2024 Notable Changes
- Minnesota legalized recreational marijuana and taxes sales at 10 percent of retail gross receipts.
- Ohio legalized recreational marijuana and taxes sales at 10 percent of retail sales.
- Delaware established a 15 percent tax on retail sales, but business licensure has yet to be completed, so sales have yet to begin. Retail licenses are expected in March 2025.
- California switched its wholesale-level tax to a tax levied on retail gross receipts.
- New York swapped its specific tax by THC content for a 9 percent ad valorem wholesale tax.
- Planned legalization in Virginia was not authorized by the state legislature, and a subsequent attempt to legalize recreational sales and tax them at 11.625 percent was vetoed by the governor.
Nearly half of US states have legalized the sale of recreational marijuana, and many more have allowed medical marijuana. A few states have decriminalized possession but have not allowed cultivation or sale of marijuana. According to a recent Gallup poll, 70 percent of Americans support legalization—including a majority of every racial, political, age, and regional demographic. Efforts to reform marijuana policy federally have previously been unsuccessful, but new attempts experience increasing support.
The STATES 2.0 Act would defederalize marijuana policy entirely, removing cannabis from the Controlled Substances Act and allowing for interstate commerce between states that decide to legalize marijuana within their jurisdictions. Recent discussions of formally rescheduling marijuana from Schedule I to Schedule III may also have tax implications. Under federal prohibition, “legal” markets in legalized states remain burdened by the inability to participate in interstate commerce, difficulty doing business with banking institutions, and other struggles associated with the unique legal framework.
A significant majority of marijuana consumption occurs via illicit markets. States that impose excessive taxes, require expensive or limited licensure, or otherwise hinder the legal markets they create 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. Taxes on legalized marijuana should be principled and not so burdensome as to preclude legal markets from effectively competing with illicit markets. 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 are established.
With interstate commerce prohibited, we don’t yet see problems created by varying tax designs that occur in other legal markets. There are no multi-state businesses that must comply with disparate 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 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.
The wide variety of marijuana products and potencies renders taxation complicated. The most efficient option would be to tax by potency (as measured by THC content) where practicable and to tax by weight where THC content is too difficult to measure. This most effectively targets the actual harm-causing element with the tax and minimizes other problems with ad valorem taxes, like volatile revenues. Market prices in legalized markets have tended to steadily decrease, as supply increases and production becomes more efficient, which may erode ad valorem revenues over time. Rates should also be kept low enough to allow new legal markets to compete with existing illicit markets, incentivizing consumers to switch to the safer option while driving revenues to taxable consumption.
