Marijuana Reform and Taxes

States that have legalized adult-use recreational marijuana use a variety of tax strategies including special marijuana sales tax as a percentage of price, general state sales tax (plus applicable local sales tax), weight-based sales tax, or THC-potency tax. Regardless of the type, marijuana tax revenue supports a range of programs and initiatives including substance use/addiction recovery and public health, the state’s general fund, law enforcement and public safety, or social equity programs. Ten states, including Ohio, have specifically allocated a certain percentage of the special tax revenue to local governments without putting restrictions on how this money can be spent. However, the way in which local governments spend the resulting revenue is underexplored, with only anecdotal accounts from individual jurisdictions and no systematically collected data.

Ohio’s enacted statute, which became effective on December 7, 2023, establishes Chapter 3780 within the Ohio Revised Code. Among other things, the law specifies how recreational marijuana will be taxed and how the resulting tax revenue will be allocated although members of the Ohio General Assembly and Governor Mike DeWine have expressed interest in possible revisions to the ballot initiative’s tax rate and tax revenue allocations.

This page aims to inform discussion of marijuana taxation and revenue allocation, at both the state and local level. We detail how the Ohio initiative’s tax and revenue structures compare to the other 23 states that have already fully legalized marijuana for adult use and provide the first systematic exploration into how local governments spend or are planning to spend marijuana tax revenue in states that allocate part of their overall marijuana state tax revenue to local governments.

Visit our resource page on Issue 2 to learn more about what you need to know now that adult-use marijuana sales have begun in Ohio.

NOTE: This page does not incorporate citations. Download the reports below to find the full list of sources and references used.

Figure 1. Ohio Marijuana Tax Allocation by Fund

There are four different types of taxes levied on legal marijuana states across the 23 legal states: special marijuana sales tax as a percentage of price, general state sales tax (plus applicable local sales tax), weight-based sales tax, and THC-potency tax. The most common type of tax imposed by states is the percentage-of-sales tax levied at the time of purchase, as well as the general state and local state taxes. Only three states impose a THC potency tax (Illinois, New York and Connecticut), with five additional states imposing some form of weight-based tax, whether at the point of consumer sale or at the point of wholesale (Alaska, Colorado, Maine, Nevada, and New Jersey).

While a comparison across all 23 states is complex given the type of tax and price variations, we can readily compare the taxes levied at the point of purchase for the 19 states that do not impose potency-based or weight-based tax at the point of purchase (for the purposes of this paper, we are including statewide sales taxes, but excluding local sales taxes given variation among different localities within a state). As set forth in Figure 2 below, the tax rates imposed by the 19 states differ significantly, with the lowest tax adopted by the state of New Jersey at 6.625% and the highest tax imposed by Washington at 43.5%.

Figure 2: Tax rates at point of sale

Of the 19 states that impose only a percentage-of-price retail tax at the point of sale, two charge less than 10%, eleven charge between 10-19% and six states tax 20% or more, which results in a median tax rate of 17% and average rate of 18%. In most cases, the effective tax rate at point-of-sale results from a combination of a special marijuana tax plus the standard state sales tax. But a few states rely only on a special marijuana tax or only on a standard sales tax as the means of taxing recreational retail cannabis sales.

Ohio’s proposed recreational cannabis retail tax rate of 15.75% (10% special marijuana tax plus 5.75% regular state sales tax, excluding local sales tax) puts Ohio slightly below the average and median tax imposed by other states, but equals almost exactly the tax rate imposed by the only neighboring state, Michigan (16%), that has legalized marijuana for adult use.

Marijuana tax revenue supports a number of different programs and initiatives across the 23 states that have legalized adult-use marijuana sales. While details for each state differ, we created eleven categories to allow us to compare allocations across states as shown in Table 1 below. Two key notes: first, some of these categories are not mutually exclusive. In several instances we classified one state funding provision under two categories due to the stated purpose of the allotted funding. For instance, Colorado allocates 25% of their marijuana retail tax revenue to fund the Marijuana Education Fund, which fits into both the Substance Use and Addiction Recovery category as well as Public Health category we set forth below. Second, we are not able to determine whether marijuana tax revenue deposited into the state’s general fund is ultimately used to fund some of the eleven categories indirectly. For instance, New Mexico channels nearly 70% of its marijuana tax revenue into the state’s general fund and we cannot determine whether some of this revenue does not end up indirectly funding substance abuse programs in the state.

The five categories that are most frequently funded by the 24 states (including Ohio) are:

• substance use and addiction recovery and public health (each 15 states),
• the state's general fund (14 states),
• oversight/administration and law enforcement and public safety (each 13 states),
• and social equity programs (12 states plus Rhode Island which funds social equity from application and licensing fees).

The portion of tax revenue devoted to each category, however, differs significantly from state to state. For instance, some states are investing as much as 70% of their marijuana tax revenue in social equity programs (New Jersey), while others are setting aside only 7% for that purpose (Delaware).

Additionally, while some states break down their revenue allocation by percentages, other states, such as California or Minnesota, chose to designate a fixed amount of funding to each category for a specific number of years.

Table 1. Tax Allocation Categories Across 23 Adult-Use States

A detailed a breakdown of each states’ allocation can be found in Appendices B and C in the full report.

Ohio’s tax rate and tax revenue allocation plan seems to be in line with the practices of other states. As mentioned above, the proposed tax rate of 15.75% (10% special marijuana tax plus 5.75% state sales tax) for cannabis retail sales is very close to the median of the remaining states (17%) and virtually mirrors tax structure in the neighboring state of Michigan. Similarly, Ohio’s plan to allocate 3% to administrative costs, 25% to substance use treatment, 36% to localities with operating cannabis entities, and 36% to a social equity program aligns with some of the funding priorities we see in other recreational states.

The Ohio General Assembly, along with Governor DeWine, have signaled a desire to make amendments to the marijuana reform statute as passed by the voters on November 7th, with tax rate and tax allocation being mentioned as possible issues under consideration. In respect to the tax rate, the Ohio General Assembly will need to balance their desire to maximize tax revenue and maximize deterrence of problematic use with their desire to curtail the illicit cannabis market as much as possible. A higher tax rate might theoretically bring in additional tax revenue, but it can also incentivize adult customers to purchase their cannabis product from unsanctioned sellers if the higher tax results in uncompetitive prices for legal cannabis product.

Lastly, the special marijuana tax revenue (that we estimate at $162-$237 million at year five of full implementation) would represent less than 0.5% of Ohio’s overall state budget. While not an insignificant amount, the potential impact of this new marijuana revenue could be limited if resources are spread thin across multiple priorities. Additionally, while it might make sense to appropriate some funding to certain priorities in perpetuity, that approach may not be ideal with other priorities. For instance, given our country’s history with drug use and addiction, it likely makes sense to allocate part of cannabis revenue to fund substance use prevention and treatment indefinitely. Other priorities, such as funding for the expungement of applicable criminal records which has been a concern for many other jurisdictions, might require only several years of dedicated funding as we should expect arrests for cannabis offenses to virtually disappear for adult users over time.

The Ohio General Assembly should take time to carefully consider not only whether the proposed taxation plan for adult-use marijuana should be changed, but also which areas they want to prioritize for funding from the resulting revenue. In addition, whether the taxing and allocation provisions approved by voters are largely preserved or are subject to significant revisions, the Ohio General Assembly should be sure to support and draw guidance from data collection and analyses in the marijuana reform arena. Whatever priorities and plans are implemented, the marijuana reform landscape has been evolving very rapidly, and future reforms in neighboring states and at the federal level could significantly impact both tax revenues and what reform-related issues should become a priority for Ohio policymakers. Best practices in this space often call for legislating and regulating with an eye toward gathering data on an array of key metrics and with the expectation that the state’s needs are sure to evolve and change over time.