3 states increase cannabis levies as ideal tax rate remains elusive

Three states are raising cannabis taxes this year in response to budget deficits, with more predicted shortfalls looming in 2026 as consumer spending stalls and President Donald Trump’s signature spending bill hammers state and local government balance sheets.

If that sounds like unwelcome news to the U.S. marijuana industry, consider: If governors and lawmakers across the country had their way, three other states likely would have increased their cannabis taxes.

The tax increases in California, Maine and Minnesota are the latest instance of state governments turning to cannabis to balance budgets in an era when revenue from local and federal sources is dwindling.

But they’re also the latest tests in an ongoing experiment that’s seeking the elusive answer to a fundamental question: What’s the ideal number for marijuana taxes that ensures meaningful government revenue while also encouraging legal market growth?

Or, put another way: How much are consumers willing to pay at a state-licensed store before they’ve had enough?

Different markets, different cannabis tax numbers

There’s no universal answer, according to experts who spoke with MJBizDaily.

As a nationwide survey of cannabis tax rates indicates, what might be reasonable in one state could be outrageous in another.

But observers are nonetheless raising a collective eyebrow at state governments’ willingness to turn to their still-young, regulated marijuana industries as a ready source of cash.

And, they stress, additional taxation without either the appetite or the funding for a crackdown on a freshly incentivized illicit market might backfire.

“I’m kind of surprised so many jurisdictions are doing it,” said Patrick Oglesby, a North Carolina-based attorney and researcher at The Center for New Revenue who has advised several state governments on cannabis taxation.

“It’s like cutting off the cat’s tail one inch at a time.”

3 states raise marijuana taxes; 3 tax plans stall

As a general rule, the states that legalized recreational marijuana more recently have lower tax rates than the first wave of adult-use markets.

However, the tax increases are in states with mature markets, relatively new markets and one market that has yet to open.

• California, which launched adult-use sales in 2018 after years of a robust medical cannabis market, is increasing the excise tax from 15% to 19% after a last-second tax freeze supported by Gov. Gavin Newsom was thwarted by a key state legislator.
• Minnesota, which legalized adult-use cannabis in 2023 but has yet to launch sales, is raising its tax from 10% to 15%.
• Maine, where adult-use sales began in 2020, from 10% to 14%.

Critics in Minnesota are questioning the wisdom of raising taxes before its recreational marijuana market launch, which still has no solid start date.

Cannabis tax increases were floated in several other states but ultimately failed.

• In Ohio, a controversial package of changes to voter-approved legalization regulations that included a 50% increase in the state excise tax, from 10% to 15%, failed last month.
• In Michigan, where a 10% tax is considered by many national experts to be a “gold standard,” Gov. Gretchen Whitmer pitched a whopping 32% wholesale tax on marijuana to fund infrastructure spending. That proposal stalled in April.
• In New Jersey, outgoing Gov. Phil Murphy in March proposed a budget with a 500% increase in a per-ounce tax, to $15 per ounce. But the Legislature quietly abandoned the proposal this spring and it was not in the budget Murphy signed July 1, according to Heady NJ.

Nationwide median cannabis tax of 17%

Those recent tax increases mean California, Maine and Minnesota are still relatively close to the nationwide cannabis tax median of 17% observed in fall 2023 by Ohio State University researchers.

But, that report noted, while “(a) higher tax rate might theoretically bring in additional tax revenue … it can also incentivize (recreational) customers to purchase their cannabis product from unsanctioned sellers if the higher tax results in uncompetitive prices for legal cannabis product.”

Finding that ideal tax number is elusive – except for the observation that there is no universal answer.

For instance, Washington state cannabis consumers pay the nation’s highest tax at 37%, according to the Washington, D.C.-based think tank Tax Foundation.

That’s almost twice the state levy applied to cannabis in California.

However, Washington state isn’t experiencing the same problems with a shrinking legal market and a rampaging illicit market as California, Oglesby noted.

And while California officials, from the governor down to the local level, decry the illicit market and have celebrated enforcement efforts, those efforts have yet to significantly curtail unlicensed marijuana activity.

“Tax rate and enforcement are two blades of the same pair of scissors,” Oglesby said.

“If you only have one blade, the scissors can’t cut.”

Even red states have high taxes

However, state excise tax rates for cannabis do not tell the full picture.

The excise tax in Missouri – a conservative state that launched adult-use cannabis sales in 2023 – is one of the lowest in the country at 6%.

Some observers credit this low levy for a market that’s far exceeded early expectations.

That’s despite the fact Missouri consumers might actually pay as much as 22% in taxes on marijuana purchases once local and county general sales taxes as well as cannabis taxes are calculated.

For now, that might include city and county marijuana taxes as well as the state’s 6% excise tax.

That’s under a practice called “tax stacking” that’s being challenged at the state Supreme Court, which is expected to issue a decision sometime this summer.

California has a similar situation in which the state sales tax can range from 7.25% to as much as 10.75% depending on the city or county.

Tax situation varies widely but unlikely to improve

Along with the cannabis tax picture, overall budget situations vary significantly from state to state.

Tax revenue in California, for example, is connected to stock market performance, specifically blue-chip tech companies. But it also hinges on consumer spending.

And both tariffs as well as recession fears along with soaring housing costs have kept sales tax revenue down, analysts say.

Federal spending also directly affects the states.

But unlike federal lawmakers, state and local governments can’t borrow their way out of a deficit and must present balanced budgets.

More pressure will mount on state legislatures over the next year as the massive cuts to Medicaid and food-stamp assistance are felt.

That means another round of marijuana tax increases is likely next year, unless lawmakers can be steered toward other sources.

But those are more entrenched industries that enjoy stronger lobbyists.

“You’ve got to wonder why they don’t go after alcohol or tobacco,” Oglesby said.

“There’s not really an illicit market in either. Nobody’s bootlegging alcohol that I know of.”

Chris Roberts can be reached at chris.roberts@mjbizdaily.com.