Marijuana Taxes

State and Local Backgrounders Homepage

Marijuana taxes are selective sales taxes on the legal purchase of marijuana. Most states tax the consumer purchase of marijuana (similar to a retail sales tax) but some tax the transaction between cultivators and distributors or retailers (similar to taxes on alcohol).

Where is marijuana legal and how much revenue do state and local governments raise from taxes on marijuana?

Although prohibited under federal law, marijuana sales are legal and taxed in seven states: Alaska, California, Colorado, Massachusetts, Nevada, Oregon, and Washington. Marijuana is legal in Maine and Vermont but neither state has established its tax system and begun collecting revenue yet. Michigan voters approved legal and taxable marijuana in November 2018, but the state is also working out its tax system. The District of Columbia legalized marijuana in 2014, but Congress currently prevents the city from regulating and taxing sales.

In Colorado  and Washington , where marijuana has been taxed since 2014, marijuana taxes bring in hundreds of millions of dollars, or roughly 1 percent of each state’s general revenue. Nevada collected nearly $70 million in its first year of taxable sales, which is also roughly 1 percent of its own-source general revenue. In the past year, Alaska collected $10 million and Oregon collected $80 million—both totals are well below 1 percent of each state’s own-source general revenue. California and Massachusetts have taxed marijuana for less than a year.

Medical marijuana is legal in 32 states and some of these states levy a tax on the purchase. But these tax rates are often the same as or close to the state’s general sales tax rate and do not raise much revenue.

How much do marijuana tax rates differ across states?

Most states tax marijuana as a percentage of the retail price: California (15 percent), Massachusetts (10.75 percent), Nevada (10 percent), Oregon (17 percent), and Washington (37 percent). These taxes are similar to a retail sales tax where the consumer pays a tax on the purchase and the retailer remits it to the state. Michigan’s legislature is setting up its tax system, but the ballot initiative called for a 10 percent excise tax on retail sales. Localities can also levy an additional tax in some states, mostly as an excise tax on retail sales.

Colorado (15 percent) and Nevada (15 percent) additionally have a tax on the wholesale transaction between cultivators and distributors or retailers. The expectation is that some or all of these wholesale taxes are passed through to the consumer via higher purchase prices—similar to how alcohol taxes work. Alaska and California also levy a tax at this stage of production but tax marijuana per ounce instead of as a percentage of price (similar to a cigarette tax). Alaska's tax is $50 per ounce for buds and flowers and California's tax is $9.25 per ounce for flowers and $2.75 per ounce for leaves.

Some states also levy their general sales tax on the purchase of marijuana in addition to the excise taxes.

How do states use marijuana revenue?

So far, every state that taxes marijuana has dedicated at least a portion of the resulting revenue to specific programs:

  • Alaska sends half of its revenue to its general fund and half to programs aimed at reducing repeat criminal offences.
  • California’s revenue pays for administrative costs associated with marijuana legalization, and then uses excess funds for programs related to drug use, including economic development, academic studies, and youth programs.
  • Colorado’s revenue is dedicated to education programs.

  • Massachusetts distributes its revenue to various public safety programs.

  • Nevada’s revenue is sent to education programs and its rainy day fund.

  • Oregon dedicates its revenue to education programs, drug prevention and treatment programs, and transfers to local governments.

  • Washington dedicates its revenues to health care programs.

Further reading

A Trump Crack Down on Legal Marijuana Would Hurt State Budgets
Richard C. Auxier (2017)

Should We Tax Internalities Like Externalities?
Donald Marron (2015)

How Should Governments Use Revenue from Corrective Taxes?
Adele C. Morris and Donald Marron (2016)

Note

All revenue data are from the US Census Bureau’s Annual Survey of State Government Tax Collections. All dates in sections about revenue reference the fiscal year unless stated otherwise.