Cannabis Tax Debates are Ramping Up; Here's What We've Learned from Five Years of Cannabis Taxation Thus Far – Just Taxes Blog

January 23, 2019

January 23, 2019

This month marks the five-year anniversary of the first legal, taxable sale of recreational cannabis in modern U.S. history. After decades of speculation about what taxing cannabis might mean for state and local coffers, the true revenue potential of cannabis taxes is finally coming into focus. And just in time. This year lawmakers in Connecticut, Delaware, Hawaii, Illinois, New Jersey, New York, Rhode Island, and Vermont will all be debating the taxation of recreational cannabis. A new ITEP report reviews the track record of recreational cannabis taxes thus far and offers recommendations for structuring cannabis taxes to achieve stable revenue growth over the long haul.

As the report shows, half a dozen states generated a combined total of more than $1 billion from their excise taxes on cannabis in 2018—a 57 percent increase relative to one year earlier. Colorado and Nevada are already raising more revenue from excise taxes on cannabis than from excise taxes on alcohol, and the same is projected to occur in California by 2020.

But while cannabis tax revenues are proving meaningful thus far, most states allowing for the legal sale of recreational cannabis have set themselves up for long-run revenue disappointments. Six of the nine states with tax structures in place are choosing to tax cannabis based solely on its price. But the experiences of Colorado, Oregon, and Washington—the three states that have been taxing cannabis the longest—make clear that cannabis prices will decline significantly in the years following legalization as legal businesses learn to operate more efficiently and as the legal barriers that had inflated the price of cannabis come down.

In Colorado, for instance, wholesale cannabis prices are already down 61 percent relative to their 2015 peak and experts have

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