Michigan Governor Gretchen Whitmer recently signed an $81 billion budget that includes a controversial 24% wholesale tax on cannabis—one of the harshest cannabis taxes in the United States. This move threatens to cripple the legal cannabis industry just as it was gaining momentum and stability.

The new wholesale tax will be levied on cannabis transferred from cultivators and manufacturers to retailers, effective January 1, 2026. This comes on top of Michigan’s existing 10% retail excise tax and 6% sales tax, creating a cumulative tax burden that could devastate legal operators and drive consumers back to illicit markets.

What makes this tax particularly concerning is how it was implemented. On September 25, Michigan House Reps voted 78-21 in favor of HB 4951, Then the Michigan Senate narrowly passed the provision in a early morning 19-17 vote on October 3.

While the Governor’s press release, detailing who gets what in the massive budget bill, conveniently omitted any mention of how it would be funded, particularly the hundreds of millions to be taxed from the cannabis industry.

Michigan’s New Cannabis Tax Structure

The 24% wholesale tax is a fundamental shift in how Michigan taxes cannabis. Unlike the existing 10% excise tax paid by consumers at retail, this new tax hits businesses at the wholesale level—between cultivators, manufacturers, and retailers.

Michigan’s cannabis industry now faces a three-tiered tax system:

• 24% wholesale tax (new)
  
  
• 10% retail excise tax (existing)
  
  
• 6% sales tax (existing)

This creates one of the highest effective tax rates on cannabis in the nation, with the wholesale tax alone projected to generate approximately $420.7 million annually for the state.

The revenue from this wholesale tax will primarily fund road infrastructure through the newly created Comprehensive Road Funding Fund. While road improvements are undoubtedly needed, using the cannabis industry as a primary funding mechanism places an enormous burden on legal operators.

Industry Response and Economic Concerns

Cannabis industry leaders have responded with alarm to the new tax. Stuart Carter, founder of the Detroit Cannabis Industry Association, called the measure a “slap in the face,” via Newsweek, criticizing how it was pushed through the Legislature with minimal opportunity for public input.

The Michigan Senate Fiscal Agency projects a 14.4% drop in cannabis sales due to the higher tax burden. This prediction aligns with economic principles that show excessive taxation typically reduces legal market participation while strengthening illicit alternatives.

Adam Hoffer, director of excise tax policy at the Tax Foundation via the Associated Press, warned: “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.”

These concerns aren’t theoretical. States with high cannabis taxes have consistently struggled with the illicit market that undercut legal operators. California’s cannabis industry, burdened by high taxes and complex regulations, has seen significant challenges with illegal competition.

The Michigan Cannabis Industry Association wasted no time in challenging the new tax, filing a lawsuit on October 7—the same day Governor Whitmer signed the budget into law. The lawsuit seeks to block the tax before its January 1, 2026 implementation date.

The constitutional challenge could prove successful, as courts have historically protected voter-approved initiatives from legislative interference without proper procedural compliance.

Impact on Consumers and Market Dynamics

The 24% wholesale tax will inevitably increase consumer prices. Wholesale taxes are typically passed through the supply chain, meaning retailers will likely raise prices to maintain their margins. Combined with existing taxes, Michigan cannabis consumers could see significant price increases.

Higher prices create several problematic outcomes:

Reduced Legal Market Participation: Price-sensitive consumers may reduce their cannabis purchases or seek alternatives in the illicit market.

Competitive Disadvantage: Legal operators already compete against untaxed illegal sellers. The additional tax burden makes this competition even more challenging.

Business Viability Concerns: Cannabis businesses operating on thin margins may struggle to absorb the additional tax burden while remaining competitive.

Revenue Reduction Risk: If sales drop as projected, the state may collect less total tax revenue than anticipated, defeating the purpose of the tax increase.

Michigan’s 24% wholesale tax places it among the highest cannabis tax jurisdictions in the United States. This move runs counter to trends in other states that have reduced cannabis taxes after experiencing similar problems with high tax rates.

Colorado, one of the first states to legalize cannabis, has consistently adjusted its tax structure to maintain a competitive legal market. Other states have learned that excessive taxation can undermine legalization goals by preserving black market activity.

The Tax Foundation and other policy organizations have repeatedly warned that high cannabis taxes create more problems than they solve. Michigan appears to be ignoring these lessons, potentially setting up its legal cannabis industry for significant challenges.

Looking Ahead: Potential Consequences

If the constitutional challenge fails and the 24% wholesale tax takes effect in January 2026, Michigan’s cannabis industry faces an uncertain future. The combination of reduced sales, increased compliance costs, and intensified illicit market competition could force some legal operators out of business.

This outcome would be particularly unfortunate given Michigan’s progress in building a thriving legal cannabis market. The state has seen steady growth in legal sales, tax revenue, and job creation since legalization. A poorly designed tax policy could undermine these gains.

The controversy also highlights larger issues with cannabis policy-making. The lack of transparency in the Governor’s announcement and the rushed legislative process suggest that cannabis policy is still being treated as secondary to other political priorities.

The Need for Balanced Cannabis Taxation

Michigan’s 24% wholesale cannabis tax is a cautionary tale about the dangers of excessive taxation on emerging industries. While states have legitimate needs for revenue, using cannabis as a disproportionate funding source undermines the goals of legalization.

Effective cannabis policy requires balancing multiple objectives: generating reasonable tax revenue, maintaining a competitive legal market, reducing black market activity, and protecting public health. Michigan’s new tax policy sacrifices several of these goals for short-term revenue generation.

The legal challenge currently working its way through the courts may provide relief for the industry. However, regardless of the lawsuit’s outcome, Michigan policymakers should reconsider this approach and work with industry stakeholders to develop more sustainable taxation policies.