The Institute on Taxation and Economic Policy (ITEP) has reported that state and local excise taxes collected from U.S. recreational marijuana sales (among the tax reporting states: Alaska, California, Colorado, Nevada, Oregon, and Washington) surpassed $1 billion in 2018, marking a 57% increase from 2017.
ITEP’s executive summary of the report, in part, states that:
- In states allowing taxable sales of recreational cannabis, annual cannabis excise tax revenues ($1.04 billion) already rival total excise tax revenues collected from all forms of alcohol ($1.16 billion) including beer, wine, and liquor. In Colorado and Nevada, cannabis excise taxes raise more revenue than alcohol excise taxes, and the same is projected to occur in California by 2020. Notably, all six states reporting cannabis revenue data raised more from excise taxes on cannabis than from sales of beer and wine, and the total amount of cannabis excise tax revenue reported across these states ($1.04 billion) more than tripled the amount of revenue raised from excise taxes on beer and wine ($304 million) in 2018.
- While cannabis tax revenues are meaningful, and growing rapidly, they still represent less than 1 percent of total state and local tax collections in each of the six states reporting data.
- Cannabis tax revenue is growing rapidly and has tended to grow fastest in the first few years following legalization as legal businesses expand their operations to meet consumer demand. Across states reporting multiple years of revenue collection data, annual revenue growth has averaged 158 percent between years one and two before slowing to 55 percent growth, 29 percent growth, and 17 percent growth in each subsequent year.
- The price of cannabis is falling, and this will pose a major challenge to cannabis tax revenue collections in many states. In Colorado, for instance, average wholesale cannabis prices are down 61 percent from their 2015 peak.
- Nationwide legalization and taxation of recreational cannabis could generate approximately $11.9 billion in state and local excise and sales tax revenue each year. This assumes taxation levels similar to those that currently exist in Washington State
ITEP recommends that “states should phase-in their cannabis taxes over time, rather than locking in a permanently low rate of tax. Low tax rates can help legal businesses price cannabis at levels more competitive with the illicit market during the early stages of legalization when legal prices tend to be highest. But as prices fall and consumers become accustomed to shopping in the legal market, low tax rates will no longer be needed to discourage shopping in the illicit market.”