Legal cannabis is generating significant tax revenue for governments in the U.S. and Canada, according to data from cannabis tax authorities in Arizona, Colorado, and five other states.
Over the past decade, cannabis legalization history in Canada has demonstrated that governments can collect substantial cannabis tax revenue — in many cases surpassing what they earn from alcohol taxes.
Yet while cannabis taxes have benefited regional and federal governments, the impact on consumers and retailers remains a contested issue.
Cannabis Tax Revenue Numbers Across North America
Benzinga reported that Arizona collected $6.3 million in cannabis-related taxes in March 2022 alone. That broke down into three separate tax categories: a 16 percent Recreational Marijuana Excise Tax, the sales tax on all recreational purchases, and a sales tax on medical cannabis purchases.
Arizona made headlines for cannabis tax collection, but many other legal markets are generating comparable cannabis tax revenue.
The Institute of Taxation and Economic Policy dove into this issue earlier this year to explore how much tax is rolling in from legal markets everywhere.
The ITEP reported in 2021, 11 adult-use markets in the U.S. raised a whopping $3 billion in recreational cannabis excise taxes. In seven out of the 11 markets, the amount brought in surpassed that raised through alcohol sales. Between 2020 and 2021, cannabis tax revenue increased 33 percent.
In Canada, the story is much the same. As per BNN Bloomberg, since legalization, taxes (direct and indirect) have raised more than $15 billion in revenue for provincial and federal governments.
Few other consumer industries contribute as much cannabis tax revenue to government budgets as the legal cannabis sector. Plus, the market is still rapidly expanding. Unlike alcohol and tobacco, two other recreational consumer industries, the revenues from cannabis taxes continue to grow year after year.
Cannabis POS systems built for Canadian dispensaries also play a role in legal market compliance, helping cannabis retailers accurately report sales data through cannabis retail analytics and sales reporting tools that feed into excise tax calculations.
How Cannabis Excise Taxes Burden Retailers and Consumers
Retailers and Producers Call for Excise Tax Reform
Yet, even if the various regional cannabis excise taxes are paying off for federal governments, there are increasing calls by retailers, producers, and consumers for change. Especially in Canada and other tax-heavy districts, the substantial excise tax burden prevents further growth in the industry.
The Canadian Chamber of Commerce and the B.C. Chamber of Commerce have recently called for change. A BC Chamber report stated clearly, “The current excise system keeps the black market alive. Costs trickle down to the consumer as well as pose business viability risks to producers.” Meanwhile, the Canadian Chamber called the excise tax untenable.
High Prices Push Consumers Toward the Black Market
Because the tax burden falls on producers, retailers, and subsequently onto the consumer, more consumers are still turning to the legacy market to source recreational cannabis. Of course, there will likely always be cheaper weed on the black market. But the current tax climate distorts this picture even more.
As the B.C. Chamber put it, “Regulatory changes are needed to enable the market price of legal cannabis to be as competitive as possible.” While the number of people legally buying cannabis has finally surpassed purchases from illegal sources, many Canadians are still relying on the legacy market. The Globe and Mail found that illegal cannabis still accounts for more than 35 percent of cannabis sales that affect dispensary owner earnings in the country.
Price point and the associated taxes may have a lot to do with Canadians’ lingering inclination to head to the legacy market.
Canada Updates Cannabis Regulation Under New Federal Mandate
The current frustrations with cannabis taxation are trickling into federal policy in Canada. Although underreported, the federal government’s 2022 Budget includes a section titled “Engaging the Cannabis Sector.”
Several key points in the budget indicate the Canadian government has heard industry complaints and is moving toward cannabis regulatory reform. Notably, the Department of Innovation, Science and Economic Development — not Health Canada — would manage this strategy.
Second, it’s focused on creating “an ongoing dialogue with businesses and stakeholders in the cannabis sector.” And third, this new mandate aims to “improve conditions for investment, enhance Canada’s innovation performance, increase Canada’s share of global trade and build a fair, efficient, and competitive marketplace.”
The task force has not yet reported findings, but the information gathered is expected to inform cannabis banking and financial regulations in Canada anticipated in the Cannabis Act’s first review, predicted for 2023.
Balancing Cannabis Tax Rates Against Consumer Expectations
Legal Cannabis Markets Still Compete with the Black Market
Recreational cannabis is a brand new sector that is still in an era of restlessness. Although similar in some regards to recreational alcohol, its trajectory and regulation have been remarkably different. As a result, it will take a long time for the market to mature. Especially given the number of new regions still waiting to legalize.
Cannabis Taxes Must Compete with Black Market Pricing
One of the biggest challenges facing regulators will continue to be the competition from the black market. Although legal markets offer consumers safety, testing, consistency, and reassurance, prices remain a sticking point for consumers. Cannabis taxes, often much more substantial than those applied to other recreational products, dissuade consumers from making the switch.
High cannabis excise taxes also discourage legacy market operators from transitioning to legal retail and block smaller producers from entering — an obstacle explored further in resources on the cost to open a cannabis dispensary. Cannabis taxes have demonstrated their fiscal value in the legal market, but regulators may need to recalibrate rates to align with consumer price expectations.