As states across the U.S. continue to legalize cannabis, each also makes their own rules and regulations, creating a unique patchwork of shifting policy around cannabis as you navigate from legal state to legal state. This might mean different products, limits and compliance laws state-to-state, not to mention varying prices and tax rates.
The recent Urban-Brookings Tax Policy Report, “The Pros and Cons of Cannabis Taxes,” looks deeper at the various cannabis tax rates and models throughout the country, ultimately finding that Alaska has the highest recreational cannabis taxes in the country and New Jersey has the lowest. Of course, it’s a bit more complicated under the surface, given that each state has a different approach to cannabis taxing.
The authors’ introduction points to this reality, differing from the standard taxes associated with alcohol, cigarettes and gas.
“Instead, governments use three different types of cannabis taxes: a percentage-of-price tax, a weight-based tax, and a potency-based tax. Different states use different taxes and some states levy multiple taxes. Additionally, some state and local governments levy their general sales tax on the purchase of marijuana,” the authors state.
The report was made as a guide for policymakers, journalists and community members to better understand cannabis tax debates, detailing the cannabis tax system of each state, providing data on cannabis tax revenue, explaining the pros and cons of different cannabis taxes and discussing the goals of the various tax models.
The report examines the various tax models by comparing the taxes on a retail purchase on an ounce of cannabis flower among the 19 states where adult-use taxes were enacted by September 2022. In order to ensure the comparisons were equal, the authors didn’t focus on state-by-state price discrepancies and said, hypothetically, each state would price an ounce at $100, while referencing that the actual price of a retail ounce is generally higher for customers in most states.
Similarly, they also applied a generalized 20% THC potency to deal with the THC-potency tax rates in certain states. Wholesale taxes were also applied to the purchase price for each ounce, with the assumption that all wholesale taxes are passed onto customers.
Alaska had the most taxes by far, an estimated $57.50 on a $100 ounce, largely because of the state’s $50-per-ounce tax on cannabis flower. The remaining $7.50 is from a local percentage of price excise tax in Anchorage.
Washington follows Alaska, at $47.25 for a hypothetical $100 ounce, though the authors also pointed out that the state has lower-than-average cannabis prices, so the price of an ounce would likely be lower. Since taxes are calculated as a percentage of the retail price, it means that the final tax paid would likely be a lower amount.
New York, Connecticut, and Nevada all rounded out the top five highest-tax states, at $45.37, $45.16 and $41.39 for a hypothetical $100 ounce, respectively.
New Jersey and Michigan were at the bottom of the list, boasting the lowest tax amounts at $14.32 and $16, respectively. New Jersey had a 6.625% tax rate, which is meant to be low to help legal businesses compete with the illicit market. However, local New Jersey governments can add a gross receipts tax on regulated retailers, distributors and cultivators, meaning that the authors’ estimate could be low depending on where the tax is applied. For this reason, authors added a 2% gross receipts tax. Michigan has a 10% excise tax and 6% general sales tax.
The report also breaks down a number of tax highlights, like 2022 being the first fiscal year in which any state cannabis tax revenue declined from the previous year (specifically in California, Colorado, Nevada, Oregon, and Washington, all more mature markets).
California also collected the most state cannabis tax revenue for 2022, at $744.4 million or $20 per capita, and Washington state and Colorado had the highest per capita taxes, at $67 and $61 respectively. The most popular taxation approach was through retail tax, and local taxes were reported as the most burdensome on consumers.