While the focus of marijuana legalization debates is rightly on the potential health and criminal justice impacts, the decision to legalize marijuana also has real implications for state and local revenue.
Over the past two decades, 23 states and the District of Columbia have enacted laws allowing the production and use of marijuana for medical purposes. Taking this one step further, Colorado, Washington, Alaska and Oregon are moving forward with systems that will permit the general production and purchase of retail marijuana. California, Maine, Nevada and others may soon follow in the coming years.
Given the increasing prominence of these issues, the Institute on Taxation and Economic Policy (ITEP) has written a new report providing a comprehensive overview of best practices for taxing marijuana and the potential impact these taxes could have on state and local revenue.
One of the central findings of the ITEP report is that predicting how much money state and local governments could raise from marijuana taxes is extremely difficult. To start, no jurisdiction in the world has legalized marijuana in modern times for a sustained period of time so there is not much historic data to go on.
Colorado and Washington have raised tens of millions in revenue from marijuana taxes, but these experiments in taxing marijuana are only a year old and the markets in both states are still evolving immensely, making it difficult to draw too many definitive lessons from either state.
The critical problem with estimating the revenue yield of marijuana taxes is that there are unpredictable factors that could work to substantially increase or decrease the revenue these taxes could yield. On the negative side for example, it's unclear whether there will be a dramatic decrease in the cost of marijuana production if legislation allows for cheaper cultivation methods, which could limit the ability of state governments to impose really dramatic excise taxes. Another significant factor that could drive marijuana tax revenue downward would be a step up in enforcement of federal laws against the production and consumption of marijuana.
One factor that could increase revenue is that legalization would likely significantly increase marijuana consumption across the United States, which would mean a bigger marijuana market to tax. In addition, bringing marijuana into the legal market would mean that individuals involved in the cultivation and sale of marijuana would be more likely to report their income from and pay taxes on these activities. Finally, states that adopt legalization early may experience a significant uptick in revenues from tourists, though this revenue could be fleeting as more states legalize marijuana.
Taking these factors all together, a recent study by the Congressional Research Service found that a $50-an-ounce tax at the state level could potentially raise about $6.8 billion annually if it were implemented across the country. Another report found that applying existing sales taxes and a 15 percent excise tax on marijuana in each state would generate just under $3.1 billion in state tax revenue. To give some context, raising somewhere between $3.1 to $6.8 billion would put marijuana taxes in the ballpark of the $6.5 billion that state and local alcohol taxes raise each year, yet put them well below the $17.6 billion raised by state and local cigarette taxes.
Read the Full Report: