State Watch

Pot taxes surpass those from alcohol in legalization states

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Most states that have legalized marijuana for recreational consumption now take in more tax revenue from pot sales than from alcohol sales, according to a new analysis.

The report, from the Institute on Taxation and Economic Policy, found the 11 states where marijuana is legal pulled in just shy of $3 billion in excise taxes on pot in 2021, compared with about $2.5 billion they made on alcohol excise taxes or liquor store profits.

California’s fast-growing legal marijuana market generated $832 million in excise taxes, about twice as much as from alcohol sales. Marijuana revenues in Colorado generated $396 million for the state, almost eight times as much as alcohol taxes.

Marijuana taxes eclipsed alcohol taxes in Illinois, Massachusetts, Washington, Arizona and Nevada, as well. Alcohol still counts for more state revenue than marijuana in Michigan, where pot sales have only recently come online, as well as Oregon, Maine and Alaska.

“This is still a small part of state budgets, but it’s a very quickly growing area. There aren’t many revenue sources that grow year over year. This has been a several-year trend now,” said Carl Davis, one of the authors of the ITEP study. “The early states, what you see is revenue start low and grow very, very quickly.”

In the two states with the most established legal marijuana markets, Colorado and Washington — where voters approved legalization schemes in 2012 — tax revenues from marijuana eclipse even tobacco tax revenue, the most lucrative of the so-called sin taxes states levy.

For now, in most of the rest of the legalization states, tobacco taxes remain paramount. Tobacco excise taxes account for more than double the pot tax revenues in California, Illinois, Michigan, Massachusetts, Oregon, Arizona, Maine and Alaska.

Davis said he expected other states to see marijuana eclipse tobacco as a source of tax revenue in the coming years. Most states already tax tobacco products at much higher rates than marijuana, and smoking rates have declined for decades.

“The long run trajectory [in tobacco use] here has been downward for quite a while,” he said. “It’s going to come down to what states do with their tobacco tax rates.”

States tax different products at far different rates, even within categories like alcohol. In Colorado, the state levies a 15 percent excise tax on both wholesale and retail marijuana transactions. At the same time, it has one of the lowest tax rates on alcohol products: $2.28 per gallon of distilled spirits, 32 cents per gallon of wine and just 8 cents per gallon of beer.

Most other states levy a straight excise tax on retail marijuana sales, ranging from 10 percent in Michigan to 37 percent in Washington State. California levies a 15 percent excise tax on wholesale rates, along with taxes of $9.65 per ounce on marijuana flowers, $2.87 per ounce on leaves and $1.35 per ounce of fresh cannabis plants.

Among alcohol products, spirits are always taxed at the highest rate. In Washington State, a gallon of spirits incur a $35.31 excise tax, the highest in the nation, followed by Oregon and Virginia. The highest excise taxes on beer, by contrast, stand at just $1.29 per gallon, the rate levied in Tennessee. Wine is taxed most in Kentucky, at $3.23 per gallon, according to the nonpartisan Tax Foundation.

Several other states are considering joining the 11 pioneers in legalizing recreational marijuana. As they do, Davis said the best way to maximize revenue is to remove barriers to entry for the businesses that cultivate and sell marijuana.

“If their priority becomes to maximize revenue, the way you do that is to allow for a large number of retail outlets and allow for delivery and discourage local bans on cannabis shops,” Davis said. “You can tax cannabis quite heavily and raise a significant amount of revenue. Washington is raising more than any other state [per capita] because it has a high tax rate.”

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