Excise Tax on Cannabis
A breakdown of how cannabis excise taxes are structured, why rates matter, and where the revenue goes.
This article is general information, not legal advice. Laws change; check current rules with official sources or a lawyer.
Cannabis excise taxes are designed to raise revenue, discourage consumption, and fund programs—just like tobacco taxes. The complication: a huge untaxed alternative exists. When legal prices climb too high, consumers buy illicit cannabis instead. States are learning that high-rate structures that work for alcohol or cigarettes don't automatically work for weed. There's no single 'right' rate; it's a tradeoff between revenue and market share.
What an excise tax is
An excise tax is a tax levied on a specific good rather than on income or general sales. Governments use excise taxes to raise revenue, to discourage consumption of goods considered harmful ('sin taxes' on alcohol, tobacco, and gambling), and to fund programs tied to the taxed activity [1][2].
Cannabis excise taxes inherit this framing. They sit on top of ordinary sales tax and are typically collected from cultivators, distributors, or retailers, then passed through to consumers in the shelf price [1].
Cannabis excise tax structures
There are three main designs, and many jurisdictions combine them [1][3]:
Ad valorem (percentage of price). The tax is a percentage of the wholesale or retail price. Simple to administer but tax revenue falls as wholesale prices drop—which has happened in every mature legal market.
Weight-based. A fixed dollar amount per gram or ounce, often with different rates for flower, trim, and immature plants. Revenue is more stable but doesn't scale with potency.
Potency-based (THC). Tax scales with milligrams of THC. New York and Connecticut adopted versions of this Weak / limited. Proponents argue it aligns the tax with intoxication; critics note it is expensive to test for and may push consumers toward cheaper, higher-THC products [4].
Canada uses a hybrid approach: a federal excise duty of the greater of $1 per gram or 10% of the producer's selling price, plus provincial markups and standard GST/HST.
US state tax rates and examples
Rates and structures vary dramatically across states. This snapshot reflects information current as of the verification date; verify current rates with your state revenue department [1][3][5][6]:
- California: 15% state cannabis excise tax at retail, plus state and local sales tax and local cannabis business taxes. A cultivation tax was repealed effective July 1, 2022 [5].
- Colorado: 15% wholesale excise tax plus 15% retail marijuana sales tax, on top of standard sales tax [6].
- Washington: 37% excise tax at retail—among the highest in the country [1].
- Illinois: Tiered by product type and THC content: 10% on flower ≤35% THC, 20% on infused products, 25% on flower >35% THC, plus state and local sales tax [3].
- New York: Potency-based at the distributor level (0.5–3 cents per mg of THC depending on product) plus a 9% state and 4% local retail excise [3].
No federal excise tax exists in the US because cannabis remains a Schedule I controlled substance under the Controlled Substances Act [2].
Tax rates and the illicit market
Cannabis is unusual among taxed goods because a robust untaxed substitute—the illicit market—already exists. When total taxes push legal retail prices significantly above illicit prices, consumers shift back to unlicensed sources, undermining both revenue and the public-health rationale for legalization Weak / limited [1][4][7].
California is the most-cited case study: high combined taxes, local retail bans in roughly two-thirds of municipalities, and a mature illicit supply chain have kept the unlicensed market larger than the legal one years after adult-use sales began [7].
Weight-based taxes also create a perverse incentive once wholesale prices crash: the tax becomes a larger share of the final price over time. Several states have adjusted their structures in response [3].
Where excise tax revenue is allocated
Most legalization statutes earmark excise revenue rather than sending it to general funds. Common destinations include K–12 education, substance-use treatment, law enforcement training, social-equity programs for communities harmed by prohibition, and cannabis-related expungement programs [1][6]. Colorado's school-construction program and Illinois's community-reinvestment program (R3) are frequently cited examples.
Whether disbursed revenue matches legislative intent is a separate political question and one worth checking in your own state's annual revenue reports.
Recent changes and current outlook
As of October 2026:
- California eliminated its cultivation tax in 2022 and shifted excise collection from distributors to retailers. The legislature has periodically revisited the 15% rate, with statutory adjustments tied to revenue trends [5].
- Several states (Michigan, Missouri, Maryland after 2023 legalization) have opted for relatively low, simple ad valorem rates, partly as a deliberate strategy against illicit competition [3].
- Federal rescheduling of cannabis from Schedule I to Schedule III, proposed by the DEA in May 2024 and announced in October 2024, would not by itself create a federal excise tax but would change the IRC §280E business-tax landscape—a separate issue from excise taxation [8].
Last verified: October 2026. Rates and statutes change frequently; always confirm with the state revenue department or a qualified tax professional before relying on any specific number in this article.
This is not legal or tax advice.
Sources
- Government Urban Institute & Brookings Institution. 'How do state and local marijuana (cannabis) taxes work?' Tax Policy Center Briefing Book.
- Government Congressional Research Service. 'Federal Proposals to Tax Marijuana: An Economic Analysis.' CRS Report R43785, 2014 (updated through 2024).
- Reported Boesen, U. 'A Road Map to Recreational Marijuana Taxation.' Tax Foundation, 2022.
- Peer-reviewed Hansen, B., Miller, K., & Weber, C. 'Taxing the Potency of Sin Goods: Evidence from Recreational Cannabis and Liquor Markets.' National Tax Journal, vol. 73, no. 2, 2020.
- Government California Department of Tax and Fee Administration. 'Tax Guide for Cannabis Businesses.'
- Government Colorado Department of Revenue. 'Marijuana Tax Data & Reports.'
- Reported Fuller, T. 'Getting Worse, Not Better: Illegal Pot Market Booming in California Despite Legalization.' The New York Times, April 27, 2019.
- Government U.S. Drug Enforcement Administration. 'Notice of Proposed Rulemaking: Schedules of Controlled Substances: Rescheduling of Marijuana.' Federal Register, vol. 89, no. 99, May 21, 2024.
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Related
- Cannabis Laws in Florida — Medical cannabis is legal; recreational use is illegal; hemp-derived THC remains in legal...
- Cannabis Laws in Maryland — Adult-use legal since July 2023; medical program ongoing; Schedule I at federal level.
- Federal Cannabis Law in the United States — How federal prohibition coexists with state legalization, and what may change.