US Losing $8.5B In Cannabis Taxes Due To Lack Of Federal Legalization, New Taxation 'Blueprint'

When it comes to taxation of cannabis products, things are rather complex.

Marijuana is still considered a Schedule 1 substance under federal law, and just 24 states have their own legal recreational markets. The result is a wide variety of tax regulations. What would happen with taxes in case of federal legalization?

The nonprofit Tax Foundation released a report last week analyzing the current situation and projecting what could happen in case of national reform.

“The design of an excise tax is important. Well-designed taxes generate revenue with far less societal impact than poorly designed taxes,” the report reads.

Per the projections, federal legalization could generate $8.5 billion annually for all states. This compares to some $3 billion in cannabis revenues last year. 

Report Highlights

• In the case of interstate commerce authorization, the tax consistency across jurisdictions would be of great importance.

• The experience of some legal states shows that it is important that tax rates be low enough to enable legal markets to destabilize legal illegal markets.

• While potency-based taxation is ideal, the trouble with it is that potency testing is still expensive and oftentimes unrealized. Until that improves (potency testing becomes more affordable and reliable), the solution could be sought in a weight-based tax or a hybrid weight-based tax based on a limited number of potency categories. This model would enable higher tax rates on more potent products, at the same time limiting the costs of testing. 

• The proposed hybrid weight-based tax model could set a base tax rate by weight for cannabis products containing less than 10% THC; that rate could double for products with 10% to 25% percent THC and then double again for products containing 25%THC or more. 

“A simple, low-rate, and low-cost tax system has the potential to raise significant amounts of revenue, while simultaneously decreasing social harms from cannabis by bringing illicit market transactions into a legal market framework,” concluded Adam Hoffer, the Tax Foundation’s director of excise tax policy, and lead author of the report.

See Also: Congressman Dave Joyce Files Cannabis Reclassification Bill Allowing Interstate Commerce, Tax Relief & More

Photo: Benzinga edit with images by Karolina Grabowska via Pexels and Dee from Pixabay