States rake in billions from taxes on weed sales. Here's where the money goes

Oklahoma voters on Tuesday resoundingly rejected legalizing recreational marijuana, deciding not to join 21 other states and the District of Columbia. Approving the ballot measure would have raised tens of millions of dollars in new annual tax revenue for the state.

In a special election, voters turned down State Question 820 by more than 20 percentage points. Had it passed, the measure would have brought the state new money from a 15% excise tax on top of its existing 4.5% sales tax for cannabis sales.

With the vote, Oklahoma joined three other states — Arkansas, North Dakota and South Dakota — that have rejected recreational marijuana in recent months. But in states that have embraced legalization, revenue from the legal sale of marijuana to adults 21 and older has been a boon to state coffers, raking in billions of dollars a year from hefty taxes and other fees. Those funds have helped finance everything from the public schools to state health insurance, attracting the attention of lawmakers and voters even in some of the most red states.

The "no" vote was likely bolstered by Republican Gov. Kevin Stitt's opposition. At a news conference last month, he said the biggest reason he was against the measure is that marijuana remains a controlled substance on the federal level.

"There shouldn't be a patchwork of states doing different things," he said. "We need to let the feds tell us if it's legal or illegal. We shouldn't let the states tell us that."

States make billions off legal pot

Despite the outcome of Tuesday's vote, medical marijuana will remain legal in Oklahoma.

"There's actually a lot more tax revenue that's pulled in from the recreational ... side," says Robert Mikos, a professor of law at Vanderbilt University who is an expert on marijuana legalization and its economic impact. "The medical market is quite large, but the recreational market is even bigger."

A study authored by the law firm Vicente Sederberg LLP and the Oklahoma Cannabis Industry Association, estimated that from 2024-2028, recreational marijuana could have more than doubled the state's revenue from legal pot to $821 million.

In neighboring Colorado, a 15% marijuana sales tax raised more than $325 million last year. Even so, that figure was down by nearly $100 million from the previous year — after a significant bump attributed to the COVID-19 pandemic, according to The Denver Gazette.

Nationwide, combined totals for taxes on medical and recreational use reached $3.7 billion in 2021, according to the Marijuana Policy Project, a leading advocate for the legalization of cannabis. Those figures, however, do not include local sales tax on marijuana charged by some cities, such as Denver.

In Oklahoma, that new money would have been earmarked for local governments, courts, public schools, substance abuse treatment and the state's general revenue fund.

"There's a lot of earmarking that goes on and I think it's used as a way to appease some opponents or convince people who are on the fence to jump on board," Mikos says. "You specify that not only will we be generating millions of dollars in new tax revenue, but it's going to go to a cause that you care about."

Take public schools, for instance. That's where all of Colorado's marijuana revenue goes. Public schools are also a priority for Oregon, Nevada, and Michigan. That's also true for New York, where sales began in December. Other states use some of the money for community colleges.

By contrast, Alaska invests its marijuana revenue into a recidivism reduction fund and a re-entry program for former inmates. A sizeable chunk of New York's pot taxes go to support drug treatment and public health programs, as will Virginia's when sales begin there next year.

Colorado and California both charge a 15% tax, while Massachusetts and Michigan are somewhat lower.

Montana charges 20% and Virginia plans a 21% excise tax when recreational sales are permitted there next year.

In the state of Washington, where the marijuana tax is a steep 37%, much of the resulting revenue is funneled into public health initiatives and health insurance for low-income families, in addition to the general fund. California says it spends its excise tax revenue from cannabis sales on transportation, public safety and health, libraries, schools, social services, and natural resource management programs.

"They've actually generated more total revenue from cannabis taxes in Washington and some other states than they have [from] alcohol," says Karen O'Keefe, director of state policies at the Marijuana Policy Project.

"The alcohol taxes don't come anywhere near" those for cannabis in Washington, she says, and the total revenue raised comes despite there being "far more servings of alcohol" consumed in the state.

Some states have gone for lower taxes because "they want to make sure that they absorb as much as possible of the cannabis market and don't have an illicit market."

"California is a state that just in the past year got rid of a cultivation tax that they had because they were finding that the illicit market was still pretty robust," she says.

The long history of legalization

In 1996, California became the first state to legalize medical cannabis. But it wasn't until 2012 that recreational marijuana first became legal in the U.S. — in Colorado and Washington. Recreational use became legal in Alaska and Oregon two years later, followed in 2016 by California, Nevada, Maine and Massachusetts.

Vanderbilt's Mikos says states have invariably followed the same path, approving medical marijuana first, then recreational.

"I think that demonstrated that you could legalize this without everything running amok and the sky falling," he says.

And it's worked out despite the concern about the patchwork of state laws that Oklahoma's governor warned about.

Mikos says permitting medical marijuana established a "beachhead" that ultimately paved the way for recreational use in these states.

"If you know somebody who's going through chemotherapy and is using marijuana to combat the nausea associated with that, and this person is otherwise an upstanding member of the community, it starts to change your attitudes towards it," he says.

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