Recreational cannabis excise taxation in the USA: Constructing a comparable tax measure for empirical analysis

Background

As of August 2023, 20 states in the US have established recreational cannabis retail markets and impose excise taxes on these products. However, there is significant heterogeneity in the bases (i.e., characteristics that taxes are applied to, such as price, weight, and potency), rates, and collection points (e.g., cultivation vs. wholesale) of excise taxes on recreational cannabis across states.

Methods

We constructed a novel cannabis excise tax measure in $ per flower oz, which is comparable across different tax bases. Specifically, ad valorem excise taxes based on wholesale and retail prices and THC-based taxes were converted to excise taxes ($) per oz using monthly state-level prices between 2014 and 2023. We also calculated tax incidence (i.e., taxes as a percentage of the retail prices) and analyzed its association with tax bases and converted taxes using ordinary least square (OLS) regressions.

Results

The mean and median values of converted excise taxes on recreational cannabis flowers were $37.93 and $37.55 per oz, respectively. The tax incidence for recreational cannabis was 18 %, lower than the incidence of e-cigarette and cigarette excise taxes. During 2014–2023, real cannabis taxes and prices have decreased significantly over time. In addition, tax bases and converted excise taxes were not associated with tax incidence.

Conclusion

As the prices and taxes of recreational cannabis continue to decrease, tax incidence remains low and is not significantly associated with tax bases or rates, posing concerns about whether the current levels of excise taxes are large enough in reducing cannabis use. Future research shall investigate this matter using converted cannabis taxes empirically. In addition, the wide range of tax magnitude and incidence across states suggests that tax avoidance opportunities may exist for recreational cannabis users who live in higher-taxed states to purchase in neighboring states with lower taxes.