A Road Map to Recreational Marijuana Taxation by Ulrik Boesen published by Tax Foundation (6/2020).
“Since 1970, the U.S. federal government has considered marijuana a schedule 1 controlled substance. This categorization, shared with drugs such as heroin and LSD, means the federal government deems marijuana to be a dangerous drug with a high potential for abuse and no accepted medical use.1 Nonetheless, according to state laws, it is legal for adults over 21 years of age to grow, process, sell, or consume recreational marijuana in 11 states. (In the District of Columbia, voters approved a measure to legalize, but federal law prohibits implementation.)2 Furthermore, a total of 33 states and the District of Columbia allow medical marijuana sales and consumption.3
Nevertheless, marijuana is an addictive product with certain societal costs, which means that states with legalized marijuana sales desire some control over the market. This control is maintained through a regulatory system as well as excise taxes.
This paper focuses on the design of the excise taxes on recreational marijuana. Medical marijuana should not be subject to excise taxes to the extent that it is genuinely consumed for medical reasons. While recreational marijuana shares negative externalities (secondhand smoke, driving under the influence, health impacts) with other “sinful” products like tobacco and alcohol, medical marijuana would by definition not be viewed the same way when recommended as a treatment for medical conditions.4 The case for or against marijuana legalization is outside the scope of this paper. Rather, our focus is to help policymakers consider appropriate tax regimes to the extent that they decide to legalize the product for recreational use.
Legalization of recreational marijuana is a still relatively new trend, but diminishing tax receipts from traditional sources of revenue as a result of the coronavirus pandemic, reports of growing marijuana sales, and popular support make it likely that more states (and maybe the federal government) will consider legalizing and taxing marijuana.5 However, excise taxes should, as a guiding principle, only be levied when appropriate to capture some negative externality or to create a “user pays” system—not as a general revenue measure.
Comprehensive policy recommendations are still developing because the market for recreational marijuana is rather young—in 2014, Colorado was the first state to allow sales. Analysts, businesses, and lawmakers alike are still improving their understanding of the complexities of legalization. This paper aims to contribute to the discussion surrounding recreational marijuana excise tax design. It does so by presenting arguments for a principled tax design of recreational marijuana and by discussing the different strategies and lessons from states with established marijuana markets.
The first section presents the marijuana market data and tax design from U.S. states. The second section discusses tax design options for states and the federal government as well as some of the factors impacting tax policy design in the marijuana space...”
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