A recent article published by the Tax Policy Center looks at the various types of tax systems that states and local governments use on cannabis sales.
In the piece, called “Cannabis Tax Revenue Is Down in Some States—And Maybe That’s Okay,” author Richard Auxier, senior policy associate at the Tax Policy Center, points out the pros and cons of the different tax systems. https://www.taxpolicycenter.org/taxvox/cannabis-tax-revenue-down-some-states-and-maybe-thats-okay
“A well-designed cannabis tax system can achieve multiple goals. But focusing myopically on revenue growth could create more problems than solutions,” Auxier wrote.
Auxier said there are four primary types of cannabis taxes that states and local governments deploy — and each has its plusses and minuses.
One is percentage-of-price taxes, which work like a general sales tax. This is the most popular, wrote Auxier, as 11 states use it while five others use it in addition to another tax.
While it is the easiest to administer, if the tax rate is not increased, revenue will slow or even drop as the retail price of cannabis falls.
The second is weight-based taxes, which are employed by five states. Cultivators generally weigh their product, set a tax rate, and remit the tax to the government. The author said this type of tax is generally not impacted by price, but they can be onerous for sellers.
The third is potency-based taxes, based on the level of tetrahydrocannabinol (THC), in the cannabis. So, products with a higher-TCH level would be taxed higher.
Finally, there is a general sales tax, which is used in 15 states. As Auxier points out, this is not a cannabis tax but is affected by the purchase price.
In the five states where tax collections fell in 2022 — California, Colorado, Nevada, Oregon, and Washington – said there could be several reasons for the decline. But one of them could be related to the tax systems in the states. That may have been the case in California.
“California repealed its weight-based tax and reformed its retail tax this summer because policymakers concluded that those taxes were stifling the development of the state’s legal cannabis industry. That is, California’s revenue problems were a warning about its burdensome tax system,” Auxier wrote.
As the author points out, while policymakers want to generate revenue, they must be careful to weigh the pros and cons to ensure they don’t levy taxes that drive consumers out of the market.