Policy Brief: Tax rates, state revenue and markets for marijuana

How much tax revenue can states raise on legal cannabis before driving users into the illegal market?

Editor’s note:

The experience of other states, researchers have found, is that legalizing adult recreational use of marijuana, or cannabis, whatever its other effects, may improve the employment outlook. But what of another often-touted economic benefit, tax revenue? 

In this sixth installment in our “real facts” series, Jeremiah Mosteller looks at the available research. Some conclusions:  

States that legalized cannabis now collect billions of dollars in taxes, but the higher the tax rates, the greater a share of marijuana sales remain in the legacy illegal market.  

This means that two separate goals for taxing a legalized market — to raise revenue and to shrink the illegal drug trade — are in conflict with each other.

Read the policy brief

Tobacco and alcohol taxes, meanwhile, remain much larger revenue sources for states. 

This part of our series follows previous installments:

• An introduction to the project.
• A finding that Wisconsin has, without deliberation, has drifted into a de facto decriminalization as prosecution for marijuana offenses has become rare in much of the state.
• A finding that legalization elsewhere has led to either neutral or positive effects on crime, but an increase in highway crashes.
• A finding that legalization for recreational or medical use increases the use of the drug among adults, while research on youth use is less conclusive.
• A finding that, in other states, legalizing cannabis for adult use reduced unemployment and increased labor force participation, and that it seemed to have no impact on wages but led to a reduction in workers’ compensation claims.
• A finding that legalizing all adult use of cannabis is likely to increase the uncontrolled and harmful use of the drug — that is, “cannabis use disorder” — in Wisconsin. Researchers are more divided on whether legalizing only the medical use of marijuana has similar effects, and adult recreational legalization also is likely to reduce opioid use and overdoses.