Taxing Cannabis

Source: Carl Davis, Misha E. Hill, Richard Phillips, Institute on Taxation & Economic Policy, January 2019

From the introduction:
State policy toward cannabis is evolving rapidly. While much of the debate around legalization has rightly focused on potential health and criminal justice impacts, legalization also has revenue implications for state and local governments that choose to regulate and tax cannabis sales.

For decades, analysts interested in the tax revenue potential of legalizing cannabis had to use unreliable survey data and speculation regarding how a legal market might operate. But this is changing. This month marks the five-year anniversary of the first legal, taxable sale of recreational cannabis in modern U.S. history. In January 2014, recreational cannabis establishments in Colorado opened their doors to the public, followed soon thereafter by businesses in Washington State, Oregon, Alaska, Nevada, California, and most recently Massachusetts. These states’ experiences with a tax that did not exist just a few years ago are providing invaluable information to lawmakers across the country as they consider legalizing and taxing recreational cannabis sales.

This report describes the various options for structuring state and local taxes on cannabis and identifies approaches currently in use. It also undertakes an in-depth exploration of state cannabis tax revenue performance and offers a glimpse into what may lie ahead for these taxes.