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IMA Tax Policy Blog

New Reports Examine Marijuana Taxation In The U.S.

By Richard Borean, The Tax Foundation — How have states faired so far? What lessons can other states learn? How much federal revenue could marijuana legalization produce?

The nonpartisan Tax Foundation recently released two new reports on the federal and state taxation of marijuana. The first examines how much revenue the federal government could raise in taxes from a fully developed, legal marijuana industry. The second examines the experiences Colorado and Washington have had with taxing marijuana, and provides guidance for states seeking to tax these products in the future.

“Legalization is happening in several states and that number is going to go up. Federal and state policymakers can benefit from the lessons learned in the first few states,” said Tax Foundation Vice President of State and Legal Projects Joseph Henchman.

Marijuana Legalization and Taxes: Federal Revenue Impact examines how much revenue the federal government could raise from taxes on legal marijuana, including business and individual income taxes from added economic activity. The report’s key findings include:

Marijuana tax collections in Colorado and Washington have exceeded initial estimates.

A mature marijuana industry could generate up to $28 billion in tax revenues for federal, state, and local governments, including $7 billion in federal revenue: $5.5 billion from business taxes and $1.5 billion from income and payroll taxes.

A federal tax of $23 per pound of product, similar to the federal tax on tobacco, could generate $500 million per year. Alternatively, a 10 percent sales surtax could generate $5.3 billion per year, with higher tax rates collecting proportionately more.

The reduction of societal risk in being engaged in the marijuana trade, as well as the inclusion of taxes, will combine to reduce profits (and tax collections) somewhat from an initial level after national legalization.

Society pays all the costs regardless of legality but tax revenues help offset those costs.

Marijuana Legalization and Taxes: Lessons for States from Colorado and Washington evaluates how marijuana legalization has proceeded in the first states, how taxes are levied and how they’ve changed, and revenue estimates for a marijuana tax for each state (p. 14). The report serves as a checklist for policymakers as they consider whether and how best to build a tax system around this new industry. The report’s key findings include:

Marijuana tax collections in Colorado and Washington have exceeded initial estimates, and a nationwide legalization-and-tax regime could see states raise billions of dollars per year in marijuana tax revenue.

Colorado, Washington, and Oregon have all taken steps to reduce their marijuana tax rates, with Alaska considering it, after initial rates of 30 percent or more did not reduce the black market sufficiently. More recent ballot initiative proposals across the country propose rates between 10 and 25 percent.

Tax rates on final retail sales have proven the most workable form of taxation. Other forms of taxation that have been proposed, such as taxing marijuana flowers at a certain dollar amount, taxing at the processor or producer level rather than the retail level, or taxing products by their level of THC, have faced practical implementation difficulties.

Medical marijuana is usually more loosely regulated and less taxed than recreational marijuana. In Washington, moving nonmedical sales to the retail market has proven difficult given the enormous differentials in tax rates and regulatory structure, and officials there wish the two systems had been tackled simultaneously.

While the revenue can be in the tens or even hundreds of millions of dollars, it takes time to accrue. Revenues started out slowly in Colorado and Washington, as consumers became familiar with the new system and after state and local authorities spent time and money setting up new frameworks and regulatory infrastructure.

Significant attention must be given to health, agricultural, zoning, local enforcement, and criminal penalty issues. These important issues have generally been unaddressed in ballot initiatives and left for resolution in the implementation process.

Source: The Tax Foundation