Cannabis Legalization: How Recreational Tax Revenue Benefits Economies

As the nation moves closer toward business as usual many industries are still reeling from financial loss. Others, however, seem to have gotten through unscathed, even coming out on top. Among the industries that flourished mid-pandemic? Legal cannabis and cannabinoid sales. 

The root of the surge in recreational cannabis consumerism is multifaceted. First, the increased stress and anxiety resulting from the pandemic, civil unrest, and the constant barrage of changes to everyday life led many consumers to increase their use of cannabis and CBD products or inspired new consumers to try it for the first time. Consumers also had more opportunities to consume cannabis in the privacy of their own homes and during daytime hours. 

Inaccurate stereotypes and assumptions about cannabis consumers led to predictably underestimated sales numbers. Predictions suggested that cannabinoid sales would drop again once unemployment benefits ran out - a clear picture of how government agencies view cannabis consumers. However, the typical cannabis consumer is anything but typical, and far from stereotypical. 

Once assumed that the bulk of cannabis consumers were below the poverty line, unemployed, or employed in the service sector, it’s clear from the data that's not the case. In reality, consumers - many of whom fall in the middle and upper-class - are savvy patrons that rely on cannabis for its medicinal, therapeutic, and motivating characteristics. Consumers of all types have discovered a lasting relationship with cannabis, which will surely impact the market for years to come.

As more and more states pass legislation and observe the nationwide commercial benefits of legalized cannabis sales, taxation and tax revenue have become trending topics. Cannabis has now been recreationally legalized in 17 U.S. states and the District of Columbia (and that number more than doubles when medically legal states are included). Several more have taken measures to begin the process, approving ballots for upcoming residential votes. Out of the 17 legalized states, 11 have completed the time-consuming process of setting up a tax and regulation system, allowing the implementation of taxable cannabis sales. 

Tax Revenue Basics

Since the U.S. lacks federal legalization, purchasing cannabis for recreational enjoyment is contingent on your location within the United States. Due to the varying legal status of each state, consumers are not legally permitted to take cannabis products outside the jurisdiction that allowed the sale. Simply put, consumers aren’t permitted to bring purchased products across that respective state’s borders. The full transaction - from seed (growth) to smoke (consumption) - must occur within state lines.

The location also sets the precedence for all other distinctions in purchase processes and varied taxation procedures. While consumers don’t pay taxes on valid medicinal cannabis purchases (in theory - there are hurdles in many states to be granted this right), state governments can tax non-medicinal cannabis transactions in the following ways: 

Percentage of the price

When consumers purchase products, they usually pay tax on the overall purchase price. The tax is then remitted to the state by the respective retailers. With cannabis taxation, this charge is considered an excise tax, and the rate is typically a higher rate than a state's general sales tax. Unlike sales tax, which applies to all taxable retail sales, the excise tax applies to goods and services like fuel, tobacco, and alcohol. Most excise taxes (ad valorem [according to value] or sin [in combination with federal taxes]) are paid by businesses that often counter the expense by charging the consumer a higher purchase price. To be clear, excise tax does not replace sales tax, it is in addition to sales tax. 

Weight-based tax

As the name suggests, weight-based tax is calculated by the weight of the cannabis product. The tax is initially paid by the cannabis grower or distributor, who then builds it into the final cost charged to consumers. Weight-based taxes are also imposed on cigarette transactions, but calculated per pack. 

Potency of the Product

This tax is exactly as it sounds. The rate of taxation directly correlates to the cannabinoid profile and potency of the product. Taxation based on THC levels of the cannabinoid product is currently only imposed by one state.

Recreational cannabis and cannabinoid products come with multiple tax rates attached, with most states collecting their general sales tax on top of excise taxes. In Massachusetts, taxable cannabis purchases are subject to a 10.75% excise tax, the state’s normal 6.25% sales tax, and an optional local excise tax, which can be as high as 3%. The rates in other states can be looked up via Leafly’s state-by-state marijuana tax rate guide. 

Legalized Sale Benefits

So how do state economies benefit from legalized cannabis sales? Three major ways include increased tax revenue intended for community programs, investment opportunities, and job growth. The first two work together: taxes allow each respective state to reinvest the money into programs and services intended to benefit the community. 

Increased tax revenue

Undoubtedly, the increase in tax revenue is the biggest motivating factor for states with recreational legalization. U.S. cannabis sales were over $12 billion in 2019 and are projected to reach over $30 billion by 2024. In Massachusetts alone, 2020 recreational sales brought in $14.9 million in tax revenue. 

MA revenue goes into the Marijuana Regulation Fund, which is controlled by the Massachusetts Cannabis Control Commission (CCC). The money is then allocated to initiatives accordingly. So far, every state that generates taxable cannabis income from recreational transactions follows a similar system, dedicating portions of their cannabis tax revenue to public community programs. 

Investment opportunities

Cannabis tax revenue can be used for a wide range of public and behavioral health services, including substance abuse prevention and treatment programs, early intervention services, and grants for school districts or community coalitions running youth substance prevention initiatives. An example of one such initiative is MAP, the Massachusetts Afterschool Partnership. MAP aims to foster safe spaces for students to make smarter choices by participating in enrichment activities. 

Other states are using their cannabis tax revenue for similar endeavors. Most of New York’s extra revenue, for example, is slated for school districts, public drug treatment education programs, reinvestment grants for high-risk communities, and additional research costs. California’s revenue pays for administrative costs associated with marijuana legalization and uses excess funds for drug-related programs: economical, educational, and youth-based. 

To see how the cannabis revenue funds are being allocated in all of the legalized states, check out the online statistics posted via the Tax Policy Center.

Job Expansion

Perhaps the most significant benefit to cannabis legalization is the influx of legitimate, prosperous cannabis companies. These companies include, but aren’t limited, to dispensaries, research facilities, and cannabis-infused health and wellness brands. Cannabis-related careers also encompass other existing industries with positions in farming and harvesting, production, scientific research, marketing, accounting, technology, legal services, distribution, and manufacturing. According to the Leafly 2021 Job Report, the United States employs more legal cannabis workers than electrical engineers, EMTs, and paramedics, and more than twice as many legal cannabis workers as dentists!

Potholes In Proposals

As with any new initiative, no execution is foolproof. As states implement legislation, some are encountering potholes. In Boston, for example, many on board with legalization were led to believe that the proceeds would benefit high-risk communities; those targeted most by the nation’s substance abuse epidemic. The leaders in those neighborhoods hoped that the revenue funds would help minority groups find permanent housing and steady employment. Instead, some reports show the bulk of the revenue being funneled into substance abuse programs already in existence. While this is beneficial in alleviating the financial burdens of state bureaus, many interject that it hasn’t added value to the areas where programs were severely lacking, even nonexistent. This is a huge point of contention for many Massachusetts minority community advocates, who feel that although Governor Baker’s administration is fulfilling Massachusetts law requirements, the true spirit and intention of the law are being violated. 

The administration counters allegations of uneven fund dispersals, claiming the funds go toward causes important to those in minority communities and neighborhoods. Job training, jail diversion, reentry services for the formerly incarcerated, youth summer employment, and entrepreneur grants were all on their list of programs funded by cannabinoid revenue. The hope is they’ll be able to support more revenue distribution and allocate to new causes, rather than existing ones. Yet only time will tell. 

The Bottom Line

It’s important to note that each state will undoubtedly be subject to seasons of trial and error as they learn the ropes. There are still unknowns regarding the impact of cannabis and cannabinoid tax revenue. As more states adopt pro-cannabis legislation and more research is done into the impacts of various fund allocations, the hope is that expectations will be met and exceeded. One thing is for certain: we’ve already seen major benefits surrounding employment expansion and statewide economic growth. With a little fine-tuning, that growth has the potential to continue spreading, hopefully improving all communities still fighting for a victory against the war on drugs.