2021 Fiscal Briefs – National Conference of State Legislatures

By Jackson Brainerd

As states head into their 2021 legislative sessions, many will have to grapple with budget shortfalls caused by the coronavirus and efforts to mitigate its spread. For states that need to raise revenue, the legalization and taxation of recreational marijuana sales might be an option many consider.

Marijuana is no longer the flashpoint it once was; 15 states and D.C. have legalized recreational cannabis  in some fashion and two-thirds of the public now supports doing so. Revenue collections in the states with established markets are outstripping alcohol and cigarette tax collections. A Politico article in March 2020 noted that “Marijuana sales are booming, with some states seeing 20% spikes in sales as anxious Americans prepare to be hunkered down in their homes potentially for months. Weed sellers are staffing up too, hiring laid-off workers from other industries to meet demand.” In 2020 alone, five states legalized it: Arizona, Montana, New Jersey, South Dakota, and Vermont. In four of the five, it was approved by voters at the November ballot by wide margins.

States have not coalesced around a uniform approach to marijuana taxation and many uncertainties linger surrounding the best design. This brief examines some of the most significant considerations and state experiences with legalization.

Tax Type

Most states have chosen to apply an excise tax to the sale of cannabis. (See Table 2 below.) These can be levied at the retail or wholesale level. Several states have excise taxes at both levels. In nine states, the excise tax is levied in addition to the general sales and use tax. Eleven states have also provided for an additional local option tax.

The excise taxes that states have imposed have follow three different approaches.

Based on price. In most states, marijuana excise taxes are based on the retail

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