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Taxing Legal Marijuana

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Legalization of for-profit cannabis production and sale invariably causes a price collapse. The natural price of cannabis production in a mature, legal, for-profit market may be as low as a nickel per joint.

Legalization-driven price declines means that taxes assessed solely as a percentage of sale price lose value rapidly both as a revenue source and as a deterrent to low-price stimulated upticks in cannabis use.



  • Weight-based taxes that are indexed for inflation (e.g., $2/gram) do not lose value over time. However, they do create an incentive to produce and sell more potent cannabis products, which probably carry more risk of harm to health.
  • The incentive weight-based taxes create to produce high-potency products can be countered by adopting the alcohol model of capping the allowable potency of products and by taxing high-potency products more than low-potency products.
  • High THC/low CBD cannabis strains are more harmful to health, according to some research. That finding supports consideration of higher taxes on cannabis products with an unfavorable THC/CBD ratio.


Sole reliance on marijuana taxes based on a percentage of price is likely to create a low-price market that stimulates heavy use and provides minimal tax revenue to states. Weight-based taxes indexed for inflation address this problem. However, weight-based taxes could drive marijuana product-potency higher unless coupled with a potency cap and/or potency-targeted taxes.

Key Policy Evidence:
  • Wholesale cannabis prices in Colorado have dropped 70% in 4 years, following  legalization of for-profit cannabis production. 
  • State wine taxes are much higher than beer taxes because such taxation increases along with alcohol content. This same idea could be applied to high-THC strains of cannabis.
  • Higher THC content has been linked to adverse public health consequences. Chronic use of THC during adolescence leads to immediate and long-term impairments in object recognition and working memory, according to a 2017 study. It also increases anxiety and compulsive behaviors.