Theo Nash
Alcohol and marijuana are two of the most commonly consumed psychoactive substances in the world. As such, governments often regulate and tax them to control their distribution and sale. Alcohol excise taxes are imposed at the manufacturer and importer level, based on per-unit production or importation. These taxes are often criticised for being too low and outdated, with researchers advocating for higher taxes to curb alcohol consumption and related harms. In the case of marijuana, the situation is more complex due to federal prohibition. However, some states have legalised and taxed marijuana, with tax rates ranging from 6% in Missouri to 37% in Washington. These taxes are used to fund various government programs, including those addressing the negative effects of drug use and prior drug law enforcement.
| Characteristics | Values |
|---|---|
| Number of states with recreational marijuana markets | 21 |
| Number of states with medical marijuana markets | 37 |
| States with the highest recreational marijuana tax rates | Washington (37%), Minnesota (10%), Ohio (10%), Delaware (15%) |
| States with the highest revenue from cannabis in 2023 Q1 | California, Washington, Colorado, Arizona, Maine, Massachusetts, Michigan, Montana, Nevada, New Mexico, Oregon |
| States with no sales tax on alcohol or cannabis | Alaska |
| States with the highest alcohol tax revenue in 2018 | Washington ($191 million) |
| States with the highest cannabis tax revenue in 2018 | Washington ($284 million) |
| States where cannabis taxes provide more support to social programs than alcohol taxes | Alaska, Washington, three unidentified states |
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What You'll Learn
State and local governments tax marijuana sales
Despite federal prohibition, nearly half of US states have chosen to regulate and tax legal marijuana sales and consumption. Twenty-one states levy some type of excise tax on recreational cannabis purchases. However, different states use different taxes, including percentage-of-price taxes, weight-based taxes, and potency-based taxes, and some levy multiple taxes on cannabis. Local governments in 12 states also levy an excise tax on marijuana, but these taxes are almost always percentage-of-price taxes.
State cannabis tax rates range from 6% in Missouri to 37% in Washington. Local cannabis taxes are typically capped by the state and set between 2% and 5%. The percentage-of-price tax is the most popular tax on cannabis. Fifteen states solely use this type of tax, and five states use it in addition to another tax. Alaska, Colorado, Maine, Nevada, and New Jersey use a weight-based cannabis tax. Tax calculations vary across these states, but in every state, the cultivator is responsible for remitting the tax to the government, and in every state but New Jersey, different parts of the plant are taxed at different rates. For example, flower is taxed at the highest rate because it is the most potent part.
A potency-based tax is calculated based on the cannabis product's level of tetrahydrocannabinol (THC), the primary psychoactive compound in cannabis. This type of tax roughly mirrors state alcohol taxes, where higher tax rates are applied to products containing a higher concentration of alcohol. However, taxing cannabis based on THC content is more difficult than taxing alcoholic beverages by alcohol content. Reliable and cost-effective potency-based testing remains a significant barrier, particularly for raw plant material. Testing consistency still varies across labs, and a sizable percentage of the product is destroyed during the testing process.
Cannabis taxes are sometimes called a "sin tax" because, unlike a general sales tax, the tax is levied in part to address the negative effects of marijuana use, such as addiction and impaired decision-making. However, unlike a cigarette tax, a cannabis tax is not typically meant to discourage broad consumption. Instead, some states use revenue from cannabis taxes to fund programs related to the drug or the harmful effects of prior drug law enforcement.
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Marijuana tax revenue supports public health and safety
Secondly, marijuana tax revenue can be used to address the negative effects of marijuana use, such as addiction and impaired decision-making. This is known as a "sin tax", where the tax is levied in part to address the negative consequences of the taxed activity or product. For instance, tax revenue can be allocated to public safety, youth drug use education, and cessation programs.
Thirdly, marijuana tax revenue can support local law enforcement and public safety more broadly. For example, in Ohio, 36% of the 10% marijuana tax is directed to municipalities hosting dispensaries, which may include funding for safety initiatives.
Finally, marijuana tax revenue can help to generate tax revenue for state programs and essential local services, such as transportation, libraries, schools, and social services. This can indirectly support public health and safety by providing additional resources for communities to invest in these areas as needed.
Overall, marijuana tax revenue plays a crucial role in supporting public health and safety initiatives, with the potential to generate significant revenue for states and communities.
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Alcoholic beverage tax registration and bonding requirements
New York
In New York, all distributors of alcoholic beverages must be registered with the Tax Department for the Alcoholic Beverages Tax (ABT). The term “distributor” includes anyone who imports alcohol into New York or produces alcoholic beverages in the state for commercial purposes or sale. Before beginning any production, distribution, or sale of alcoholic beverages in New York, businesses must complete the necessary licensing and registration requirements with both the Tax Department and the State Liquor Authority (SLA). Additionally, when packaging alcoholic beverages in bottles, cans, or crowlers for sale, businesses may be required to register with New York State as a Bottle Deposit Initiator to collect a deposit on every beverage container sold within the state.
California
In California, businesses must register with the California Department of Alcoholic Beverage Control (ABC) and comply with the CDTFA Alcoholic Beverage Tax Account type requirements. Common carriers, except railroads and steamship companies, must register to transport alcoholic beverages into the state. Additionally, California requires Alcoholic Beverage Tax Bonds for those engaged in the transportation or sale of alcoholic beverages. The bond amount is determined by the California Department of Tax and Fee Administration (CDTFA), and applicants must comply with relevant laws, rules, and regulations.
Texas
Texas requires mixed beverage bonds for those selling or serving alcoholic beverages in the state. These bonds must be renewed annually and ensure that permittees pay the required mixed beverage gross receipts tax and mixed beverage sales tax. The bond amount ranges from $3,750 to $100,000, and the premium starts as low as $100 per year. Additionally, a sales tax permit is required for the sale of alcoholic beverages, regardless of whether other items are sold.
Other States
Other states, including Georgia, Kansas, Michigan, Oklahoma, Tennessee, Utah, and West Virginia, also have Alcohol Retailer or Liquor By-the-Drink Tax Surety Bond requirements for businesses selling liquor at local bars, restaurants, special events, or other locations. These bonds are necessary for tax purposes and vary in amount and requirements depending on the state.
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Excise taxes on alcohol are common
Excise taxes are commonly levied on specific goods and services, such as cigarettes, alcoholic beverages, soda, gasoline, insurance premiums, amusement activities, and betting. Alcohol excise taxes are a significant source of revenue for governments, with excise tax revenue from alcoholic beverages amounting to $10.2 billion in 2022 in the US, contributing 12% to total excise tax receipts.
Alcohol excise taxes are typically imposed at the federal level but can also be applied by state and local governments. In the US, for instance, state and local excise taxes on alcohol are common, with rates varying based on the type and alcohol content. For instance, wine is taxed at a lower rate than distilled spirits, with rates ranging from $1.07 per gallon for wines with 16% alcohol or less to $3.40 per gallon for sparkling wines. Beer is typically taxed at $18 per barrel, with reduced rates for smaller breweries.
Similar to alcohol, marijuana taxation is also a policy issue in the US, with states implementing varying tax structures. Some states levy excise taxes on marijuana, with rates ranging from 6% in Missouri to 37% in Washington. Local cannabis taxes are typically capped by the state and set between 2% and 5%. While some states solely use a percentage-of-price tax, others combine it with weight-based or potency-based taxes.
The design of excise taxes on marijuana and alcohol aims to address the external harms associated with their consumption. For example, excise tax revenue from marijuana may be appropriated to address public safety concerns, youth drug education, and cessation programs. Similarly, alcohol excise taxes are considered "sin taxes" due to the negative consequences associated with excessive alcohol consumption.
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Businesses selling alcohol must pay retail tax
In the United States, the government is adding taxes to marijuana and alcohol. Marijuana taxation is one of the hottest policy issues in the country, with 21 states having implemented legislation to legalize and tax recreational marijuana sales. State cannabis tax rates range from 6% in Missouri to 37% in Washington. Local cannabis taxes are typically capped by the state and set between 2% and 5%.
When it comes to alcohol, taxes are generally remitted by producers and distributors who collect the tax during wholesale transactions. However, the cost of the tax is typically incorporated into the final retail price and ultimately paid by the consumer. Alcohol taxes are considered "sin taxes" because they are levied in part to discourage alcohol consumption, which can have costs to both the consumer and the general public, such as increased healthcare costs.
In New York, for example, distributors of alcoholic beverages are required to file a tax return each month, even if no tax is due. They are also subject to excise taxes on alcoholic beverages sold or used in the state. The state and city excise taxes are administered and collected by the New York State Department of Taxation and Finance (Tax Department).
In New York City, businesses licensed by the New York State Liquor Authority that sell retail beer, wine, or liquor must pay a tax. The State Liquor Authority provides the Department of Finance with information about new licenses issued for retail establishments selling liquor, wine, or beer, and the department then sends a bill to the business. This annual tax is 25% of the annual license fees and must be paid by June 25.
Therefore, while the government is adding taxes to both marijuana and alcohol, it is important to note that the specific taxes and regulations vary by state and locality.
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Frequently asked questions
Yes, governments are adding taxes to alcohol. Alcohol excise taxes are per-gallon taxes, and the rate is based on the type of alcohol. Liquor is taxed at a higher rate than wine, and wine is taxed at a higher rate than beer. Alcohol taxes are also sometimes called a corrective or "sin tax" because they are levied in part to discourage alcohol consumption.
Yes, governments are adding taxes to marijuana. Nearly half of US states tax recreational marijuana markets, and some states also tax medical marijuana. There are three main ways state and local governments tax recreational marijuana: percentage-of-price, weight-based, and potency-based.
Alcohol taxes are levied by both state and local governments. The producer or seller of the product pays the tax on the wholesale transaction, but it is passed on to the consumer in the final purchase price. In 2021, state and local governments collected $8.2 billion in alcohol taxes.
Marijuana taxes are levied by state and local governments. The cultivator or retailer is responsible for remitting the tax to the government. The tax is typically calculated as a percentage of the retail price and is paid by the consumer in addition to their purchase at checkout.
