Michigan Leads Trend Toward Lower Marijuana Tax

From Daily Tax Report: State

December 5, 2018

By Emma Beyer

Michigan will have the lowest tax rate in the country on recreational marijuana when sales begin Dec. 6—and it may dip even lower.

That’s no fluke. Other states newer to the market have also moved toward lower taxes on the popular product amid rising competition from both other states and the black market.

That marks a sharp reversal from just a couple of years ago when states seized on high taxes on marijuana to bring in new revenue. Now, they recognize the marketplace has quickly evolved.

“The goal is to establish a safe, legal, and regulated marijuana market for adults, and an excessively high tax rate undercuts that goal,” Matt Schweich, deputy director of the Marijuana Policy Project, a national organization that works to reform marijuana laws, told Bloomberg Tax in an email.

Aiming High

Taxes were an important element of gaining support for legalizing marijuana, so tax rates were set high with promises of high revenue gains to earn popular and political support.

But as marijuana legalization spreads, states are rethinking their tax strategies. Michigan’s excise tax on marijuana is set at 10 percent. But that may drop to 3 percent under S.B. 1243, introduced Nov. 29. After Colorado and Washington faced issues with high tax rates on marijuana sales, subsequent states such as Massachusetts and Nevada enacted lower rates in the 10 percent to 25 percent range, Joseph Bishop-Henchman, executive vice president of the Tax Foundation, told Bloomberg Tax in an email.

Part of the impetus is fear of losing sales to buyers who drive to a neighboring state with a lower tax rate, which would cut into the home state’s revenue.

Buyers are also looking for cheaper options on the black market. Both Colorado and California, which have higher tax rates, are seeing illicit pot sales continuing through the black market, Bishop-Henchman said.

States need to balance their desire for tax revenue with the need to keep people away from the black market, Lucy Dadayan, senior research associate with the Urban-Brookings Tax Policy Center, told Bloomberg Tax. “If states tax recreational marijuana too heavily, that can result in tax evasion and black market sales just like in the case of tobacco.”

“We wanted to avoid an excessively high tax rate that would allow the unregulated marijuana market to persist,” Schweich said about Michigan.

Going Lower

Colorado noticed black market issues soon after sales began in 2014.

“Rather than pay the tax, people chose to take the risk and continue to buy marijuana illegally. Apparently for many people, the risk of buying illegally was less than the cost of the tax, Bishop-Henchman, said.

Since one of the purposes of legalization was to reduce the black and gray markets (which involves home growing and medical marijuana leakage), Colorado officials concluded that their tax rate was set too high, Bishop-Henchman said.

Huge Range in Taxes

States have a range of practices for taxing marijuana sales. Some use a combination of excise and sales taxes and other charges, like California and Nevada. Excise taxes alone range from 10 to 37 percent. Sales taxes can tag on up to another 15 percent. Alaska charges a $50 fee per ounce, instead of a tax.

Michigan is the 10th state to adopt a law legalizing recreational marijuana; however, only seven other states have active marijuana markets. Vermont and Maine have legalized recreational marijuana but haven’t begun sales. They plan to begin sales in 2019. Washington, D.C. legalized marijuana use but not sales. Instead, people may “gift” up to 2 ounces.

States may see ever lower tax rates as popularity for marijuana continues and more states adopt legalization policies. But, for now, while marijuana isn’t being taxed as heavily as, say, cigarettes, it is still being taxed more than most other goods sold to consumers, Bishop-Henchman said.

Recreational marijuana sales in Michigan would bring in $89 million in tax revenue, based on a 10 percent excise tax, for the fiscal year beginning Oct. 1, 2019, according to estimates by the state’s Senate Fiscal Agency. After the first four years, the state estimates it will generate an additional $737.9 million in tax revenue.

Michigan’s ballot measure was approved by 56 percent of voters in the November midterm election.


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