Brief Update on State Cannabis Taxation

Despite its status as an illegal schedule one substance at the federal level, adult-use marijuana has become increasingly common across the states. It is legal in 19 states and D.C., Guam, and the Northern Mariana Islands. One in three Americans now live in a state with legal retail operations.

For the states that have joined the legal cannabis bandwagon, the decision paid off through the pandemic as revenues experienced consistent growth. In many states, tax collections from cannabis are outpacing alcohol collections, and in a few cases, tobacco tax collections as well.  However, according to officials in states like Colorado and California, tax revenues have flattened or slightly declined in FY 2022, as a pandemic-fueled spike in consumption returned to normal.

*Calendar year

Significant 2022 Cannabis Enactments

Seven states legalized adult-use cannabis from 2020 to 2021, but new enactments have slowed in 2022. Rhode Island is the only state to legalize adult use so far this year. Delaware’s legislature passed a measure to legalize adult use, but it was vetoed by the governor. Mississippi also passed a measure to implement a medical marijuana program and California passed a measure to reduce and restructure its cannabis tax scheme by eliminating a cultivation tax on growers.

Minnesota enacted a legalization measure of sorts by passing a law allowing 5 mg of hemp-derived THC, the primary intoxicant in marijuana, in individual products and up to 50 mg of THC per package. The regulation of hemp products is often a gray, unregulated area in state policy that is receiving growing attention. Given that intoxicating hemp is substantially similar to cannabis and can be sold legally and excise-tax-free in some states, this can create downward pressure on cannabis tax revenues. Colorado passed a law (SB 205) to create a task force that will task force will study products made with converted forms of THC. A few states (e.g., Connecticut and Michigan) have passed laws to clarify that intoxicating hemp products are to be regulated like adult-use cannabis.

• California (AB 195): Suspended the state's cannabis cultivation tax. Maintains a 15% cannabis excise tax, as required by Proposition 64, until June 30, 2025. Moves collection of the excise tax from the distributor to the point-of-sale. Requires, by July 1, 2025, the California Department of Tax and Fee Administration (CDTFA) to adjust the excise tax every two years by a rate that would generate revenue equal to what would have been collected from the cultivation tax.
• Colorado (S 205): Concerns the regulation of cannabis related products that may potentially cause a person to become intoxicated when used.
• Minnesota (HF 4065): Legalizes the sale of edibles derived from hemp; the bill does not include taxation on the products.
• Mississippi (SB 2095): The Mississippi Medical Cannabis Act legalizes the use of medical marijuana for certain medical conditions and imposes a 5% excise tax on medical cannabis cultivators.
• Rhode Island (H 7593): Legalizes recreational marijuana and regulates its use. There is a 20% tax on recreational marijuana. It is made up of a 7% sales tax, 10% cannabis tax, and a 3% tax by the municipality where the marijuana is sold.
• Washington D.C. (B 629): Creates D.C.’s first medical cannabis sales tax holiday, on Friday, Feb. 11, 2022. The holiday will start on Friday, April 15, 2022, and end on Sunday, April 24, 2022.

2022 Ballot Measures

Legalization of adult-use cannabis will be on the ballot in at least six states in 2022. Nebraska voters will be considering authorizing medical marijuana. Of the 13 states that have legalized recreational marijuana via ballot measure, it won by a margin of at least 6% of the vote in every state except Maine, so  the odds are pretty good that more states will join the legal bandwagon in November.

• Arkansas: Proposal to allow adults 21 and older to purchase and possess up to an ounce of cannabis. The state could impose up to a 10% supplemental tax on recreational cannabis sales. In addition to existing state and local tax
• Maryland: Maryland residents will have the opportunity to vote on legalizing recreational marijuana, taxation and licensing is being left up to lawmakers to resolve in 2023.
• Missouri: Legal Missouri 2022 seeks to allow people 21 and older to purchase, possess, consume and cultivate marijuana. Additionally, the bill proposes expunging the records of people with non-violent marijuana offenses.
• Nebraska: Nebraska has a two-part cannabis ballot initiative. The Medical Cannabis Patient Protection Act protects patients with serious health conditions and their caregivers from arrest. The Medical Cannabis Commission Act regulates private businesses to provide medical cannabis to qualified patients.
• North Dakota: New Approach North Dakota is a ballot measure seeking to legalize the possession of up to one ounce of cannabis, four grams of cannabis concentrate, and up to five hundred milligrams in a cannabis infused product. The measure also seeks to make the cultivation of up to 3 cannabis plants legal.
• Oklahoma: SQ820 seeks to legalize the purchase and possession of up to one ounce of cannabis and grow up to six cannabis plants for personal use. The measure also seeks to create a pathway for the resentencing and/or expunging of criminal records.  
• South Dakota: In November, South Dakota voters will see a ballot initiative to legalize personal use, possession, and cultivation of cannabis for adults 21 and older.

Update Cannabis Tax Structures

A previous fiscal brief discussed the various cannabis tax structures states have created. A few states have adopted novel tax approaches since. New Jersey adopted a hybrid tax structure, imposing a weight-based, per-ounce tax on cannabis that is adjusted according to retail selling prices. (Lower taxes are imposed if retail selling prices are higher.) Both New Mexico and New Jersey, are phasing in higher tax rates over time, partly to improve the ability of the legal market to be more competitive with the illicit market as it establishes itself. Two states, Connecticut and New York, joined Illinois in imposing a tax based on the THC content of cannabis products, with more potent products being taxed at higher rates.