Weed Taxes Far Exceed Alcohol Taxes

Photo: Shutterstock

Americans still drink far more alcohol than they use cannabis—almost eight times as many Americans binge drink than smoke weed just once a month—but there’s no doubt which vice is more important to American governments, state and local.

Your schools, your roads, and—yes—your cops: All the gears of state are increasingly greased by weed money.

Earlier this week, Massachusetts announced that, for the first time, cannabis tax revenue in that state exceeded tax revenue from alcohol sales. Midway through the 2021-2022 fiscal year, Massachusetts rang up $74 million in cannabis excise taxes, compared to $51 million in alcohol excise taxes.

Notably, this does not include sales taxes. Cannabis is subject to a 10.75 percent excise tax in Massachusetts; booze taxes range from a few pennies on cider to a few bucks per gallon on hard liquor. Nevertheless, this means that Massachusetts has joined the rest of the country.

In the states that allow adults 21 and over to use cannabis without fear of jail, cannabis tax revenue far, far exceeds alcohol tax revenue—despite, as noted, many more Americans drinking much more alcohol (and more Americans drinking lots of alcohol).

This also means that as cannabis industry players have been saying for years, cannabis is simply taxed too much.

Pitched to voters (and to the government) as a source of easy money, marijuana legalization has over-delivered on revenue to its own detriment. Governments are now banking on revenue from an overtaxed nascent industry—and one that’s still competing with a vibrant, untaxed illicit market—to fund basic government functions.

“It very much is” overtaxed, said Ulrik Boesen, a senior policy analyst at the Tax Foundation, a Washington, D.C.-based think tank, who called rhetoric like the pitch a few years ago in New York that weed taxes could fix the subway as “dangerous.”

“This is a uniquely exposed industry to taxes,” he said. “It’s really detrimental to the industry.”

Washington state imposes the heftiest taxes on liquor of any state in the union. Yet Washington collects almost double the amount of cannabis tax revenue than it collects from liquor. In fiscal year 2020, Washington raked in $473.9 million in marijuana revenue, “$229.4 million more than that of liquor,” as the state treasurer reported.

Double is nice, but what about double-double? California’s got you covered. California reported $405 million in alcohol tax revenue in the 2020-2021 fiscal year, according to the most recent data, while cannabis tax revenue eclipsed $1 billion in 2020.

And through the first three quarters of 2021—the most recent data available—tax revenue was on pace to grow nearly another 30 percent to $1.3 billion or higher for the year, as per the California Department of Taxation and Finance.

In addition to proof that the legalization is capturing the illicit market, some cannabis industry advocates believe the tax figures prove drinkers are supplementing or replacing their hazy IPA and mezcal habits with cannabis.

“People are shifting away from alcohol and using cannabis more,” said Pat Gottschlicht, a co-founder of INSA Cannabis, a Massachusetts-based cannabis company that’s expanding to Florida and Pennsylvania. “This is a sign that the East Coast industry is catching up.”

However, since legal cannabis is so expensive, this could just mean just that—legal weed is generating lots of revenue because legal weed is simply plastered in taxes.

“Higher tax revenues don’t mean more cannabis sold since state governments are generally taking 30 cents of every dollar spent on cannabis, much higher than the average tax rate on alcohol,” said Joe Caltabiano, the CEO of Choice Consolidation, a cannabis-sector SPAC, who co-founded billion-dollar multi-state operator Cresco Labs.

“The truth is that cannabis is a wellness product, and high taxes prevent people from accessing cannabis,” he added. “Conversely, if state governments taxed cannabis less, the industry would see increased sales, people would be able to transition from pharmaceuticals to utilize the nontoxic cannabis plant, and sales would move to the regulated market from the illicit market.”

The idea that marijuana legalization is leading Americans to drink less sounds nice, but simply isn’t borne out by data.

About 55 percent of Americans drink once a month and 25.8 percent of Americans binge drink, which is defined as consuming five or more drinks in a sitting for men and four drinks or more for women. In Colorado, where cannabis use is normalized and where adult-use stores have been open for eight years, 18.8 percent of adults reported binge-drinking, compared to 16.6 percent who reported past-month cannabis use.

Rather than make things easier, federal legalization could make the weed tax crisis worse. Competing bills in Congress could impose a federal excise tax of 3 percent to 10 percent on weed products—on top of existing state and local levies.

“That’s going to be a lot for states where the rate is already high,” Boesen said. Rather than view cannabis as an ATM with no fees and no limit, states who legalize should “err on the side of coming in low, to not be too disruptive.”

“If you come at this of the perspective that you’re doing it for the revenue, you’re coming at it with the wrong angle,” he said. “I think we’ve seen enough that revenue shouldn’t be the reason” behind legalization.

Cannabis is a wealthy little island, floating on a sea of alcohol. And if government isn’t careful, this golden goose of weed revenue could easily drown.