The State of Ohio is considering legislation to legalize adult-use cannabis in November 2023. If approved, the measure would be the first step toward setting up an operational market for retail sales and consumption in 2023. A recent study by The Ohio State University, Moritz College of Law, estimates potential tax revenue projections from the proposed Adult-Use cannabis program.
For this study, three different models were used to project cannabis tax revenue based on assumptions like year-to-year sales growth rates, pricing scenario comparisons between Ohio and Michigan (a neighboring state with a legal and operational adult-use market), and per capita population figures. The results of the study indicate that if Ohio were to adopt an adult use program, it would have the potential to generate $400 million in annual tax revenue by the fifth year of its operation.
Tax Revenue Estimate for the State of Ohio
The Ohio State University study used three different models to project cannabis tax revenue based on assumptions like year-to-year sales growth rates, pricing scenario comparisons between Ohio and Michigan (a neighboring state with a legal and operational adult-use market), and per capita population figures.
The study estimates that if Ohio were to adopt an adult use program, it would have the potential to generate $400 million in annual tax revenue by the fifth year of its operation. The amount of taxes collected will depend on what type of tax levels and structure is ultimately adopted if Ohio legalizes adult-use cannabis.
The Michigan tax structure currently reflects some of the lowest tax rates among all states that have legalized cannabis for adult use. In contrast, the Ohio tax structure proposed in the citizen-initiated statute is somewhat higher. Suppose Ohio’s General Assembly were to adopt a higher tax rate later, as states like Illinois and Washington have done. Ohio might produce higher overall tax revenues over the $400 million per year mark.
However, efforts to maximize potential tax revenue must consider the possible impact on the illicit market and the downstream effect on tax revenues. As the experience of states such as Illinois suggests, higher tax rates resulting in higher prices of cannabis products in the regulated marketplace might make it more difficult to combat the illicit cannabis trade. They might ultimately lead to decreasing tax revenues.
Additionally, states that have not adopted caps on the number of growers are experiencing market oversaturation, which can result in falling tax revenues, as we see in almost all six states, with the exception of Michigan. Since the 2023 Ohio ballot initiative does not include caps on the number of producers, we should anticipate that tax revenue from the cannabis market might eventually dip as the market matures.
The proposed legislation also includes a provision to set aside a portion of any taxes collected for programs such as substance abuse prevention and treatment programs and funding for local communities. It is important to note that any potential tax revenue from the adult-use cannabis program would be in addition to existing taxes on medical marijuana sales, which are already generating substantial revenue for Ohio.
Comparison to Other States’ Cannabis Tax Revenues
The neighboring state of Michigan currently has a legal and operational adult-use cannabis market. Additionally, Pennsylvania is hopeful of launching its recreational market shortly also. In both jurisdictions, taxes are collected on the sale of cannabis products, with Michigan having one of the lowest tax rates among all states that have legalized cannabis for adult use.
Comparing Ohio’s projected revenue with other states’ revenues gives us some perspective on what Ohio might expect regarding tax revenues under its proposed program.
For example, Michigan has an excise tax rate of 10%, and as of July 2023, it had collected over $170 million in taxes from its adult-use market. Pennsylvania’s proposed tax structure is slightly higher, with a flat rate of 20%, and it is estimated to bring in an additional $188 million in annual revenue for the state by 2028.
However, Ohio’s projected tax revenues are much more conservative than those of other states; the Ohio projections assume a 15% excise tax plus local taxes, and the revenue from the adult-use market is estimated to be around $400 million.
Regardless of the differences in actual figures, it is clear that legalizing adult-use cannabis in Ohio would bring a substantial amount of revenue to the state. This revenue can be used for various purposes, such as substance abuse prevention and treatment programs, funding for local communities, and other services that benefit Ohioans.
The potential tax revenue generated by an adult-use cannabis market in Ohio is significant enough that it cannot be ignored and should be seriously considered when debating the merits of legalizing cannabis for adult use.
While only time will tell the exact tax revenue figures, Ohio could benefit significantly from an adult-use market – not just in terms of its impact on public health and safety but also in terms of potential tax revenue. In addition to providing much-needed revenue to the state, it will also help to reduce the amount of revenue that residents of Ohio are currently spending in neighboring states with legal and operational adult-use markets.
This could be a major benefit for Ohio, as it would create an additional source of economic activity within its borders, driving business growth and job creation.
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