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State Cannabis Taxation

Cannabis Taxation

Meanwhile, teenagers’ cannabis use rates haven’t increased, and voter support has grown. On April 22 and April 26, 2023, Gov. John Carney (D) allowed companion legalization bills — HB 1 and HB 2 — to become law without his signature. Seven percent of the proceeds are allocated to a Justice Reinvestment Fund, while the remainder will be deposited in the General Fund. In those states that have fully legalized marijuana, revenue collections have exceeded initial estimates. While these amounts are not stratospheric, they are considerable and exceed additional enforcement and regulatory costs incurred by the states.

Marijuana tax rates in Washington, D.C.

States operating with weight-based systems would likely have to collect taxes early in the value chain before the marijuana is processed and packaged as concentrates or edibles. Furthermore, taxing based on the price harms consumer choice and product quality as it incentivizes manufacturers and retailers to reduce prices to limit tax liability. It also incentivizes downtrading, which is when consumers move from premium products to cheaper alternatives. Downtrading effects do not reduce harm and have no relation to any externality the tax is seeking to capture. After that is funded, additional revenue, approximately $200 million, goes to youth anti-drug programs (60 percent), environmental programs (20 percent), and public safety grants (20 percent).

State Tax Revenue from Adult-Use Cannabis (New York)

Current systems often unnecessarily complicate compliance for many businesses, and streamlining regulation that allows retailers to sell both would lower compliance costs. State taxes should be preferably levied at the wholesale level to avoid tax pyramiding. If interstate commerce becomes legal, marijuana risks double taxationDouble taxation is when taxes are paid twice on the same dollar of income, regardless of whether that’s corporate or individual income. Avoiding tax pyramiding would guarantee that the excise tax is a tax on consumption rather than a tax on cultivation or production. A well-designed sales tax is levied on all final consumer goods and services while exempting all purchases made by businesses that will be used as inputs in the production process.

Cannabis businesses can pay up to 80 percent in taxes. Could easing federal restrictions provide relief?

  • In those states that have fully legalized marijuana, revenue collections have exceeded initial estimates.
  • The solution to marijuana taxation is to tax by potency where possible, and weight where THC content is impractical to measure.
  • This creates a hostile environment making it nearly impossible to sustain the legal industry.
  • Alaska, Colorado, Maine, Nevada, and New Jersey use a weight-based cannabis tax.
  • Legalization of recreational marijuana should not be done in expectation of a short-term revenue bump from excise collections.
  • It is now, as it was then, important to raise sufficient revenue from excise taxes to fund related spending while ensuring that legal sellers can outcompete illicit operators.
  • Regardless of the federal viewpoint, the legal cannabis industry is here to stay, and punitive tax rules have not deterred bad actors in the market to quit; rather, they punish the quality innovators we want anchoring this emerging industry.

Beyond not being equitable, revenue raised by ad valorem taxes risks being more volatile. Since they are price-based, and prices are likely to drop as the market matures, revenue raised per ounce of marijuana purchased may drop. Quantity-based taxes would also limit the state revenue from potential changes to federal law, which could have significant implications for the tax revenue from legalized marijuana.

Although we do not have comprehensive data on local cannabis tax revenue and revenue from general sales taxes on marijuana purchases, the limited data suggest governments are collecting considerable additional revenue from these taxes. For example, in Oregon, the state government levies a 17 percent cannabis tax on the retail price and local governments can additionally levy a 3 percent tax. In fiscal year 2022, the state collected $171 million from its tax and local governments collected an additional $27 million. Meanwhile, in Massachusetts in fiscal year 2022, the state’s cannabis excise tax (10.75 percent) provided $157 million while its general sales tax (6.25 percent) produced another $92 million for the state. With these numbers in mind, from a pure tax policy perspective, there is great incentive to legalize marijuana.

Cannabis Tax Revenue in States that Regulate Cannabis for Adult Use

Consequently, ad valorem taxes offer a simple and quick option for states but may create issues down the road as market develops and prices decline (especially in the case of federal legalization that could open the door for interstate marijuana commerce). Moreover, these taxes do not tax products equitably and are vulnerable to distortion from potential federal taxes. States that implement ad valorem taxes should stay attentive to developments that may affect their market and revenue in the short term.

Cannabis Taxation

Effect of Legalization on the Marijuana Market

What impact would reclassifying marijuana federally have on Minnesota cannabis businesses? – CBS Minnesota

What impact would reclassifying marijuana federally have on Minnesota cannabis businesses?.

Posted: Mon, 27 May 2024 22:13:00 GMT [source]

With the addition of Missouri and Maryland in 2022, 21 states have implemented legislation to legalize and tax recreational marijuana sales. First, from a theoretical perspective, the social harms of cannabis consumption aren’t caused by the price of the product, but rather by the quantity of the product consumed. While price and quantity are related, a poorly targeted tax runs the risk of failing to accomplish its goals (both raising revenue and marginally deterring consumption) if market dynamics shift. Price-based taxes result in higher tax payments on more expensive products, generally—but imperfectly—resulting in higher payments for (presumably higher-priced) more potent and premium products that are more commonly purchased by consumers with higher incomes.

Estimated State Sales Tax Revenue from Adult-Use Cannabis (Michigan)

Cannabis Taxation

For vertically integrated companies, weight-based taxes do not require artificial valuation. Nevada and Colorado have solved this by levying the wholesale ad valorem medical marijuana accounting tax based on a temporarily fixed value per ounce. Such taxes are currently applied to spirits (volume-based), cigarettes (per stick), and motor fuel (volume-based).

  • Taxing marijuana is complex, in part because an array of marijuana consumption products exists.
  • While price and quantity are related, a poorly targeted tax runs the risk of failing to accomplish its goals (both raising revenue and marginally deterring consumption) if market dynamics shift.
  • Cannabis taxes can be a pain in the pocketbook, but they keep marijuana legal and well regulated.
  • For more information, check out Ohio’s medical marijuana program website and this account of Ohio’s medical marijuana program.
  • Implementation typically takes at least several months and it could take years for revenues to mature as markets develop, as experiences documented by states like Colorado and Washington illustrate.
  • A September 2022 report by the Urban-Brookings Tax Policy Center found Alaska’s tax rate would be the highest in the nation if average cannabis prices were $100/ounce.

$172K in illegal tobacco, cannabis products seized by Livermore PD

Cannabis Taxation

The below chart shows the year-by-year totals for Colorado’s cannabis tax revenue. After years of steady growth in cannabis sales and related tax revenue, Colorado experienced reductions in adult-use cannabis tax revenue in 2022 and 2023 — from $396 million in 2021 and $305 million in 2022 to $256 million in 2023. Contributing factors in the recent decline include lower wholesale prices, an end of COVID-related shut-downs that created a short-term boost in sales, and additional states legalizing, resulting in fewer out-of-state consumers. Colorado has a significant medical program, with about 1.1% of the population enrolled. As is the case in most states, Colorado’s cannabis taxes do not apply to sales to registered medical cannabis patients.