“THC taxes, aiming squarely at cannabis’s main intoxicating molecule, are stable; they keep nudging against intoxication and rising potency, even as pre-tax prices fall.”
By Pat Oglesby, Center for New Revenue
When cannabis is legalized, taxes are part of the deal—like it or not. Society wants to tax marijuana mainly because one molecule, Delta-9-tetrahydrocannabinol (THC) is intoxicating and seductive. Can’t government just tax that molecule?
Yes, we can. And we should.
Public health experts worry about intoxication and cannabis use disorder; taxes can nudge against those. But what kind of taxes?
Price-based taxes (taxes based on percentage of sales price) fluctuate. They automatically fall when markets mature, making pre-tax prices drop; federal legalization will push prices down even more. Price-based taxes are easy to enact, but quick to fade.
There’s a better way: THC taxes, aiming squarely at cannabis’s main intoxicating molecule, are stable; they keep nudging against intoxication and rising potency, even as pre-tax prices fall.
And another thing: Government revenue may be the caboose on the drug policy train, but government needs revenue for administering legalization, for popular programs, and for all-important voter support. Price-based taxes shrink and bring that revenue down with them. THC taxes don’t.
But few jurisdictions tax THC. Why don’t they? Here are some stated objections, and analysis.
THC taxes are too high.
Legal sellers compete with the illicit market and with neighboring jurisdictions, so a tax burden can be too high. The tax burden is the product of a tax rate, like two cents, and a tax base, like per-milligram of “hemp derived cannabinoids.” (That’s Tennessee’s law.)
Sometimes, people confound burden and base. The burden of potency taxes can be as low you want. A THC tax could be set at a tenth of a cent per milligram. Or a hundredth. The burden of THC taxes is not inherently high.
To be sure, as prices decline with market maturity (to the benefit of industry, consumers, and the fight against the illicit market), stable THC taxes are a growing fraction of after-tax prices (to the dismay of industry). Intoxication gets cheaper, but a THC tax holds its own. When prices drop, public health concerns grow, but a THC tax answers those concerns—and protects revenue.
THC testing can be unreliable.
While good-faith THC testing in processed products yields pretty consistent results, testing of flower (raw plant material) isn’t so reliable, even among samples from one batch.
While states work to improve testing, as they should, THC taxes can help address the problem of unreliable THC testing—so long as the THC tax is based on the THC number that consumers see. Unreliability usually points one way: sellers sometimes shop for labs that give the high THC results that consumers demand. A THC tax acts as a counterweight and militates against that incentive.
Still, if flower testing really is too wide a river to cross, states can emulate the Canadian model—taxing flower by weight and taxing everything else by THC. A weight tax doesn’t correlate well with intoxication, but at least that kind of tax doesn’t fade away when prices drop.
Administration of THC taxes can be complicated.
Since legalizing jurisdictions require THC testing anyway, the incremental cost of tallying up THC for tax purposes is negligible. With a THC test result in hand, collecting THC tax can be easy, whether collected at retail or upstream. Clear labels and QR codes can make the amount transparent to the buyer, the seller and the tax collector.
To be sure, taxing different products like edibles and concentrates at different per-milligram rates, as New York and Connecticut tried, requires line drawing. A general per-milligram rate, like the one used in Canada, bypasses that problem.
THC taxes can overlook minor cannabinoids and the entourage effect.
THC taxes that cover only delta-9 THC are suboptimal. A potency tax should also cover any legal semi-synthetics and hemp-derived compounds.
Any entourage effect is not quantifiable enough to serve as a tax base. If research says it needs to be accounted for somehow, that can happen when the time comes.
For now, THC is the best proxy for intoxication we have.
THC taxes are more regressive than price-based taxes.
Luxury products benefiting from costly celebrity endorsements and sold at a premium to affluent consumers in glamorous boutiques, for instance, pay the same THC tax as low-priced products of similar potency that poorer consumers can readily afford. A price-based tax would tax those luxury products more.
So there’s a trade-off: a glimmer of progressivity (meaning the rich pay more) from price-based taxes versus public health and stable revenue from the THC tax.
Not everything can be the top priority. If public health is the top priority, excise tax progressivity can’t be, too.
New York and Connecticut abandoned THC taxes.
In Canada, a THC tax on processed products has been at work since 2019.
But faced with a dominant and entrenched illicit market, New York’s beleaguered legal sellers successfully urged the state not just to cut the tax burden, but also separately to switch the tax base from THC to price. Neighboring Connecticut followed New York’s lead, replacing a lucrative THC tax with a price-based tax in a revenue-losing swap.
Those states could have cut the tax burden by reducing the tax rate without switching the tax base, but that would not have satisfied industry, whose influence is not to be sneezed at.
In the long run, as prices inevitably decline, industry benefits from the automatic tax cuts that a price-based tax deliver. Industry likes a tax that cuts itself.
Conclusion
No tax system is perfect, and THC taxes have flaws—no jurisdiction yet has had them “start low and go slow,” increasing only as the legal market strengthens and as enforcement marginalizes the illicit market, and no jurisdiction has indexed them for inflation.
But THC taxes can help nudge consumers away from highly intoxicating products, and their flaws pale compared to those of price-based taxes that shrink, to the detriment of public health—and revenue.
Pat Oglesby, a North Carolina lawyer and a former chief tax counsel for the U.S. Senate Committee on Finance, founded the Center for New Revenue, a tax policy non-profit focusing on marijuana taxes, in 2011. He is a member of North Carolina Governor Josh Stein’s (D) Advisory Council on Cannabis, but the views here are only his own.
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