More States Legalize and Tax Marijuana

The number of states in which marijuana is now legal more than doubled this week as Maine, Massachusetts, Nevada, and California approved ballot measures.  As marijuana sales emerge from the shadows, their modest revenues may make it a bit easier for states to fulfill voter expectations for high-quality schools and other public investments.

Marijuana legalization ballot initiatives emerged victorious this year in part because states struggling to make needed investments in public services are looking to marijuana sales and production as new sources of revenue.  Some states have yet to recover fully from the Great Recession, and state revenue systems have been weakened by unaffordable tax cuts or are gradually weakening because of long-standing structural problems. 

It’s too soon to know for sure how legalization will perform as a revenue source.  It cannot take the place of broader revenue sources, such as income, sales, or property taxes.  Official estimates of the revenue impact from imposing excise and other taxes and fees on marijuana sales and production (see below), and the Colorado experience with legalized marijuana so far, suggest the measures will raise less than 1 percent of total general fund revenue.   

Other forms of “sin” taxes have proven problematic as ongoing sources of revenue for schools and other public services, even if they provide needed revenue.  Cigarette taxes can raise revenue and improve public health, but the revenue typically fails to keep up with the rising costs of public services, in part because the taxes reduce consumption.  And gambling revenues, which many states have turned to since the recession hit, tend to slow or even decline over time. 

Still, marijuana legalization expands the tax base from which public services can be funded, raising revenue that is often sorely needed for states to make the important public investments their residents want and their economies need.  

Here are more details about the marijuana taxes enacted this week:

• California will impose a 15 percent excise tax on sales, require growers to pay a per-ounce tax, and collect license fees from marijuana retailers and growers.  The funds will be used primarily for youth substance abuse programs, programs to reduce public health problems resulting from marijuana use, and cleaning up and protecting the environment from illegal marijuana growing.  In 2018 the revenue is expected to rise to about $1 billion, or 0.78 percent of general fund revenues.
• Maine’s measure requires a 10 percent excise tax on sales and imposes fees on marijuana-related businesses.  Revenues will first cover the costs of implementing the tax; remaining new revenue will flow into the state’s general fund, where it will support schools and other public services.  The state estimates it will raise about $2.8 million from legalization in 2018, or only 0.08 percent of general fund revenues, though the state projects that revenue could increase to as much as $10.7 million — or 0.3 percent of revenues — in future years.  
• Massachusetts voters imposed a 3.75 percent excise tax on marijuana sales, on top of the state’s 6.75 percent sales tax, as well as license fees.  The new revenues will first cover the tax’s implementation; remaining revenue will flow into the state’s general fund.  The state’s Special Senate Committee on Marijuana estimates the state will raise roughly $60 million, or about 0.24 percent of general fund revenue in the current fiscal year.  
• Nevada voters agreed to a 15 percent excise tax on wholesale sales of marijuana, as well as license fees.  Revenues remaining after they cover implementation will go to schools.  The state’s fiscal analysis division could not estimate the resulting revenues.  Proponents optimistically estimate $60 million in new revenue, or about 1.6 percent of total general revenue.