Director of State Fiscal Research
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: