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A blueprint for nationwide cannabis tax policy

Cannabis taxation is one of the hottest policy issues in the United States. Twenty-one states have implemented legislation to legalize and tax recreational cannabis sales: Alaska, Arizona, California, Colorado, Connecticut, Illinois, Maine, Maryland, Massachusetts, Michigan, Missouri, Montana, Nevada, New Jersey, New Mexico, New York, Oregon, Rhode Island, Vermont, Virginia, and Washington.

Cannabis markets operate under a unique legal framework. Federally, cannabis is classified as a Schedule I substance under the Controlled Substances Act, making the drug illegal to consume, grow, or dispense. States that have legalized consumption and distribution do not actively enforce the federal restrictions.

Among the many effects this creates, each state market becomes a silo. Cannabis products cannot cross state borders, so the entire process (from seed to smoke) must occur within a single state. This unusual situation, along with the novelty of legalization, has resulted in a wide variety of tax designs.

The design of an excise tax is important. Well-designed taxes generate revenue with far less societal impact than poorly designed taxes.

Perhaps the closest markets from which to mirror public policy for cannabis are the well-established taxes on alcohol and tobacco. However, cannabis markets have not evolved a standardized product like tobacco, where taxes can be levied by stick (cigarette) or pack, nor is the intoxicating ingredient (THC) as easily measured as alcohol content for an appropriately targeted tax.

The resulting tax landscape is chaotic, lacking an academically supported consensus foundation for tax policy. Certain states apply specific taxes, others apply ad valorem taxes, and some states apply a hybrid approach that uses both.

Read more at taxfoundation.org

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