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A recent analysis from the Tax Foundation, a Washington, D.C.-based nonprofit think tank, suggests that the nationwide legalization of cannabis across all states could significantly boost annual cannabis tax revenue, projecting it to reach $8.5 billion. The foundation proposes a comprehensive federal and state taxation model for cannabis, aiming to keep costs low to discourage illicit sales while advocating for higher tax rates on more potent marijuana products.
The current state-by-state approach to marijuana taxation, according to the report, is chaotic. Therefore, there is a need for a reevaluation of the existing framework considering both public health and revenue implications.
According to the report, cannabis sales generated nearly $3 billion in tax revenue for legal states in the past year. The foundation anticipates that this figure could nearly triple if marijuana were legalized nationwide.
While drawing parallels to tobacco and alcohol taxation may seem logical in theory, the report argues that the lack of a standardized marijuana product makes this approach impractical. Unlike tobacco, marijuana lacks a universally recognized product form, and its intoxicating component, THC, poses challenges in measurement comparable to alcohol content.
The proposed alternative is a taxation system based on weight or potency, depending on practicality, instead of the current method of percentage-based taxation on sales price. A weight-based system, according to the foundation, is effective for capturing harm from smokable products. It also provides a simpler entry for new products into the market, avoiding excessively high barriers for product testing solely for tax purposes.
The Tax Foundation highlights three key lessons from state experiences with marijuana taxation. First, it advises keeping tax rates low enough for legal markets to compete with the illicit market, preventing impaired effectiveness due to excessively high tax rates. Second, it recognizes the significant revenue potential of legal marijuana markets but cautions that it may take years to materialize, with potential volatility under certain tax models. Third, the foundation stresses the importance of consistency across jurisdictions, particularly as interstate commerce becomes a possibility.
Currently, most state marijuana markets impose excise taxes on cannabis products, with rates ranging from 6% in Missouri to 37% in Washington state. Some states, including New York and Connecticut, have integrated potency-based tax policies, though this approach remains uncommon.
Although various federal proposals to impose additional taxes on cannabis have been introduced, short-term advancement is unlikely. Nevertheless, the United States Census Bureau is monitoring state-level marijuana tax trends, providing an interactive map detailing the proportion of state revenue from cannabis taxes.
Given the amounts of tax dollars that sector players such as Trulieve Cannabis Corp. (CSE: TRUL) (OTCQX: TCNNF) are already paying, a projection of $8.5 billion in taxes on a national scale is possible if the right regulatory measures are put in place to facilitate legal sales while curbing the black market.
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