Marijuana tax revenues fall short of projections in many states, including Colorado

Nearly half of Americans live in a state that allows legal access to recreational marijuana. Eleven more states, including Wisconsin and Florida, are considering legalization in 2024.

One of the most common rationales for legalizing marijuana is increasing state tax revenue. How much revenue comes in depends on decisions states make about regulating the marijuana industry, including how it is taxed.

I’m an economist who specializes in forecasting how various tax regimes affect markets. My expertise spans industries such as legal recreational marijuana, alcohol and tobacco. I’ve examined various taxes on marijuana in states such as Colorado and Washington to understand how much revenue has been brought in and the role state tax policies have played in that outcome.

Recreational marijuana taxes are generally based on price, quantity, weight or potency – much like other “sin goods” such as tobacco and alcohol products.

Taxing sin goods is thought to shape public health policy and reduce the harmful impacts these products have on the public. These taxes, also known as excise taxes, are usually higher on sin goods than taxes on other products by design.

Taxing these goods aggressively is about more than government greed. It is well understood that alcohol and tobacco use creates burdens on society such as increased violence and health care costs. Economists like me call these impacts on people who are uninvolved in a situation “negative social externalities.”