Us Government: Taxing Alcohol And Marijuana?

Alcohol and marijuana are two of the most contentious substances in the United States, with a long history of debate surrounding their production, sale, and consumption. Both substances are subject to taxation, which has become an increasingly complex issue as market innovations and changing public policies shape the economic landscape. Alcohol, in particular, is one of the most highly taxed products in the country, with a federal categorical tax approach that distinguishes between beer, wine, and spirits. Meanwhile, the legalization of marijuana for recreational and medical purposes in several states has led to a variety of tax designs, including ad valorem and ad quantum taxes, with rates varying by tetrahydrocannabinol (THC) content. As the dynamics of these industries continue to evolve, the taxation of alcohol and marijuana will remain a highly debated topic, reflecting the intersection of public health, industry innovation, and government revenue.

Alcohol excise taxes and their impact on reducing alcohol-related harm

Alcohol excise taxes have been a topic of interest for public health officials and economists alike, with both groups studying their impact on alcohol consumption and related harm. Excessive alcohol consumption causes 79,000 deaths annually in the US, reducing the lives of those affected by approximately 30 years.

Nearly all studies examining the relationship between alcohol taxes and excessive drinking have found an inverse relationship between the two. In other words, as alcohol taxes increase, excessive drinking and alcohol-related health outcomes decrease. This relationship holds for underage populations as well, with increased taxes associated with reduced consumption and alcohol-related harm among minors.

The impact of raising alcohol taxes is expected to be proportional to its magnitude and modified by factors such as disposable income. While some argue that alcohol excise taxes disproportionately burden low-income drinkers, others contend that the amount of tax paid is directly related to the amount of alcohol consumed. Thus, increases in alcohol excise taxes will be borne primarily by excessive drinkers, who also experience most of the alcohol-related harms. Furthermore, the economic benefits of reducing excessive alcohol consumption may be disproportionately greater for people with low incomes.

A meta-analysis of 50 publications found that doubling the alcohol excise tax would lead to significant reductions in various alcohol-related harms. For example, alcohol-related mortality would decrease by an average of 35%, traffic crash deaths by 11%, sexually transmitted diseases by 6%, violence by 2%, and crime by 1.4%.

In addition to the public health benefits, raising alcohol taxes can also address the widening gap between the societal costs of alcohol sales and their corresponding excise tax rates. Most alcohol excise taxes at the federal and state levels are based on volume and have not kept pace with inflation, eroding their value over time. Increasing alcohol excise taxes can help recoup the social and economic costs incurred from alcohol sales that are currently not borne by producers.

Federal and state-level cannabis taxation policies

Marijuana taxation is one of the hottest policy issues in the United States. Twenty-one states levy some type of excise tax on recreational cannabis purchases, with 15 states solely using this type of tax and five states using it in addition to another tax. However, despite the growing legalisation of marijuana, it is still prohibited under federal law.

There are three main ways state and local governments tax recreational marijuana: percentage-of-price, weight-based, and potency-based. Local governments in 12 states also levy an excise tax on marijuana, but these taxes are almost universally percentage-of-price taxes.

States that solely rely on a percentage-of-price tax include Arizona, which levies a 16% excise tax on cannabis sales paid by consumers and remitted by retailers. States that use a weight-based tax include Alaska, Colorado, Maine, Nevada, and New Jersey. Tax calculations vary across these states, but in every state, the cultivator is responsible for remitting the tax to the government. Alaska, Connecticut, Illinois, and New York use THC in their tax calculations.

Potency-based taxes are calculated based on the cannabis product's level of tetrahydrocannabinol (THC), the primary psychoactive compound in cannabis. This type of tax is similar to state alcohol taxes, where higher tax rates are applied to products containing higher concentrations of alcohol.

Cannabis taxes are sometimes called a "sin tax" because, unlike a general sales tax, they are levied in part to address the negative effects of marijuana use, such as addiction and impaired decision-making. However, unlike cigarette taxes, cannabis taxes are not meant to discourage broad consumption. Instead, states use the revenue from cannabis taxes to fund programs related to the drug or the harmful effects of prior drug law enforcement.

California's shift from cultivation tax to retailer tax

California has long been criticized for its taxation policies on marijuana, which have been deemed "misguided". The state previously levied a weight-based tax, which was repealed in 2022. In addition to this, California's state government also imposed a cultivation tax, which was a flat tax of $161 per pound, and was applied at the time of harvest, regardless of whether the materials were sold. This was significantly higher than the cultivation tax on other agricultural products.

The cultivation tax was eliminated on July 1, 2022, when Governor Gavin Newsom signed Assembly Bill 195. This was done in a bid to prevent businesses from going out of business, and to shrink the illicit market. However, in a compromise with beneficiaries of cannabis tax money, the legislation included a provision to raise the cannabis excise tax rate to as much as 19% on January 1, 2025, to make up for any losses from the elimination of the cultivation tax.

Local governments in California can also levy an excise tax on cannabis businesses. Some local governments tax cannabis businesses based on the square footage of their commercial operations, while others levy a gross receipts tax. The latter is applied to the cultivator, distributor, and retailer, which means the tax burden on the customer is possibly well above the listed tax rate.

California is one of 21 states that levy a cannabis tax. The state generated the most revenue from marijuana in 2022, along with Washington and Colorado.

Alcohol tax rates for beer, wine, and spirits

Alcohol tax rates in the US vary depending on the type of beverage and the state in which it is purchased. Spirits typically face the stiffest tax rates due to their higher alcohol content compared to wine or beer.

Beer Taxes

Beer is subject to various taxes depending on the state. For instance, Texas adds an excise tax of 19.4 cents per gallon of beer, while Missouri adds 6 cents. In some states, the excise tax is higher, such as in Missouri, where the excise tax is 42.68 cents per gallon. Beer is also subject to sales taxes, which vary by state and local rates. The state rate is typically between 5.6% and 7%, while local rates can add up to an additional 2% to 4.5%.

Wine Taxes

Wine taxes also vary by state. Texas, for example, adds an excise tax of 20.4 cents per gallon of wine. If the wine is over 14% alcohol or sparkling, the added excise tax is 40.8%. Missouri adds 42 cents per gallon, while other states, like the one in the previous example, add a lower excise tax of 35 cents. Wine is also subject to sales taxes, which can range from a combined state and local rate of 8% to 12.1%. Some states, like Texas, also impose an on-site tax for wine, which can be as high as 15%.

Spirits Taxes

Spirits are taxed at higher rates than beer or wine due to their higher alcohol content. The excise tax rates for spirits vary significantly across states. Texas, for example, adds an extra excise tax of $2.40 per gallon of spirits, while Missouri adds $2.00. Washington state levies the greatest excise tax rate on distilled spirits at $36.55 per gallon. Spirits are also subject to sales taxes, which can range from a combined state and local rate of 7% to 12.1%. Some states also impose an on-site tax for spirits, such as Texas, with a rate of 14.95%.

The tax rates for beer, wine, and spirits are subject to change and can be influenced by various factors, such as production, processing, or foreign assignments. Additionally, states may have different policies and tax credits that can affect the effective tax rate for these alcoholic beverages.

Marijuana tax revenues in 2022

Marijuana taxation is one of the hottest policy issues in the United States. Twenty-one states have implemented legislation to legalize and tax recreational marijuana sales. In 2022, states collected nearly $3 billion in marijuana tax revenues (medical and recreational). The largest and longest-established markets generated the most revenue in California, Washington, and Colorado.

There are three main ways state and local governments tax recreational marijuana: percentage-of-price, weight-based, and potency-based. Local governments in 12 states also levy an excise tax on marijuana, but these taxes are almost universally percentage-of-price taxes. A simple, low-rate, and low-cost tax system has the potential to raise significant amounts of revenue while simultaneously decreasing social harms from cannabis by bringing illicit market transactions into a legal market framework.

California, for example, imposes a 15% excise tax on cannabis retailers. It used to impose cultivation taxes but ended those in July 2022. California eliminated its weight-based cultivation tax in 2022 and shifted the point of collection and remittance from distributors to retailers. Connecticut levies an excise tax of 0.625 cents per milligram of THC for cannabis flower, 2.75 cents per milligram for edibles, and 0.9 cents per milligram for other products. Alaska's weight-based tax is collected on the first sale of cannabis from a licensed cultivator to a product manufacturing facility or retail store. Arizona levies a 16% excise tax on cannabis sales that are paid by consumers and remitted by retailers.

Marijuana tax revenues are used for various purposes, such as prevention, outreach, education, and data collection. In Missouri, marijuana tax revenue is first used to cover operational costs and then to pay for the expenses incurred by the court system for expunging marijuana charges from people's criminal records. In California, the revenue covers regulatory and research costs, and 60% goes to anti-drug programs targeting children.

Frequently asked questions