Too High To Thrive: Excessive Cannabis Taxes Are Undermining Legal Markets (Op-Ed)

“Higher taxes do not eliminate consumer demand. They simply change where consumers buy their cannabis.”

By Rodney Holcombe, LeafLink

In a recent piece, The New York Times editorial board called for a federal tax on cannabis and urged states to raise their own taxes to “dollars per joint, not cents.” That argument assumes cannabis is lightly taxed today—but across the country, the opposite is true.

Taxes on legal cannabis are higher than almost every industry in the United States and have generated nearly $25 billion since adult-use sales commenced in 2014. Despite these rates, efforts to increase cannabis levies are continuing to gain steam.

In 2025 alone, Maryland, Minnesota, Maine, Ohio, Michigan and California attempted to raise or expand cannabis taxes. This year, Colorado and Oklahoma are looking to do the same. Many of those proposals emerged as lawmakers confronted budget shortfalls and the expiration of federal pandemic aid. Cannabis has increasingly been treated as an untapped source of revenue.

In several large markets, cannabis taxes are layered on top of one another. Excise taxes are combined with state sales taxes, wholesale taxes, local taxes and, in some cases, potency-based taxes. In states such as Illinois, Michigan and Washington, the effective burden can exceed 40 percent. This is in addition to the federal tax burden cannabis businesses carry under §280E, which limits their ability to deduct ordinary operating expenses.

These structures are straining the legal market. High tax burdens are contributing to business closures (particularly among smaller operators) and pushing many consumers to the illicit market.

According to publicly available data, several highly taxed states, including California, Colorado, Illinois, and Washington, have experienced year-over-year declines in adult-use sales and industry job losses in recent years. At the same time, the illicit markets across these states remain entrenched. In California, one of the nation’s oldest legal cannabis markets, estimates suggest that roughly 60 percent of sales still occur outside the regulated system.

Higher taxes do not eliminate consumer demand. They simply change where consumers buy their cannabis.

Licensed businesses pay for testing, packaging, compliance systems, labor and sometimes local licensing. Unregulated sellers do not. When the legal price rises too far above the illicit alternative, price-sensitive consumers shift accordingly. That weakens the regulated market that legalization was intended to build. When tax increases take effect, the impact shows up quickly in wholesale pricing pressure, retailer margin compression, and shifts in purchasing behavior.

The cannabis industry is still new, but data tell us that the type of tax matters as much as the rate.

THC-based potency taxes have created compliance and administrative challenges in states such as Connecticut and Illinois. Because liability is tied to measured THC content rather than price, minor variations in laboratory testing can alter tax obligations. That adds cost and uncertainty for operators. It also influences pricing in ways that do not necessarily advance public health goals. New York eliminated its potency tax and replaced it with a distributor-level excise tax after determining the structure was not working as intended.

States with lower and simpler effective tax structures have generally shown more stable performance. Markets with competitive total burdens and several years of operating history have tended to demonstrate steadier sales and job growth. While federal prohibition and hemp-derived THC competition complicate conditions nationwide, tax policy remains fully within state control.

Recent developments illustrate how sensitive these markets are to tax changes.

In 2025, San Diego raised its local cannabis tax to 10 percent, double the rate when it was first introduced. Data show that the tax brought in less revenue than projected, likely as a result of consumers seeking out alternate channels for purchasing products.

In Michigan, a 24 percent wholesale tax took effect this year atop the existing excise and sales taxes. The state’s January 2026 sales revenue decreased 16 percent from December and falls below January 2025 levels.

Cannabis tax revenue funds many meaningful programs across the country, but these programs depend on a functional legal market that can actually generate that revenue. If tax rates push consumers back to the illicit market, this revenue simply won’t materialize. The issue is not whether cannabis should be taxed. It is whether tax systems are calibrated in a way that allows the legal market to function as intended.

Calls to raise taxes to “dollars per joint” overlook how high effective tax burdens already are in many states. When licensed operators are forced to compete with illicit sellers, higher taxes risk slowing the transition of consumers into regulated channels and weakening this still nascent industry.

If policymakers are evaluating the performance of legalization or creating a framework for a new market, tax design should be a critical part of that conversation. Excessive and complex tax systems make it harder for licensed businesses to compete and for states to achieve their public health, safety, and revenue goals.

Rodney Holcombe is the vice president of Public Policy and Communications at LeafLink.