Marijuana taxes are levied on legal purchases of marijuana. States tax either the consumer purchase (similar to a general sales tax but at higher rates), the transaction between cultivators and distributors or retailers (similar to taxes on alcohol), or both.
- Where is marijuana legal and how much revenue do state and local governments raise from taxes on marijuana?
- How much do marijuana tax rates differ across states?
- How do states use marijuana 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, marijuana sales for recreational use are legal and taxed in nine states: Alaska, California, Colorado, Illinois, Massachusetts, Michigan, Nevada, Oregon, and Washington. Marijuana is legal in Maine and Vermont but neither state has established its tax system and begun collecting revenue yet. The District of Columbia legalized marijuana in 2014, but Congress prevents the city from regulating and taxing sales.
Colorado and Washington have been collecting marijuana tax revenue since 2014. In calendar year 2018, Colorado collected $267 million and Washington collected $439 million in marijuana tax revenue, or roughly 0.5 percent of state and local general revenue in each state. Four other states reported a full year’s worth of state marijuana tax revenue in 2018: Alaska ($15 million), California ($354 million), Nevada ($87 million), and Oregon ($94, million). All of these totals were less than 1 percent of state and local general revenue. (Please note, none of these totals include local tax revenue.)
Medical marijuana is legal in 33 states and the District of Columbia and some of these states levy a tax on the purchase. However, these tax rates 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 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. A few states levy their percentage of price tax on the wholesale transaction, not the retail transaction, but 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 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. States with this type of tax also typically set different rates for different marijuana products. 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. As with other wholesale taxes, it is assumed most of this cost is passed on to the consumer in the final purchase price.
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.
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 2020:
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. Localities can also levy a percentage-of-price excise tax.
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. 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 levy their general sales tax on marijuana purchases.
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. The state will also levy a 10 percent excise tax on the retail sale price of marijuana. (Note: As of April 2020, Maine was not yet collecting marijuana taxes.)
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.
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.
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.
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 its general fund and half to programs aimed at reducing repeat criminal offenses.
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.
Illinois's revenue first pays for administrative costs associated with marijuana legalization. Any remaining revenue is then divided among the general fund, programs that supporting criminal justice reform efforts, substance abuse programs, and local government transfers.
Maine, when it begins collecting tax revenue, will evenly split it 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.
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.
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