The potential tax revenue from the legalization of cannabis has been at the center of the argument between republicans and democrats. Proponents of legalization say states who haven’t legalized cannabis should look at the revenue generated from alcohol and other sin taxes as a window into what could be.
According to a May 2019 Gallup poll, 60% of those who oppose the legalization of cannabis, say making the plant recreationally available “would not benefit individuals or society much.” In this memo, we take these two arguments presented and attempt to gain a better understanding and stoke discussion around how cannabis taxes in recreationally legal states are currently benefiting society in comparison to alcohol.
Alcohol and cannabis taxation are reviewed in five states: Alaska, California, Colorado, Oregon, and Washington. The memo reviews three aspects of each state’s taxation scheme. The following are highlights from the memo, broken down by state:
- Both cannabis and alcohol are earmarked for social services.
- In 2018, alcohol generated $19.6 million in tax revenue while cannabis generated $5.3 million.
- 50% of alcohol’s tax revenue vs 75% of cannabis tax revenue is allocated towards social services.
- Alcohol and cannabis are both heavily taxed via sales and excise taxes.
- In 2018, alcohol generated $382 million and cannabis generated $288 million in tax revenue.
- All alcohol excise taxes (91% of all 2018 alcohol tax revenue) go to the Alcohol Beverage Control Fund which can be used for general state services.
- Cannabis sales and use taxes are deposited into a general state fund, while 96% of excise taxes on purchasers and cultivators go towards social programs.
- Pre-legalization, the state legislature believed cannabis would generate $1 billion in tax revenue.
- Speculation from advocates points to high tax rates and a complex regulatory scheme as potential reasons for the industry’s underperformance and the black market’s continued existence.
- 2018 generated $47 million in alcohol tax revenue and $252 million in cannabis tax revenue
- 85% of its alcohol excise tax went to a fund that offers financial assistant and medical benefits to low income seniors.
- 90% of cannabis tax revenue is allocated towards a general fund, school fund, and a Marijuana Tax Cash Fund (MTCF).
- MTCF is spent at the discretion of the legislature but is typically allocated towards social programs.
- In 2018, half of the state’s $288 million alcohol tax revenue goes towards a general fund.
- $9 million is allocated to the Mental Health Alcohol & Drug Services Account, the rest is dispersed among the cities and counties.
- The state imposes a 17% sales tax on cannabis products and generated over $67 million in cannabis tax revenue in 2018.
- After paying for administration and enforcement costs, Oregon deposits 80% of the revenue into social programs (mostly state school funding).
- Of the $90 million in alcohol tax revenue generated in 2018, 15% is earmarked for social programs. The rest goes to general state services and municipalities.
- A 37% excise tax is applied to cannabis.
- Washington rejects a price-based excise tax model.
- The state generated $283.4 million in cannabis tax revenue.
- Around 24% goes towards health and social services
Cannabis and alcohol are taxed in similar ways across all five states. In most cases, both are subject to the state sales tax. Some states, like California, simply place sales tax in a general fund for appropriations subject to the discretion of the legislature. Still there are other states, like Colorado, which earmark sales tax for a particular purpose. In all five cases, states have created a cannabis-specific excise tax which is earmarked at least in part for crucial social services. In some cases, alcohol is also earmarked for social services.