Cannabis Industry Putting More Tax Revenue in State Coffers

As the legal use of marijuana continues to grow, the tax revenue generated by the cannabis industry has other states wanting in. In fact, according to the Institute of Taxation and Economic Policy (ITEP), tax revenue for the 10 states where the legal sale of adult-use cannabis exists exceeded $3 billion in 2020.

COVID Had More People Purchasing Cannabis Products

In addition to an expanded legal market, the pandemic also contributed to cannabis use and the subsequent rise in tax revenue. Analysis by the ITEP shows that excise and sales tax on cannabis jumped by more than $1 billion in 2020, or 58% compared to 2019. Of the total $3 billion generated last year, California alone produced $1 billion. Stay-at-home orders issued during 2020 sparked a rise in cannabis use and buoyed sales in established markets such as Washington State, Colorado, Oregon, and Alaska. 

States Early to the Cannabis Market See More of a Revenue Windfall

Washington State, which launched its legal cannabis market in 2014, continues to have the most lucrative cannabis tax revenue stream in the nation, producing almost $86 for every person living in the state. This is accomplished through a combined excise and sales tax equal to about 46% of the price of cannabis sold, currently the highest rate in the nation, according to the ITEP. States with established markets generate significantly more in revenue than states with newer markets that are still in the process of growing to meet consumer demand. Some states also opt to levy lower tax rates on cannabis, bringing in less revenue.

Where is the Cannabis Tax Revenue Going?

Depending on the state, tax revenue made from the sale of cannabis is allocated in a variety of ways. For example, in California, revenue is deposited in a marijuana tax fund and earmarked to support public health and youth programs, repair the environment, and improve public safety. In Colorado, 10% of the revenue goes to local governments and 90% goes to the state government with a percentage going into a public school fund. In Oregon, cannabis tax revenue is allocated as follows: 40% to the state school fund; 20% to mental health, alcoholism, and drug services; 15% to the Oregon state police; 5% to the Oregon Health Authority for drug treatment and prevention; and 20% to cities and counties.

Undeniably, one of the most compelling incentives for states to legalize marijuana is the revenue it brings in. Several bills have also been introduced on the federal level to legalize pot, or at least take the pressure off of banks who want to accept money from the marijuana industry.