On November 8, voters in five states will decide whether to legalize and tax marijuana. If they all pass, 23 percent of Americans will live in a state with recreational marijuana sales, compared to about 5 percent today.
Currently, recreational marijuana is legal in Colorado (2014), Washington (2014), Oregon (2015), the District of Columbia (2015), and Alaska (2016). The proposals on the November 8 ballot are:
Arizona Proposition 205, which would impose a 15 percent taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. on retail marijuana sales, licensing fees, and state and local sales taxes (which average 8.25 percent). The licensing fees would be split 50-50 with local jurisdictions, with most of the state money dedicated to education and public health programs. The tax is estimated to generate $82 million a year by 2020. Arizona approved medical marijuana in 1996. Full text
California Proposition 64, which would impose a 15 percent tax on retail marijuana sales, as well as processor-level cultivation taxes of $9.25 per ounce on flowers and $2.75 per ounce, plus state and local sales taxes (which average 8.48 percent). The first $25 million raised would be spent on health and law enforcement expenses related to legalization, with the remainder divided 60 percent for youth drug education and treatment, 20 percent to environmental programs, and 20 percent to programs to reduce driving under the influence. Officials could not estimate a precise expected amount of revenue, but we calculate it will be $646 million per year or more. California approved medical marijuana in 1996 but rejected recreational marijuana in 1972 (33.5% to 66.5%) and 2010 (46.5% to 53.5%). Full text
Maine Question 1, which would impose a 10 percent tax on retail marijuana sales. Estimated to raise $10.7 million per year, 98 percent of the revenue would be deposited in the state general fund, with the remaining 2 percent distributed to cities and towns. Maine approved medical marijuana in 1999. Full text
Massachusetts Question 4, which would impose a 3.75 percent tax on retail marijuana sales, on top of the state sales taxA sales tax is levied on retail sales of goods and services and, ideally, should apply to all final consumption with few exemptions. Many governments exempt goods like groceries; base broadening, such as including groceries, could keep rates lower. A sales tax should exempt business-to-business transactions which, when taxed, cause tax pyramiding. of 6.25 percent. The estimated $50 million per year will be used for regulatory costs and the state general fund. Massachusetts approved medical marijuana in 2012. Full text
Nevada Question 2, which would impose a 15 percent tax on wholesale marijuana sales, plus licensing fees, and retail-level state and local sales taxes (which average 7.98 percent). Officials could not estimate a precise expected amount of revenue, but we calculate it will be $48 million per year or more. The revenue will be used for costs of administration and regulation, with the remainder used for education funding. Nevada approved medical marijuana in 2000 but rejected recreational marijuana in 2002 (39.1% to 60.9%) and 2006 (44.1% to 55.9%). Full text
In our report earlier this year on the lessons of states legalizing and taxing marijuana, we had five main conclusions:
- The marijuana tax rate should not be so high as to prevent elimination of the black market. Colorado, Washington, and Oregon have all taken steps to reduce their marijuana tax rates, with Alaska considering it. Colorado concluded with strong evidence that its 30 percent tax rate did not sufficiently reduce the black market, and more recent ballot initiative proposals all over 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 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. Driving factors have included the difficulties with practical implementation of these ideas, the danger of double-taxing some businesses if vertically integrated businesses get a tax benefit, and the favorable federal tax treatment for excise taxes as opposed to business taxes.
- Be conscious of the medical marijuana market. Medical marijuana is usually more loosely regulated and less taxed than recreational marijuana. In Washington, moving non-medical 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.
- Be cautious with revenue estimates. While the revenue can be in the tens or even hundreds of millions of dollars, it takes a lead time to develop. Estimating the size of an illegal market is difficult, as is estimating how many consumers will switch to the legal market when it is available. Revenues started out slowly in Colorado and Washington, both 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.
- Resolve 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.