Five states with the “longest history of legal and taxable marijuana sales” saw declines in tax revenue from cannabis product sales in 2022, according to a report from the Urban Institute & Brookings Institution that examined cannabis tax policy across the country.
Colorado experienced the largest decline of 13.9 percent in tax revenue, amounting to a $56.9 million decline in revenue, according to the report. California, Nevada, Oregon and Washington also experienced more modest declines ranging from 3.5 percent to 6.8 percent.
The authors of the study note that tax revenue in Colorado and Washington – the two states with the longest history of legal and taxable cannabis sales – had been rising steadily since 2015 and the authors were unsure the cause of the decline last year but speculated it could be related to the pandemic.
“At this point, definitive reasons for this one-time drop in cannabis tax revenue are unclear,” wrote authors Richard Auxier and Nikhita Airi. “In particular, all aspects of state and local finance were affected by the COVID-19 pandemic and the federal government’s response to it in fiscal years 2021 and 2022. Specifically, for cannabis tax revenue, collections may have spiked in 2021 when consumers had disposable income (i.e., stimulus checks and reduced spending options) and a desire to substitute marijuana purchases for more public activities like going to a bar or restaurant. If true, the 2022 cannabis tax collections in these states could merely represent a return to more normal consumptions patterns.”
However, the authors also noted that the sale price of marijuana in some of the states also declined during this time, affecting tax collections but also showing signs of a successful market. “As such, the states with relatively new legal cannabis taxes could possibly experience similar volatility in their annual cannabis tax collections as the market evolves,” the report said.
Connecticut legalized adult recreational marijuana purchases in 2021 and legal retail sales are set to begin in 2023 with the opening of six retail locations, as other prospective businesses, including the state’s equity applicants, still make their way through Connecticut’s regulatory and lottery system.
State fiscal analysts project that Connecticut will see total tax revenue of $26.3 million in fiscal year 2023, which is already underway, and will rise to $73.4 million by 2026. Cannabis sales in Connecticut are taxed three times under the state’s sales tax, a separate state cannabis tax and a municipal tax for cities and towns hosting retail marijuana stores.
Connecticut’s tax regulations for marijuana sales puts it near the top of the list for highest-taxing states for marijuana sales, according to the Urban Institute’s report. Based on a hypothetical purchase of $100 of marijuana, Connecticut had the third highest total tax paid at roughly $45, in line with neighboring New York but much higher than Massachusetts and Rhode Island.
Alaska and Washington were the two states with a higher tax rate. New Jersey had the lowest tax burden, but the report authors say New Jersey’s rate is difficult to determine due to a local gross receipts tax. Michigan had the lowest “reliable” tax rate.
The report also noted that both Connecticut and New York followed in Illinois’ footsteps in establishing a tax based on the potency of the product. The authors note that such taxes “steers consumers away from the high-potency cannabis products that ostensibly have the highest risks to consumers,” but also requires the state “to establish and fund a new administrative system,” to monitor the potency.
The report notes this tax could become easier to administer if the federal government reforms its federal marijuana laws. Marijuana remains illegal at the federal level. High tax rates can also contribute to lower sales and thus tax revenue if consumers are pushed toward illegal markets, something that affected California’s legal marijuana market before the state instituted reforms.
“After nearly a decade of legal and taxable sales, it is clear that cannabis taxes can generate hundreds of millions of dollars in annual revenue for state and local governments,” the report concluded. “However, recent revenue declines in five states, each with a distinct cannabis tax system, underscore that revenue growth is not limitless and that various factors can affect what governments collect from year to year.”
There are now 19 states that have legalized and taxed cannabis for adult use.
