compared to FY 2020 in all nine states in which a consumption tax was levied in both years. This makes sense as the legal marijuana markets in the states are still maturing.
While excise taxes on marijuana can be meaningful tax revenue, some designs are better than others. In addition, excise taxes are generally not a stable source of income, so lawmakers need to think carefully about how best to deal with externalities, support emerging economies, and spend income.
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