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:

Alabama*	Illegal
Alaska	Recreational legalized
Arizona	Recreational legalized
Arkansas*	Medical only
California	Recreational legalized
Colorado	Recreational legalized
Connecticut	Medical only
Delaware	Medical only
District of Columbia***	Recreational legalized
Florida	Medical only
Georgia	Medical CBD oil only
Hawaii	Medical only
Idaho*	Illegal
Illinois	Recreational legalized
Indiana*	Medical CBD oil only
Iowa*	Medical CBD oil only
Kansas*	Illegal
Kentucky*	Medical CBD oil only
Louisiana*	Medical only
Maine	Recreational legalized
Maryland	Medical only
Massachusetts	Recreational legalized
Michigan	Recreational legalized
Minnesota	Medical only
Mississippi	Medical only
Missouri	Medical only
Montana**	Recreational legalized
Nebraska	Illegal
Nevada	Recreational legalized
New Hampshire	Medical only
New Jersey**	Recreational legalized
New Mexico	Medical only
New York	Medical only (legalization legislation being developed in early 2021)
North Carolina	Illegal
North Dakota	Medical only
Ohio	Medical only
Oklahoma*	Medical only
Oregon	Recreational legalized
Pennsylvania*	Medical only
Rhode Island	Medical only
South Carolina*	Illegal
South Dakota**	Recreational legalized
Tennessee*	Illegal
Texas*	Medical CBD oil only
Utah*	Medical only
Vermont	Recreational legalized
Virginia	Medical CBD oil only
Washington	Recreational legalized
West Virginia*	Medical only
Wisconsin*	Medical CBD oil only
Wyoming*	Illegal

Find trusted local vendors in the D.C. Metropolitan area. Where’s weed? Here’s Weed.

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.

State	Tax Design	Tax Rate	Revenue FY 2020	Revenue Per Capita FY 2020	Projected Revenue FY 2021	Projected Revenue Per Capita FY 2021
Alaska	Specific	$50/oz. mature flower; $25/oz. 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/oz. flower; $2.87/oz. leaves cultivation tax; $1.35/oz cannabis plant	$525,943,734	$13.31	$757,482,335	$19.17
Colorado	Ad valorem	15% excise tax (levied at wholesale by weight at average market rate); 15% excise tax (retail price)	$307,278,327	$53.36	$410,584,023	$71.30
Illinois (b)	Potency (ad valorem)	7% excise tax of value at wholesale level; 10% tax on cannabis flower or products witd less tdan 35% tdC; 20% tax on products infused witd cannabis, such as edible products; 25% tax on any product witd a tdC concentration higher tdan 35%	$52,698,873	$4.16	$315,645,689	$24.91
Massachusetts	Ad valorem	10.75% excise tax (retail price)	$51,684,592	$7.50	$104,428,106	$15.15
Michigan (c)	Ad valorem	10% excise tax (retail price)	$31,364,000	$3.14	$75,000,000	$7.51
Nevada	Ad valorem	15% excise tax (levied at wholesale by weight at Fair Market Value); 10% excise tax (retail price)	$105,180,947	$34.15	$153,227,327	$49.75
Oregon	Ad valorem	17% excise tax (retail price)	$133,150,349	$31.57	$175,106,330	$41.52
Washington	Ad valorem	37% excise tax (retail price)	$468,502,946	$61.52	N/A

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:

State	How Marijuana Taxes are Used
Alaska	25% to the general fund.50% to the Department of Public Safety, Health and Social Services, and Department of Corrections.25% to the Marijuana Education
California	First, the revenue covers regulatory and research costs.Then, 60% goes to anti-drug programs targeting kids;20% goes to environmental programs; and20% goes to public safety.
Colorado	10% goes to local governments.90% goes to the state government.15.56% of the state revenue goes to the general fund.12.59% goes to the state public school fund.71.85% goes to the marijuana tax cash fund.
Illinois	35% to the general fund.25% to the Illinois Recover, Reinvest and Renew Program.20% to mental health and substance abuse.10% to pay state bills.8% to local government.2% to public education.
Maine	$335 per pound of flower.$94 per pound of trim.$1.50 per seedling or immature plant.$0.30 per seed.
Massachusetts	Sales tax revenue goes to the general fund, the Massachusetts Bay Transportation Authority, and the School Building Authority.The excise tax support programs like the Alcoholism Administration and the Cannabis Control Commission.
Michigan	In the first two years of legalization, $20 million in revenue will go to medical marijuana research. The rest will be split between cities, townships, villages, counties, the state’s School Aid Fund, and the Michigan Transportation Fund.
Nevada	Income from the retail tax goes to the state’s rainy day fund. Revenue from the wholesale tax goes to cover expenses and boost the rainy fund as well.
Oregon	40% to the state school fund.20% to mental health, alcoholism, and drug services.15% to the Oregon state police.5% to the Oregon Health Authority for drug treatment and prevention.20% to cities and counties.
Vermont	Bill S.54 states that “revenue from the sales and use tax imposed . . . on retail sales of cannabis or cannabis products in this State shall be used to fund a grant program to start or expand afterschool and summer learning programs, with a focus on increasing access in underserved areas of the State.”
Washington	The state health authority for a healthy youth survey.The University of Washington for marijuana-related educational programs.The state’s health professions account.  Various state departments for   research related to pesticides, licensing, accreditation, and testing.

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.