Start low and go… fast? How to tax weed in Minnesota

Last week’s budget-palooza in St. Paul revealed a small but potentially significant rift between Gov. Walz and the DFL-controlled legislature on the topic of marijuana policy.

In announcing their legalization bill, DFL legislators proposed taxing cannabis sales at 8% on top of the existing state sales tax of 6.5% (the sales tax is higher in some cities.) In his budget, however, Walz proposed roughly doubling the marijuana-specific tax to 15%, while also keeping the state sales tax on top of it.

That difference will likely be ironed out as the legislation makes its way through a lengthy committee process. But the diverging tax rates are a reminder that marijuana tax policy is a relatively new topic for lawmakers to grapple with, and that nobody’s figured out an optimal or standard approach to it yet.

“No one knows the best way to tax cannabis,” explains Beau Kilmer, co-director of the RAND Drug Policy Research Center. But, he says, “one option for Minnesota would be to start with a low tax rate that quickly increases over time. This could help transition consumers to the legal market” — and quickly undercut the black market. 

The persistence of a flourishing black market has emerged as a concern in some other states that have socked consumers of the legal product with high taxes. The high taxes push consumers back to the black market while impeding profitability for legal producers. 

“Start low and go fast,” in other words – a twist on the familiar mantra for first-time edibles consumers. Minnesota’s legalization bill has the first half of that directive in the bag. At either 8 or 15%, taxes on Minnesota weed would be among the nation’s lowest, according to data from the Urban-Brookings Tax Policy Center.

On a hypothetical $100 Minnesota ounce, you’d pay about $22 dollars in total taxes under the Walz plan. By contrast, that same ounce in Washington state comes with nearly $50 in taxes, while in Alaska it carries almost $60.

That would almost certainly undercut the black market here more quickly than in most other states. But taxation touches on other aspects of pot policy as well. Higher taxes can be used to fund substance abuse programs, top off school coffers, or even reverse inequities caused by decades of the War on Drugs. For that reason, Kilmer and others like a tax approach that starts out low to crowd out the black market, and then ramps up in order to fund the new legal cannabis bureaucracy as well as other vital programs.

One challenge, Kilmer notes, is that private companies who enter the market at a low tax rate are likely to balk at any future tax increases, backed by influential lobbyists roaming the Capitol. Lawmakers would have to plan for that, ideally by publishing a clear schedule of rate increases going forward. 

Kilmer’s also not keen on simply taxing marijuana as a percentage of sales, which is the Minnesota proposal as well as the reality in most states. Marijuana prices tend to drop rapidly when more players enter the market. The plant is astonishingly easy to grow in virtually any conditions – there’s a reason they call it “weed.” That makes it easy to overproduce relative to demand, causing prices – and hence tax revenues – to fall with it.

That may not be a problem for Minnesota lawmakers, who have stated repeatedly they don’t see legal weed as a revenue driver. But it is a reminder that there are other models for cannabis taxation out there. 

Some states, for instance, tax by THC content rather than price, thus tying revenue to how high consumers are getting.