The State of Michigan is formally defending its new 24% wholesale cannabis tax, stating in recent court filings that the measure is constitutional. This move comes in response to a lawsuit from the Michigan Cannabis Industry Association (MCIA), which aims to block the tax from taking effect.
At the heart of the dispute is whether the state legislature overstepped its bounds. Cannabis industry leaders in Michigan argue the new tax illegally amends the voter-approved 2018 law that legalized recreational cannabis, a change that would constitutionally require a three-fourths supermajority vote. The tax, however, passed with a much slimmer margin.
The state’s counterargument hinges on a key distinction. Attorneys for Michigan claim the new wholesale tax is a separate measure intended to raise revenue for road repairs and does not directly alter the text of the original voter-approved initiative.
By framing it this way, the state maintains that the supermajority requirement does not apply. As the lawsuits unfold, cannabis businesses and consumers are left watching, concerned that the tax could destabilize an already competitive market and ultimately undermine the very goals of legalization.
A Tax for Roads, Not Regulation
In its court filings via Bridge Michigan, the state of Michigan argues that the new 24% wholesale tax is distinct from the voter-initiated retail tax and therefore does not function as an amendment to the existing cannabis law. The state’s brief explains, “the Legislature enacted a law that works in concert with the legal framework for regulating marijuana, which exists in several separate, but intertwined, laws.”
A central pillar of the state’s defense is that the primary purpose of the tax is to raise an estimated $420 million annually for a $2 billion plan to fix state and local roads. By defining the tax’s objective as revenue generation for infrastructure rather than the regulation of the marijuana industry, the state seeks to legally separate it from the 2018 legalization law.
Attorneys contend that the new tax builds upon the foundation of the 2018 initiative, which they argue “created a targeted tax on retail adult-use marijuana sales and specifically allowed that all other taxes would still apply.”
The state also challenges the lawsuit on procedural grounds. State attorneys referenced a 1960s-era Michigan law, arguing that a governmental agency cannot be sued for carrying out its core functions. They claim that collecting taxes is a routine duty of the Department of Treasury. This defense strategy aims to dismiss the lawsuit outright, positioning the tax as a legitimate exercise of legislative power.
The Industry’s Fight for Survival
For cannabis businesses, the state’s defense overlooks the dire economic realities they face. The MCIA and other industry plaintiffs argue the new tax is an unconstitutional “slap in the face” to both the industry and the voters who established it. Their lawsuit contends that implementing the tax would cause “immediate and irreparable” damage to legal operators.
The core of the industry’s legal challenge is that the legislature violated the Michigan Constitution. Amending a voter-approved law requires the support of three-fourths of the Legislature, a threshold the tax’s passage failed to meet.
The lawsuit alleges that Governor Gretchen Whitmer and lawmakers improperly pushed the tax through by disguising it as a roads-funding bill to circumvent this requirement. The MCIA has asked a court to pause the tax with an injunction while the legal challenge proceeds, stating that the state cannot use an unconstitutional tax to “destroy businesses and livelihoods.”
Beyond the constitutional questions, operators warn of severe economic consequences. The Michigan cannabis market is already facing saturation and declining prices, leaving many businesses with thin profit margins.
Attorneys for one plaintiff, claim the tax will force the company to either raise prices—risking the loss of customers and market share—or absorb the tax, which could destroy its narrow operating margins. This feeling is widespread, with many fearing the tax could lead to business closures and a significant contraction of the legal market.
New Tax Undermines the Legal Cannabis Market
A major concern is that the new tax will inadvertently strengthen the illicit market. When legal cannabis becomes too expensive, consumers often turn to unregulated sources. Robin Schneider, director of the MCIA, cautioned that a significant tax hike would drive customers “straight back to the illicit market.”
Adam Hoffer of the Tax Foundation shared this, warning, “This massive tax increase is really going to hurt the legal market in Michigan. The higher the tax, the greater the incentive for consumers to seek cheaper, unregulated product.”
This outcome would defeat one of the primary goals of legalization: to create a safe, tested, and regulated cannabis supply. Furthermore, it could backfire on the state’s revenue goals. The Michigan Senate Fiscal Agency projects the tax could cause a 14.4% drop in legal cannabis sales. If sales decline, the state may collect less total tax revenue than anticipated, which would undermine the very road funding plan the tax is meant to support. Ironically, the existing 10% retail excise tax already dedicates a portion of its revenue to roads and bridges, contributing nearly $116 million in 2024 alone.
What’s Next for Michigan Cannabis?
The Michigan Cannabis Industry Association will argue for a court-ordered injunction to halt the tax in a hearing scheduled for later this month. The state’s defense has clarified its legal strategy, but the court’s decision will determine the immediate future of the tax.
This case represents more than a dispute over tax law; it tests the promises Michigan made to voters when they chose to legalize cannabis. The industry was built on the premise of creating a vibrant, legal alternative to the illicit market. If the new tax makes competing impossible for legal businesses, it risks reversing the progress Michigan has made. The outcome will signal whether the state intends to foster a sustainable legal cannabis industry or tax it to its breaking point.
