Understanding Alcohol Tax Rates
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Before delving into the details regarding alcohol vs. cannabis taxes, there is some general information readers should understand. Obviously, alcohol is a federally legal substance sold in stores across the nation. When it comes to taxing beer, wine, and alcoholic (spirts) beverages, the state, local communities, and the federal government impose alcohol tax rates. At the federal level, they impose an excise tax rate that is paid by the alcohol manufacturers, importers, wholesalers, and retailers. States and local municipalities may have additional excise tax rates and sales tax rates to beer, wine, and spirits. The excise tax rates for alcohol production is based on the amount of alcohol produced in proof gallons; it's not directly tied the overall price of the product. Alcohol producers typically just add the cost of excise taxes to the final price for consumers to pay.
Federal Excise Tax Rates on Alcohol
- Distilled Spirits: $13.50 / proof gallon (one liquid gallon with 50% alcohol)
- Wine: $1.07 – $3.40 / gallon (varies depending on the type of wine and alcohol content)
- Beer: $18 / barrel (1 barrel = 31 gallons)
Keep in mind that the above excise tax rates are just the federally imposed rates. State and local municipalities may then add additional excise tax rates and impose a sales tax rate. The state-imposed sales taxes on alcohol are directly tied to the price of the alcohol.
Cannabis taxes operate a bit differently than alcohol taxes, though.
Understanding Cannabis Tax Rates
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Cannabis tax rates are not quite the same as alcohol tax rates. While the majority of US states now have a medical marijuana program, there is often no sales tax added to medical cannabis products. There are excise tax rates for some medical marijuana programs, however, but it's not a given and varies by state.
When it comes to recreational cannabis sales, there are now 11 states plus the District of Columbia with legal recreational marijuana markets. However, only seven of these states have opened retail businesses and collected on cannabis taxes — Alaska, California, Colorado, Massachusetts, Nevada, Oregon, and Washington State. Vermont, Maine, Michigan, and Illinois have now passed the legislation to allow adult consumption, but they have yet to begin allowing retail cannabis sales.
It is also important to note that there is no federal excise tax rate on the cannabis industry since it is still a federally illegal substance. For this reason, all cannabis tax rates are only imposed by the state and local municipalities. Most legal marijuana markets impose both excise tax rates and sales tax rates on cannabis products. There a variety of tax structures that state and local governments have been using, and it varies drastically by location. Unlike alcohol taxes, not every state bases its cannabis excise tax rates on the amount of product produced; instead, there's typically an excise tax rate based on the market value of the product produced.
Cannabis Tax Structures
- Price-Based Excise Taxes = a percentage of the retail value of the cannabis product
- Weight-Based Excise Taxes = a set amount per pound sold
- State General Sales Taxes = a percentage of the final sale to consumer
Most states implement both an excise cannabis tax and a general cannabis sales tax — but again, this definitely varies as not every legal state is taking this approach. Regardless, when looking at the total cannabis tax revenue collected by each state, it is essential to understand the difference between excise tax revenue and sales tax revenue.
Alcohol Tax Revenue vs. Cannabis Tax Revenue
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In states that allow recreational cannabis sales, the tax revenue is on the rise as state markets continue to grow. Before diving into the specifics of what each state collects from alcohol versus cannabis taxes, let’s look at what the overall revenue is for each category in 2018. Thanks to a report done by the Institute on Taxation and Economic Policy, we can examine the correlations between both alcohol and cannabis taxes.
- In 2018, retail cannabis collected $1.04 billion in excise tax revenue, which is a 57% increase from 2017.
- Of the states with recorded legal marijuana sales, only $304 million was collected in excise taxes from beer and wine sales in 2018.
- Of the states with recorded legal marijuana sales, $1.16 billion was collected in excise taxes from all alcohol sales in 2018.
- In 2018, retail cannabis sales collected $300 million in general sales tax revenue.
As shown by the numbers above, the excise tax revenue collected from all alcohol sales — including all beer, wine, and spirits sold — still outperforms cannabis tax revenue overall. However, the gap between the two continues to shrink as more states legalize marijuana. Of the states with recorded retail cannabis sales, Colorado is the only state that collected more excise tax revenue from cannabis sales than all alcohol sales in 2018.
The numbers listed below are rough estimates of the tax revenue collected from both alcohol and cannabis sales in 2018 in each of the states with legal recreational marijuana markets:
- Colorado Excise Tax Revenue:
- $243.5 Million from Retail Cannabis Sales
- $46.3 Million from All Alcohol Sales
- Washington Excise Tax Revenue:
- $368.5 Million from Retail Cannabis Sales
- $381.7 Million from All Alcohol Sales
- Oregon Excise Tax Revenue:
- $110 Million from Retail Cannabis Sales
- $256.5 Million from All Alcohol Sales
- Alaska Excise Tax Revenue:
- $11 Million from Retail Cannabis Sales
- $20 Million from All Alcohol Sales
- Nevada Excise Tax Revenue:
- $87.6 Million from Retail Cannabis Sales
- $49.3 Million from All Alcohol Sales
- California Excise Tax Revenue:
- $209.4 Million from Retail Cannabis Sales
- $379 Million from All Alcohol Sales
The excise tax revenue collected from all alcohol sales still beats out that from legal cannabis sales in most states.
Colorado is also the only legal marijuana state that collected more from cannabis than tobacco excise taxes in 2018. In every other state, tobacco excise tax revenue drastically outdoes cannabis tax revenues. Keep in mind, though, these numbers do not account for the general sales taxes collected in each state; many state governments and local municipalities do not actually report how much they collect from general sales taxes of alcohol and tobacco, which makes it impossible to draw a comparison.
Regardless of the significant amount of tax revenue that legal cannabis sales have been generating, it still only accounts for 1% of total state and local tax revenue collected annually. So with that in mind, does alcohol tax revenue do more for state communities than cannabis taxes?
Alcohol vs. Cannabis Taxes: Which Does More for Society?
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Considering the novelty of the legal marijuana industry and the ambiguity around how exactly taxes are used, it is tough to determine if one type of tax revenue actually does more for society than the other. It is also relatively early to track how each state utilizes its cannabis tax revenue within the local communities. Some states put it up to public opinion with a vote to determine where its cannabis tax revenue will be allocated. Nevertheless, every state takes a different approach to where their alcohol and cannabis tax revenues are used and what exactly they do.
A report covering five states with legal marijuana explained where most of the cannabis and alcohol tax revenue is allocated by state:
Alaska
Although sales began in 2016, Alaska is a relatively new retail marijuana market.
- The state allocates roughly 50% of its alcohol tax revenue to a variety of alcohol and drug education programs with a focus on youth education.
- Around 75% of the state’s cannabis tax revenue is allocated towards social services, according to WikiLeaf.
California
The state of California is also a new retail marijuana market with a ton of potential. The state collected roughly $379 million from alcohol taxes and $209 million from cannabis taxes in 2018.
- California has allocated the majority of alcohol taxes to the Alcohol Beverage Control Fund, which oversees the state’s liquor licensing.
- Most of the state’s cannabis tax revenue goes towards drug and alcohol prevention and treatment programs, environmental and public safety programs, and childcare.
Colorado
As the first state to legalize weed, Colorado is a well-established legal marijuana market with a history of stellar cannabis sales.
- When it comes to alcohol tax revenue, Colorado puts 85% into the Old Age Pension program, and the rest is allocated to general state funds.
- Most of Colorado’s cannabis tax revenue goes to the Building Excellent Schools Today (BEST) Grant Program. The remaining revenue goes into a general fund for education.
Oregon
Oregon is another established retail marijuana market with an impressive track record in terms of cannabis tax revenue. Like Alaska, Oregon does not have a general state sales tax on alcohol or cannabis. Regardless, the state still collects millions in excise taxes.
- Of the fees collected from alcohol sales, 50% goes towards a general state fund. A small portion goes towards mental health programs as well as drug and alcohol education and help. The rest is allocated to cities and counties.
- The majority of Oregon’s cannabis tax revenue goes towards state schools, mental health services, state law enforcement, and drug abuse help and prevention. The rest of the cannabis tax revenue is allocated to cities and counties.
Washington
Washington collects extremely high tax revenues from both alcohol and cannabis sales.
- The state allocates all of its alcohol taxes to the Liquor Revolving Fund, which then distributes funds to other programs. In 2018, Washington’s alcohol tax revenue distributed 58% to general services, 35% to municipalities, and 7% to alcohol and drug education programs.
- Of the state’s cannabis tax revenue, 50% goes to the state’s health plan trust account, 15% goes to youth substance abuse programs, 10% goes towards marijuana education, 5% goes to community health centers, and the remaining revenue goes into a general state fund.
In Conclusion...
Based on the information above and the recent data from legal marijuana states, it looks like cannabis tax revenue might do a bit more for local communities in many of these states, though it obviously does vary. If societal impact is determined by the percentage of revenue allocated to social programs, cannabis tax revenue does more for state societies. A majority of alcohol tax revenue in most states goes towards alcohol and drug education, prevention, and abuse programs or is allocated towards enforcing liquor laws and licensing.
Cannabis taxes, for the time being, take the win for social support and community growth. It will be interesting to see how other states decide to allocate their cannabis taxes as the legal market spreads across the nation.
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