Marijuana taxes are levied on legal purchases of marijuana.
There are three major types of marijuana taxes: taxes on the price of the product (similar to general sales taxes, but typically at higher rates), taxes on the weight of the product (similar to per-pack cigarette taxes), and taxes on the potency of the product (similar to alcohol taxes, but based on THC). Many states levy more than one of these types of taxes on marijuana. And some jurisdictions also levy their general sales tax on marijuana purchases in addition to excise taxes.
- Where is marijuana legal and how much revenue do state and local governments raise from taxes on marijuana?
- How much do marijuana taxes differ across states?
- How do states use marijuana tax revenue?
- Further reading
Where is marijuana legal and how much revenue do state and local governments raise from taxes on marijuana?
Although prohibited under federal law, the possession of marijuana for recreational use is legal in 17 states and the District of Columbia. However, setting up a tax and regulation system takes time, so not all of these states collect tax revenue.
As of April 2021, legal marijuana purchases are taxed in 11 states: Alaska, Arizona, California, Colorado, Illinois, Maine, Massachusetts, Michigan, Nevada, Oregon, and Washington. The possession of marijuana is legal but taxable sales are not yet available in Connecticut, Montana, New Jersey, New Mexico, New York, Vermont, and Virginia. The District of Columbia legalized marijuana in 2014, but Congress prevents the city from regulating and taxing sales. Voters approved marijuana legalization in South Dakota in 2020, but the ballot initiative is being challenged in state courts.
Colorado and Washington have been collecting marijuana tax revenue since 2014. In 2020, Colorado collected $387 million and Washington collected $474 million in marijuana tax revenue, or roughly 1 percent of state-level general revenue in each state. Six other states reported a full year’s worth of state marijuana tax revenue in 2020: Alaska ($24 million), California ($1 billion), Illinois ($53 million), Massachusetts ($82 million), Nevada ($105 million), and Oregon ($158 million). All of these totals were less than 1 percent of state general revenue.
These totals do not include taxes levied at the local level. Alaska, California, Massachusetts, New York, Oregon, and Virginia allow localities to levy an excise tax on marijuana purchases.
Medical marijuana is legal in 35 states and the District of Columbia, and some of these states levy a tax on the purchase (others do not because they exempt the purchase of prescription drugs from their general sales tax). However, state tax rates on medical marijuana purchases are often the same as or close to the state’s general sales tax rate and do not raise much revenue.
There are three main ways state and local governments tax recreational marijuana.
Percentage-of-price. These taxes are similar to a general sales tax in that the consumer pays a tax on the purchase price and the retailer remits it to the state. However, like other excise taxes, the tax rate is typically higher than the state's general sales tax rate. Most states levy this tax during the retail transaction (i.e., the consumer pays the tax in addition to the product’s cost at checkout). But a few states levy their percentage of price tax on the wholesale transaction (i.e., the tax is paid by the cultivator or distributor) and it is assumed this cost is then passed on to the consumer in the final purchase price. Some states also let localities levy a percentage of price excise tax, but typically with a limit on the maximum rate.
Weight-based. These taxes are similar to cigarette taxes, except instead of taxing per pack of cigarettes the tax is based on the weight of the marijuana product. This tax is levied on the wholesale transaction. That is, the tax is paid by the cultivator or distributor and then, it’s assumed, built into the final cost of the consumer purchase. States with this type of tax also typically set different rates for different marijuana categories. For example, California levies a $9.65 per ounce tax on marijuana flowers, a $2.87 per ounce tax on marijuana leaves, and a $1.35 per ounce tax on fresh plant material.
Potency-based. These taxes are similar to alcohol taxes, except instead of taxing drinks with a higher percentage of alcohol at higher rates (i.e., liquor is taxed at a higher rate than beer), the tax is based on the THC level of the marijuana product. Illinois is currently the only state with a THC-based tax. It taxes products with a THC content of 35 percent or less at 10 percent of retail price and those with more than 35 percent at 25 percent of retail price. All marijuana-infused products (e.g., edibles) are taxed at 20 percent of retail price. New York’s recently enacted legislation also establishes a potency-based tax. However, unlike Illinois, New York will levy its tax per milligram of THC with different rates for different products (e.g., an edible is taxed at 3 cents per milligram).
Some states use more than one of these taxes. Additionally, some states and localities levy their general sales tax on the purchase of marijuana in addition to their excise taxes.
Here is each state's marijuana tax system for 2021:
Alaska: Weight-based taxes of $50 per ounce for flowers, $15 per ounce for stems and leaves, $25 per ounce for immature flowers and buds, and $1 per clone. These taxes are then built into the final purchase price of various marijuana products. Localities can also levy a percentage-of-price excise tax on marijuana purchases.
Arizona: Percentage-of-price tax on retail transactions (16 percent). The state (5.6 percent) and local governments also levy their general sales tax on marijuana purchases.
California: Weight-based taxes of $9.65 per ounce on marijuana flowers, $2.87 per ounce on marijuana leaves, and $1.35 per ounce on fresh plant. These taxes are then built into the final purchase price of various marijuana products. Additionally, the state levies a 15 percent excise tax on the retail purchase price, and localities can also levy a percentage-of-price excise tax. Further, the state (7.25 percent) and local governments levy their general sales tax on marijuana purchases.
Colorado: Percentage-of-price tax on both the wholesale transaction (15 percent) and retail transaction (15 percent). Local governments can also levy their general sales tax on marijuana purchases.
Connecticut. The recently enacted legislation creates a new THC-based excise tax with different rates for different cannabis products: 0.625 cents per milligram for plants, 2.75 cents per milligram for edibles, and 0.9 cents per milligram for all other products. In addition, the state's general sales tax (6.35 percent) will apply to marijuana purchases as will a new 3 percent special cannabis sales tax that will remit revenue to local governments.
Illinois: Products with THC content of 35 percent or less are taxed at 10 percent of retail price and those with more than 35 percent are taxed at 25 percent of retail price. All marijuana-infused products (e.g., edibles) are taxed at 20 percent of retail price. Additionally, all dispensaries pay a 7 percent tax on their gross receipts. Marijuana purchases are also subject to state (6.25 percent) and local general sales taxes.
Maine: Weight-based taxes of $335 per pound of flowers or mature plants, $94 per pound of trim, $1.50 per immature plant or seeding, and $0.35 per marijuana seed. These taxes are then built into the final purchase price of various marijuana products. The state also levies a 10 percent excise tax on the retail sale price of marijuana.
Massachusetts: A 10.75 percent state excise tax is levied on the retail transaction price. Localities can also levy up to a 3 percent excise tax on the purchase price. The state also levies its 6.25 percent general sales tax on marijuana purchases.
Michigan: A 10 percent excise tax is levied on the retail transaction price. The state also levies its 6 percent general sales tax on marijuana purchases.
Montana: The voter-approved initiative proposed a 20 percent tax on retail transactions. Montana lawmakers were not required to implement the ballot initiative’s proposed rules, but they ultimately enacted the initiative’s 20 percent retail tax. However, the final legislation did increase the share of marijuana tax revenue dedicated towards administrative costs, substance abuse prevention and treatment, and the general fund relative to the ballot initiative, while decreasing the amount dedicated for conservation programs. Legal sales and tax collection are expected to begin in January 2022.
Nevada: Percentage-of-price tax on both the wholesale transaction (15 percent) and the retail transaction (10 percent). The state (6.85 percent) and local governments also levy their general sales tax on marijuana purchases.
New Jersey: The legalization legislation passed in 2021 did not include an excise tax on marijuana purchases. However, the state’s Cannabis Regulatory Commission is authorized to impose a weight-based excise tax at rates tied to the average retail price of marijuana. Marijuana purchases will be subject to the state general sales tax (6.625 percent). Localities will also have the option to impose an additional 2 percent sales tax on purchases. As of April 2021, legal sales and tax collection had not yet begun.
New Mexico: The recently enacted legislation creates a percentage-of-price tax on retail transactions at a rate of 12 percent until July 2025. After that, the excise tax rate will rise 1 percentage point each subsequent year until the rate reaches 18 percent in 2030. Marijuana purchases will also be subject to state and local gross receipts taxes (these rates ranges from 5.125 to 8.6875 percent). Retail sales and tax collection are expected to begin in 2022.
New York: The recently enacted legislation created both a state-level (9 percent) and local-level (4 percent) percentage-of-price excise tax, for a combined tax rate of 13 percent. The state will also impose a potency-based tax on wholesale transactions, at rates of 0.5 cents per milligram of THC for flower, 0.8 cents per milligram of THC for concentrates, and 3 cents per milligram of THC for edibles. As of April 2021, legal sales and tax collection had not yet begun.
Oregon: A 17 percent excise tax is levied on the retail transaction. Localities can also levy up to a 3 percent excise tax on the retail price.
Washington: A 37 percent excise tax is levied on the retail transaction price. The state (6.5 percent) and local governments also levy their general sales tax on purchases.
Vermont: A percentage-of-price tax (14 percent) is levied on the retail transaction price. Marijuana purchases are also subject to the state’s general sales tax (6 percent) and local sales taxes.
Virginia: The recently enacted legislation created a percentage-of-price tax (21 percent) on the retail transactions. Localities may also levy a percentage-of-price excise tax of up to 3 percent. In addition, state (5.3 percent) and local general sales taxes will apply to marijuana purchases. As of April 2021, legal sales and tax collection had not yet begun.
So far, every state that taxes marijuana for recreational use has dedicated at least a portion of the resulting revenue to specific programs:
Alaska sends half of its revenue to programs aimed at reducing repeat criminal offenses, a quarter to drug education and treatment programs, and a quarter to the general fund.
Arizona dedicates a third of its revenues to community colleges, about a third to law enforcement and fire departments, a quarter to the highway fund, 10 percent to the Justice Reinvestment Fund, and the remainder to the Arizona Attorney General’s Office for the costs of enforcing the new marijuana law.
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.
Connecticut's revenue will fund social equity programs (e.g., workforce development and community investment) and drug-prevention and -recovery programs.
Illinois's revenue first pays for administrative costs associated with marijuana legalization. Any remaining revenue is then divided among the general fund, programs supporting criminal justice reform efforts, substance abuse programs, and local government transfers.
Maine evenly splits its revenue between public health and safety programs and law enforcement training programs associated with marijuana legalization.
Massachusetts distributes its revenue to various public safety programs.
Michigan's revenue is divided among education, transportation, and transfers to local governments.
Montana’s revenue will be dedicated to a wide range of programs, including conservation, substance abuse prevention and treatment, veterans’ services, health care, local governments, and expungement and resentencing efforts for people previously convicted of marijuana offenses. Some additional funds will be sent to the state’s general fund.
Nevada’s revenue is sent to education programs and its rainy-day fund.
New Jersey will require that 70 percent of revenues be invested in "impact zones," which are predominantly Black and Latino cities and neighborhoods affected by prior enforcement of marijuana laws. The remaining revenue will go to administrative costs associated with legalization and the state’s general fund.
New Mexico will direct some revenues to localities where marijuana sales take place. Additional funds will be used to carry out the new marijuana law, such as regulating the industry, collecting taxes, public safety, and expunging past cannabis-related arrests and offenses. Otherwise, revenues will go to the state’s general fund.
New York’s revenues will go to school districts, drug treatment and public education, reinvestment grants to community-based organizations in communities affected by past drug policies, and administrative and research costs.
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.
Vermont’s revenues support after-school learning programs.
Virginia will dedicate its revenues to pre-kindergarten programs, reinvestment grants for historically over-policed communities, and drug prevention and treatment programs.
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