With a number of states considering legalization of leisure marijuana, and federal lawmakers beginning the method of federal descheduling, it’s a good time to look at the tax implications of legalization. Taxes play a vital function within the success of marijuana reform, as aggressive costs in a licensed market are key to transform illicit consumption to the authorized market.
Marijuana legalization has been gaining momentum on the state degree in recent times, partially due to the prospect of recent tax income. In 2021 alone, 4 states (Connecticut, New Mexico, New York, and Virginia) have handed payments to legalize. To this point, 19 states’ voters or legislatures have handed laws to supply licenses to promote leisure marijuana in addition to impose excise taxes. Most of these states additionally apply their basic sales tax to hashish gross sales, and a few enable localities to levy extra taxes.
Whereas it’s nonetheless a comparatively new market (Colorado was the primary state to legalize hashish in 2012), excise tax income figures to this point might help lawmakers get a way of the income potential at completely different charges and contribute to the event of sound marijuana tax coverage.
The next desk exhibits the states that levy excise taxes on marijuana. It contains the tax design, ultimate income in fiscal 12 months (FY) 2020 and estimated income for FY 2021, and income per capita generated in the identical fiscal years. In complete, states with licensed markets collected $1.7 billion in FY 2020 from state-level excise taxes.
Notice that these numbers don’t embrace gross sales tax or native tax income from marijuana transactions.
|Collections in States with Operational Markets in FY 2020 and FY 2021|
|State||Tax Design||Tax Charge||Income FY 2020||Income Per Capita FY 2020||Projected Income FY 2021||Projected Income Per Capita FY 2021|
|Alaska||Particular||$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||Blended||15% retail excise tax; $9.65/oz. flower; $2.87/oz. leaves cultivation tax; $1.35/ouncescannabis plant||$525,943,734||$13.31||$757,482,335||$19.17|
|Colorado||Advert valorem||15% excise tax (levied at wholesale by weight at common market fee); 15% excise tax (retail value)||$307,278,327||$53.36||$410,584,023||$71.30|
|Illinois (b)||Efficiency (advert valorem)||7% excise tax of worth at wholesale degree; 10% tax on hashish flower or merchandise witd much less tdan 35% tdC; 20% tax on merchandise infused witd hashish, akin to edible merchandise; 25% tax on any product witd a tdC focus increased tdan 35%||$52,698,873||$4.16||$315,645,689||$24.91|
|Massachusetts||Advert valorem||10.75% excise tax (retail value)||$51,684,592||$7.50||$104,428,106||$15.15|
|Michigan (c)||Advert valorem||10% excise tax (retail value)||$31,364,000||$3.14||$75,000,000||$7.51|
|Nevada||Advert valorem||15% excise tax (levied at wholesale by weight at Truthful Market Worth); 10% excise tax (retail value)||$105,180,947||$34.15||$153,227,327||$49.75|
|Oregon||Advert valorem||17% excise tax (retail value)||$133,150,349||$31.57||$175,106,330||$41.52|
|Washington||Advert valorem||37% excise tax (retail value)||$468,502,946||$61.52||N/A||N/A|
|(a) Common collections used to venture full 12 months collections. Full FY2021 obtainable in Colorado and Illinois. Information lacking for Q2 2021 in Nevada and California. Lacking June 2021 knowledge in Alaska, Oregon, and Massachusetts. For Michigan, tde projection is tde state’s Might forecast, as Michigan’s fiscal 12 months runs from October to September. No knowledge obtainable for Washington.|
|(b) Illinois began accumulating taxes in January 2020.|
|(c) Michigan began accumulating taxes in December 2019.|
|Supply: State Income Departments, Tax Basis calculations.|
In FY 2020, California led the best way with the very best marijuana excise tax income of $526 million, adopted intently by Washington and Colorado, which collected $469 million and $307 million, respectively. Whereas not all knowledge is but obtainable, these three states are additionally anticipated to have generated the most important income in FY 2021.
Each Washington and Colorado have advert valorem excise tax designs for marijuana, which means the tax relies on the worth of marijuana. Washington has a 37 % tax fee on the retail worth of marijuana whereas Colorado levies a 15 % tax on each wholesale and retail. An advert valorem tax is contrasted with a particular tax, which relies on a per-unit foundation. California’s marijuana tax design is blended, combining an advert valorem tax and particular taxes. It has a 15 % tax on marijuana retail worth and taxes flowers at $9.65 per ounce, leaves at $2.87 per ounce, and recent crops at $1.35 per ounce.
Since these states are of vastly completely different measurement, it’s helpful to take a look at the income per capita of marijuana taxes. When adjusted for inhabitants measurement, Washington leads the best way with $61.52 in marijuana excise tax income per resident, adopted by Colorado ($53.36) and Nevada ($34.15). Colorado anticipates a big achieve, to $71.30 per capita in FY 2021, however related estimates are usually not but obtainable for Washington.
On the opposite finish of the spectrum are Illinois ($4.16 per resident) and Michigan ($3.14 per resident) with the bottom revenues per capita from marijuana excise taxes. Neither had an operational marketplace for everything of FY 2020, so the comparatively low return was to be anticipated, and each seemed to have important development in FY 2021. That is notably true of Illinois, which reported a 600 % improve in excise tax collections between FY 2020 and FY 2021.
Whereas most states, together with Michigan, levy taxes primarily based on value, Illinois has a potency-based advert valorem tax with three fee brackets that improve with increased THC (Tetrahydrocannabinol) concentrations. Illinois’ system is a de facto category-based tax scheme the place flower will typically be taxed at 10 %, edibles at 20 %, and concentrates at 25 %.
It’s unlucky that the majority of states depend on value as a tax base, as costs share no affiliation with the adverse externalities (hurt) related to consumption. Nevertheless, change could also be afoot: New York and Connecticut, which each handed laws in 2021, adopted taxes that depend on efficiency. A potency-based tax higher addresses the adverse externalities that correspond to increased THC content material.
Revenues are projected to extend in FY 2021 in comparison with FY 2020 in all 9 states that had an excise tax in each years. This is smart, as authorized marijuana markets are nonetheless maturing within the states.
Whereas marijuana excise taxes will be significant sources of tax income, some designs are higher than others. Moreover, excise taxes are typically not secure sources of income, so lawmakers should think twice about the best way to greatest handle externalities, help rising markets, and spend income.
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