Blog Post – Analysis: Taxes on Recreational Marijuana

The latest analysis from the Cato Institute

OCTOBER 28, 2022 12:13PM

State governments across the nation are legalizing recreational marijuana. Pot is legal in 19 states and voters in 5 more states will decide on legalization in November. Every state that legalizes needs to think carefully about the appropriate tax structure to apply.

Let’s look at the November ballot measures and then discuss the tax options.

  • Arkansas voters will decide on Issue 4, which would legalize the possession, use, and sale of up to one ounce of marijuana and impose a 10 percent sales tax on top of the state’s general sales tax.
  • Maryland voters will decide on Question 4, which would legalize possession and use of up to 1.5 ounces of marijuana. If voters approve the question, the tax structure would be set by the legislature.
  • Missouri voters will decide on Amendment 3, which would legalize the possession, use, manufacture, delivery, and sale of marijuana and impose a 6 percent sales tax.
  • North Dakota voters will decide on Measure 2, which would legalize the use and possession of up to one ounce of marijuana. No tax structure is specified.
  • South Dakota voters will decide on Measure 27, which would legalize the possession, use, and distribution of one ounce of marijuana. No tax structure is specified. Voters approved Amendment A in 2020, which legalized pot and imposed a 15 percent sales tax, but that ballot result was set aside by the state supreme court.

Many states have legalized marijuana but then imposed heavy taxes and regulations on the product. But that generates wasteful bureaucracy and perpetuates a large black market. For taxes, the best approach is to simply apply the current state sales tax to marijuana. Unfortunately, politicians often favor complex policies over simple ones, and so numerous states have imposed complicated tax structures on pot.

State marijuana taxes are explored in an excellent new study by Richard Auxier and Nikhita Airi of the Tax Policy Center. Charts in the study illustrate the tax approaches taken by the 19 states that have legalized.

Figure 2 from the study shows that states impose three types of marijuana taxes: percentage‐​of‐​price taxes, weight‐​based taxes, and THC‐​based taxes. Eleven states impose just percentage‐​of‐​price taxes, which range from 10 percent to 37 percent. Eight states impose either weight or THC taxes, often in addition to percentage taxes. (The study uses “marijuana” and “cannabis” interchangeably).




Table 1 from the study further clarifies the tax approaches. Most states allow local taxes on top of state taxes, and most states impose general sales taxes on top of their marijuana‐​specific taxes.




Auxier and Airi make an important contribution by calculating overall effective tax rates for a hypothetical marijuana purchase of an assumed quantity, potency, and price. The results are presented in their Figure 3, which includes state and local marijuana taxes and state and local general sales taxes.




Overall tax burdens are the lowest—at less than 20 percent of the price—in Michigan and New Jersey, but the Michigan tax structure is simple while New Jersey’s includes complex local gross receipts taxes. Tax burdens are the highest, at more than 40 percent, in Alaska, Connecticut, Nevada, New York, and Washington. These states will have a hard time eradicating black markets with such large tax impositions.

Auxier and Airi discuss the trade‐​offs in tax design for marijuana. From my perspective, Michigan has the best tax structure so far—a state‐​level 10 percent sales tax added to the general state sales tax of 6 percent. So kudos to Michigan leaders for keeping pot taxes relatively simple and moderate. Legalization should be about freedom, not about squeezing taxpayers and building government bureaucracies.

Ilana Blumsack contributed to this blog.


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