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Taxing cannabis is brand-new territory. While many states see recreational cannabis as a potential gold mine for tax revenue, the reality is more complicated.
Like taxes on alcohol, cigarettes, and gasoline, taxes on cannabis are called excise taxes. Excise taxes are best for raising enough money to pay for the “costs” related to the use of products or services.
Three principles should guide all states in their policy design, in order to minimize unintended consequences and maximize the benefits of cannabis taxation:
Many people see recreational cannabis as a potential gold mine for tax revenue. And given that the US market is estimated to be worth over $40 billion in the next few years, it’s no surprise that more and more states are legalizing, or de-scheduling, cannabis to join in on the “Green Rush.”
But while it might seem like an easy cash grab on the surface, taxing cannabis is brand-new territory, and the reality is much more complicated.
For each state to achieve the best possible outcomes, it’s important to understand the proper role of a cannabis tax, and to develop policies that balance several key principles.
Like taxes on alcohol, cigarettes, and gasoline, taxes on cannabis are called excise taxes.
Contrary to popular thought, excise taxes are not great sources for general revenue, as their tax base is much narrower than sales or income tax, and also less stable.
What excise taxes are best for is raising enough money to pay for the “costs” related to the use of products or services.
For example, gasoline taxes help fund road repairs and other transportation-related expenses.
The first principle for an effective cannabis tax, is that the rate should be low enough for the new, legal market to outcompete, and eventually eliminate, the illegal market. This will reduce crime, increase revenue, and protect public safety.
However, achieving a rate that’s low enough to be competitive is only one part of the balancing act.
The second principle is that the tax must also be high enough to raise enough revenue to fund cannabis-related spending priorities like licensing and administration, and to cover societal costs related to consumption, like cessation programs.
The third principle is sustainability. Taxing by price can be unstable because prices fluctuate. Instead, cannabis should be taxed on weight or potency, which will generate a more stable revenue stream to cover associated costs.
These principles should guide all states in their policy design, in order to minimize unintended consequences and maximize the benefits of cannabis taxation.
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