U.S. states have adopted different tax structures in their respective recreational cannabis markets, each with its pros and cons.

Insights from a recently published article by the Tax Foundation show that ad valorem taxes, which are based on the sales price of cannabis, are still the simplest to implement and mirror typical sales taxes.

However, these taxes are prone to revenue fluctuations since they rely heavily on market prices, which can change over time. As the cannabis market matures and production costs drop, prices tend to fall, potentially eroding the tax base and leading to revenue shortfalls.

On the other hand, ad quantum taxes, which are based on the weight or quantity of the cannabis sold, offer a more stable revenue stream. This tax method targets the harm-causing elements of cannabis, such as high consumption though does not factor in potency. High-potency cannabis products may cause greater harm than low-potency products, and taxing purely by weight misses this nuance.

The most targeted tax structure is based on THC content, which would allow states to tax marijuana products according to their potency. This approach directly addresses the harm-producing element of cannabis, THC. However, measuring THC content accurately requires expensive technology, making it a challenging option for widespread implementation. As technology advances, this method could become more viable and effective in balancing public health concerns with revenue needs.

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Notable Tax Changes For 2024 

• Minnesota and Ohio both introduced a 10% tax on retail cannabis sales following their legalization of recreational marijuana. These states aim to balance generating revenue for public programs while keeping tax rates low enough to compete with the illicit market.
• Delaware has also entered the recreational cannabis scene, setting a 15% retail sales tax, although actual sales will not begin until 2025 when licenses are issued. The delayed start gives the state time to establish a robust regulatory framework before opening the market.
• In California, the shift from a wholesale tax to one based on retail gross receipts is expected to simplify tax collection and make the system more transparent. 
• New York has switched from taxing cannabis based on THC content to a 9% ad valorem tax, moving away from a more complex and costly tax structure.

With much-expected cannabis rescheduling and an end to the IRS’s 280E tax burden on the horizon, the base tax framework is increasingly important for states.

• Read Next: EXCLUSIVE: Weed Companies Will Be Treated Like Normal Businesses Once This Tax Provision Goes Away, Experts Say
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Cover photo: Courtesy of Tax Foundation