Marijuana Tax Revenue: The Horizontal Equity of Taxing Marijuana

A look at how marijuana taxes are levied, and how marijuana tax revenue is collected and allocated state-by-state.

A Year in Reflection

As we come to the close of another year, as people, we often go to a place of remembrance. Whether it be loved ones lost or gained, graduations, retirements, or any memorable event, looking back on another year passed is a human past time. With that in mind, over the course of 2021, 14 states have either decriminalized, legalized, or expanded their already standing medical cannabis programs. They are now part of the 18 total states, the District of Columbia, the Northern Mariana Islands, and Guam where marijuana is legal, and the 13 states and the U.S. Virgin Islands where marijuana is decriminalized. Some of these states levy one or a combination of tax types targeted at gathering revenue from legal and medical marijuana use. 

As a point of reference, and in the spirit of revisiting, let’s revisit each state’s legal status and level of legality:

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Marijuana Tax Types

As states become more tolerant of medical and/or legal marijuana use, one thing most of them have in common is the taxation of adult marijuana use. States and local governments use one or, a combination of, three primary marijuana tax revenue collection type(s) to generate revenue for the state. The Tax Policy Center defines the three tax types in the following:

Percentage-of-price. These taxes are similar to a retail sales tax where the consumer pays a tax on the purchase price and the retailer remits it to the state. A few states levy their percentage of price tax on the wholesale transaction, but it is assumed this cost is then passed on to the consumer in the final purchase price. Some states also let localities levy a percentage of price tax—typically with a maximum rate.

Weight-based. These taxes are similar to cigarette taxes, except instead of taxing per pack of cigarettes the tax is based on the weight of the marijuana product. States with this type of tax also typically set different rates for different marijuana products. For example, California  levies a $9.65 per ounce tax on marijuana flowers, a $2.87 per ounce tax on marijuana leaves, and a $1.35 per ounce tax on fresh plant material. As with other wholesale taxes, it is assumed most of this cost is passed on to the consumer in the final purchase price.

Potency-based. These taxes are similar to alcohol taxes, except instead of taxing drinks with a higher percentage of alcohol at higher rates (i.e., liquor is taxed at a higher rate than beer), the tax is based on the THC level of the marijuana product. Illinois is currently the only state with a THC-based tax. It taxes products with a THC content of 35 percent or less at 10 percent of retail price and those with more than 35 percent at 25 percent of retail price. All marijuana-infused products (e.g., edibles) are taxed at 20 percent of retail price.

Let’s examine how each state exercises these tax types. The Urban Institute has provided a breakdown of how each state applies marijuana tax revenue in 2021. 

Alaska: Weight-based taxes of $50 per ounce for flowers, $15 per ounce for stems and leaves, $25 per ounce for immature flowers and buds, and $1 per clone. These taxes are then built into the final purchase price of various marijuana products. Localities can also levy a percentage-of-price excise tax on marijuana purchases. 

Arizona: Percentage-of-price tax on retail transactions (16 percent). The state (5.6 percent) and local governments also levy their general sales tax on marijuana purchases.

California: Weight-based taxes of $9.65 per ounce on marijuana flowers, $2.87 per ounce on marijuana leaves, and $1.35 per ounce on fresh plant. These taxes are then built into the final purchase price of various marijuana products. Additionally, the state levies a 15 percent excise tax on the retail purchase price, and localities can also levy a percentage-of-price excise tax. Further, the state (7.25 percent) and local governments levy their general sales tax on marijuana purchases.

Colorado: Percentage-of-price tax on both the wholesale transaction (15 percent) and retail transaction (15 percent). Local governments can also levy their general sales tax on marijuana purchases.

Connecticut. The recently enacted legislation creates a new THC-based excise tax with different rates for different cannabis products: 0.625 cents per milligram for plants, 2.75 cents per milligram for edibles, and 0.9 cents per milligram for all other products. In addition, the state’s general sales tax (6.35 percent) will apply to marijuana purchases as will a new 3 percent special cannabis sales tax that will remit revenue to local governments. 

Illinois: Products with THC content of 35 percent or less are taxed at 10 percent of retail price and those with more than 35 percent are taxed at 25 percent of retail price. All marijuana-infused products (e.g., edibles) are taxed at 20 percent of retail price. Additionally, all dispensaries pay a 7 percent tax on their gross receipts. Marijuana purchases are also subject to state (6.25 percent) and local general sales taxes.

Maine: Weight-based taxes of $335 per pound of flowers or mature plants, $94 per pound of trim, $1.50 per immature plant or seeding, and $0.35 per marijuana seed. These taxes are then built into the final purchase price of various marijuana products. The state also levies a 10 percent excise tax on the retail sale price of marijuana.

Massachusetts: A 10.75 percent state excise tax is levied on the retail transaction price. Localities can also levy up to a 3 percent excise tax on the purchase price. The state also levies its 6.25 percent general sales tax on marijuana purchases.

Michigan: A 10 percent excise tax is levied on the retail transaction price. The state also levies its 6 percent general sales tax on marijuana purchases.

Montana: The voter-approved initiative proposed a 20 percent tax on retail transactions. Montana lawmakers were not required to implement the ballot initiative’s proposed rules, but they ultimately enacted the initiative’s 20 percent retail tax. However, the final legislation did increase the share of marijuana tax revenue dedicated towards administrative costs, substance abuse prevention and treatment, and the general fund relative to the ballot initiative, while decreasing the amount dedicated for conservation programs. Legal sales and tax collection are expected to begin in January 2022.

Nevada: Percentage-of-price tax on both the wholesale transaction (15 percent) and the retail transaction (10 percent). The state (6.85 percent) and local governments also levy their general sales tax on marijuana purchases.

New Jersey: The legalization legislation passed in 2021 did not include an excise tax on marijuana purchases. However, the state’s Cannabis Regulatory Commission is authorized to impose a weight-based excise tax at rates tied to the average retail price of marijuana. Marijuana purchases will be subject to the state general sales tax (6.625 percent). Localities will also have the option to impose an additional 2 percent sales tax on purchases. As of April 2021, legal sales and tax collection had not yet begun.

New Mexico: The recently enacted legislation creates a percentage-of-price tax on retail transactions at a rate of 12 percent until July 2025. After that, the excise tax rate will rise 1 percentage point each subsequent year until the rate reaches 18 percent in 2030. Marijuana purchases will also be subject to state and local gross receipts taxes (these rates ranges from 5.125 to 8.6875 percent). Retail sales and tax collection are expected to begin in 2022.

New York: The recently enacted legislation created both a state-level (9 percent) and local-level (4 percent) percentage-of-price excise tax, for a combined tax rate of 13 percent. The state will also impose a potency-based tax on wholesale transactions, at rates of 0.5 cents per milligram of THC for flower, 0.8 cents per milligram of THC for concentrates, and 3 cents per milligram of THC for edibles. As of April 2021, legal sales and tax collection had not yet begun.

Oregon: A 17 percent excise tax is levied on the retail transaction. Localities can also levy up to a 3 percent excise tax on the retail price.

Washington: A 37 percent excise tax is levied on the retail transaction price. The state (6.5 percent) and local governments also levy their general sales tax on purchases.

Vermont: A percentage-of-price tax (14 percent) is levied on the retail transaction price. Marijuana purchases are also subject to the state’s general sales tax (6 percent) and local sales taxes.

Virginia: The recently enacted legislation created a percentage-of-price tax (21 percent) on the retail transactions. Localities may also levy a percentage-of-price excise tax of up to 3 percent. In addition, state (5.3 percent) and local general sales taxes will apply to marijuana purchases. As of April 2021, legal sales and tax collection had not yet begun.

Speaking of Virginia, learn how to register for medical marijuana in the commonwealth by clicking here

Where Does it Go?

Marijuana tax revenue collection efforts generate billions of dollars for states that practice them. This stands to pose the question, where does it go? Well first, let’s see what’s raked in. According to the following table from the Tax Foundation, here are revenues from FY (fiscal year) 2020, and projected revenues for FY 2021. Note the vast increase in projected revenue from FY 2021 over FY 2020.

With these staggering numbers, states are able allocate some of this marijuana tax revenue to vital state programs. Some are not as generous. This table, which includes information from the Motley Fool, shows some ways states divvy their tax revenue:

Is Taxation Fair?

While it’s quite progressive to see so many states adopting marijuana reform in such an open way (I am particularly surprised and proud of my home state of Virginia), it’s important that states do so while staying fair to taxation and demographics. One way that this fairness is compromised is Section 280e of the IRS Tax Code. The section reads as follows:

26 U.S. Code § 280E.Expenditures in connection with the illegal sale of drugs

No deduction or credit shall be allowed for any amount paid or incurred during the taxable year in carrying on any trade or business if such trade or business (or the activities which comprise such trade or business) consists of trafficking in controlled substances (within the meaning of schedule I and II of the Controlled Substances Act) which is prohibited by Federal law or the law of any State in which such trade or business is conducted.

(Added Pub. L. 97–248, title III, § 351(a), Sept. 3, 1982, 96 Stat. 640.)

Back in 1982, in an effort to combat the free-market economy of illicit drug sales (the term “crack” wouldn’t be coined for another three years), the IRS drafted this code to distance America from the illegal drug trade (the irony, given the Iran-Contra affair). That code still exists, and currently threatens LEGAL marijuana businesses. The following video explains Section 280e and its effects:

A final thought (sans Jerry Springer)

As long as fair laws and tax codes are enforced, the marijuana industry could not only continue to boom, but carve the paths for a myriad of new and important initiatives. If states continue to think progressively as it pertains to marijuana legalization and adult marijuana use, bonds can be forged in the understanding that doing this right has a resourceful outcome. According to insider.com, police spend almost $3.6 billion enforcing possession laws. Imagine if, instead of using that money to jam people up, weigh down the court system, create inmate costs, etc. that money went towards educating our children, educating people in general, building community bonds (which looks different from community to community), or strengthening our public service force. My ideas are biased based on my own personal experience, but I’m sure local and state governments could come up with something that would stand to help its constituents, instead of hurting them. There is an incredible mountain of information available on marijuana tax reform, laws, and initiatives. Get involved, or sit back and watch, but whatever you do, smoke well and prosper.