Legal recreational sales of marijuana began this month in Michigan, and they are scheduled to begin next week in Illinois. Michigan, where marijuana was legalized by a 2018 ballot initiative, and Illinois, where it was legalized this year by the state legislature, are the first two Midwestern states to allow recreational use, and their cannabis taxes reflect a divergence of views about how to balance the desire for new revenue against the goal of displacing the black market.
Michigan's Proposal 1 established a 10 percent excise tax, in addition to the standard state sales tax of 6 percent. There are no local sales taxes. That makes Michigan one of the lowest-tax states for marijuana. The combined levy is similar to what cannabis buyers pay in Oregon, which has a 17 percent excise tax and no general sales tax. Maine has a cultivation tax of $335 per pound (about $21 per ounce) and a general sales tax of 10 percent. Alaska has a $50-per-ounce cultivation tax but no excise or sales taxes.
Illinois, by contrast, will be collecting a 7 percent tax from growers and various excise taxes (10 percent on buds, 20 percent on infused products, and 25 percent on products containing more than 35 percent THC) in addition to the general state sales tax of 6.25 percent and local sales taxes as high as 4.75 percent. The combined sales tax in Chicago is 10.25 percent, making the total retail levy there more than 30 percent for edibles, in addition to the impact of the cultivation tax. That means edible buyers in Chicago will pay more than twice the taxes as edible buyers in Ann Arbor.
That's without taking into account local "occupation taxes" on cannabis retailers, which can be up to 3 percent of gross receipts under state law. Cook County, which includes Chicago, plans to impose the maximum allowable rate.
The Illinois levies are not quite as high as the burden in Washington, which charges a 37 percent marijuana excise tax on top of general sales taxes that total 10.1 percent in Seattle, or in California, where the combined taxes can be as high as 45 percent. But Illinois legislators do not seem very concerned about making it harder for state-licensed marijuana businesses to compete with illegal dealers, even though the upshot could be less revenue than might be collected at a lower rate with a bigger base.
In California, where state officials originally expected $1 billion in annual revenue from marijuana taxes, the actual take for the fiscal year that ended in June was $288 million. High tax rates are not the only reason for the disappointing revenue: Licensing lags, onerous regulations, and local bans also have helped preserve the black market, which still accounts for nearly three-quarters of sales two years after legal recreational sales began. But the taxes certainly don't help.
It will be instructive to see if Michigan, which also has the advantage of a more extensive medical marijuana industry, fares better than Illinois in shifting consumers to the legal market. The promise of new revenue for the government, which may strike libertarians as an argument against legalization, nevertheless has played a conspicuous role in persuading the public that it's time to end the war on weed. But even politicians who are in it for the money should recognize that it's against their interest to milk cannabis consumers so much that they stick with the pot dealers who collect no taxes at all.
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