Federal Cannabis Legalization Could Generate $8.5 Billion in Tax Revenue

December 18, 2023 · Ganjapreneur

The Tax Foundation, a D.C.-based think tank, has proposed a state and federal marijuana tax model in a recent report, suggesting that nationwide legalization could generate $8.5 billion in annual cannabis tax revenue. First reported on by Marijuana Moment, the foundation’s model aims to keep costs low to counter illicit sales and suggests higher rates for more potent products. The current state-by-state approach, mostly taxing by sales price, is described as chaotic, and the foundation emphasizes the importance of a well-designed excise tax for minimal societal impact.

Three key lessons from state marijuana taxation experiences are outlined:

  1. Cannabis tax rates should be low enough to compete with the illicit market.
  2. The potential for significant revenue from legal marijuana markets exists, but it may be volatile and take time to materialize.
  3. Consistency across jurisdictions is crucial, especially with the prospect of interstate commerce.

The report highlights that legal states earned nearly $3 billion in marijuana tax revenue last year, a figure projected to nearly triple with nationwide legalization. It discusses the challenges of taxing cannabis compared to alcohol and tobacco, due to the lack of standardized products and difficulty in measuring THC content. The foundation recommends taxing marijuana by potency or weight, as these methods better capture externalities and are simpler to apply to new product categories.

While cannabis remains federally illegal, the U.S. Census Bureau is tracking state-level cannabis tax trends. Numerous proposals and bills to legalize cannabis federally have been discussed in the US House of Representatives and Senate, but none currently have enough support to succeed.

However, in August the US Department of Health and Human Services recommended that cannabis be moved from Schedule I to Schedule III under the Controlled Substances Act, and the DEA is now conducting its own review in order to determine what action to take. While this would not directly create a federal framework for taxation (cannabis would still be considered federally illegal at Schedule III), it could help expedite congressional action. (Full Story)

In categories:Legalization Taxes
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