“High” Taxes—States Continue to Look to Marijuana to Generate Revenue

As Colorado and Washington continue to experiment with legalized marijuana, state lawmakers’ attention has turned to preserving the new revenues and tweaking tax provisions. Meanwhile, at least nine other state legislatures this year have considered proposals to legalize and tax marijuana sales.

Colorado has made $59.4 million in marijuana tax revenue, according to data from the Colorado Department of Revenue, for sales and excise taxes so far for fiscal year 2014-15, which began in July. Including marijuana licensing and other fees, the total marijuana revenue reached approximately $70.5 million.

However, the state may not get to spend all of that money.

Marijuana revenues are subject to Colorado's Taxpayer Bill of Rights (TABOR), meaning that residents can expect to receive a refund of excess tax money if revenues exceed constitutional limits. The Colorado Legislative Council estimates that approximately $58 million in marijuana tax revenue from fiscal year 2014-15 will be refunded to taxpayers in fiscal year 2015-16, according to a March 2015 forecast report. The actual refunded amount will be capped at the total amount of taxes collected.

But even though a refund means extra money in taxpayer pockets, state officials are looking at ways to keep it.

Legislators that would like to spend these excess revenues are crafting a proposal that will exempt marijuana revenues from TABOR, allowing the state to use excess revenues on programs like the school construction fund that is supposed to receive the first $40 million of excise tax revenue annually. Voters would have to approve any changes to TABOR, and that opportunity may come as soon as this fall’s election, in order to go into effect before the 2015 tax filing season begins.

Washington is dealing with its own set of marijuana tax woes and is reevaluating its entire approach to marijuana taxes. Currently, marijuana is taxed at three points: a 25 percent tax on each wholesale sale from producers to processors, a 25 percent tax on each wholesale sale from processors to retailers and a 25 percent tax on each retail sale. 

To eliminate the price disparity between recreational and medical marijuana, because medical marijuana is not subject to the 25 percent excise taxes, the Legislature is considering two bills aimed at equalizing the marketplace within Washington and ultimately leading to increased tax revenues.

S.B. 6062 would eliminate the three points of tax and impose a 37 percent excise tax on each retail sale of marijuana or marijuana products. This change would lead to lower recreational marijuana prices, making legal marijuana more affordable. S.B. 5052 would substantially reform Washington's medical marijuana program and apply regulations used for the state's recreational marijuana market to the medical marijuana market, as well as impose specific medical marijuana regulations. Both bills have been passed by the state Senate and are under consideration by the House.

While Colorado and Washington refine their marijuana tax systems, other states are considering whether to legalize marijuana. Here is a list of some of the legalization/taxation legislation that has been introduced this year: 

Two states may impose excise taxes on medical marijuana if they enact medical marijuana legislation. S.B. 326 in Alabama would impose an additional 2.5 percent sales tax on all medical marijuana sales. Pennsylvania’s S.B. 3 would impose a 6 percent surcharge on marijuana when it is first sold to medical cannabis dispensers.

The general assemblies of Connecticut (H.B. 6703), Georgia (S.B. 198) and Pennsylvania (S.B. 528) are also considering marijuana legalization bills, although the legislation does not include specific tax rate information.

Ballot initiative efforts are underway in Mississippi, Missouri, Ohio and Nevada that would legalize and tax in those states. Ohio’s initiative may come as soon as this fall; Nevada’s initiative is set for the November 2016 ballot.

Federal legislation, H.R. 1013 and H.R. 1014, was introduced in February and would legalize and tax marijuana at the federal level. 

Continue the discussion on Bloomberg BNA’s State Tax Group on LinkedIn: Should Colorado marijuana revenue be included in the TABOR refund or retained and spent by the state? 

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by Annabelle Gibson