Marijuana Could Generate $111 Billion In Tax Revenue Over A Decade If Legalized Federally And In All 50 States, Yale Report Shows

Federally legalizing marijuana would generate $57.9 billion in new tax revenue over a decade, according to a new Yale University analysis—and additional states also moving to legalize cannabis would nearly double that haul.

The report, from the university’s Budget Lab, notes that the “cannabis market has grown into a substantial economic sector” but caveats that there is an “unusual degree of uncertainty” about the fiscal projections, however, given the “complicated legal context” of marijuana.

“Marijuana presents an appealing target for taxation,” the Yale analysis says, noting that it is considered by many policymakers to be “socially undesirable”—as is the case with alcohol and cigarettes.

“A tax levied specifically on marijuana could serve the dual purposes of discouraging use and raising revenue, thereby funding new public spending or replacing taxes on socially desirable activities like work or savings,” it says.

Researchers projected that if cannabis were federally rescheduled and an excise tax of $0.00625 per mg of THC were applied, a gram of marijuana would be taxed at $1.31. “At an average price of $8.59 per gram of marijuana, this tax would amount to about a 15% increase in the tax-inclusive price,” the report says.

The tax would result in $57.9 billion in new revenue over the course of ten years, the researchers project, If all remaining states were to also legalize marijuana in their jurisdictions, the total haul would be $111.3 billion over a decade.

The Yale report bases its estimates on existing state tax revenue to determine that the recreational marijuana market was about $25 billion in 2024

“We project that, if the market continues to grow without federal legalization or any new states legalizing, the market will reach nearly $40 billion in 2035,” it says. “The medical segment, while more established, represents the smaller share of total activity at only about 20 percent. As such, the medical marijuana segment accounts for between $5 and $8 billion in sales each year from 2024-2035.”

Uncertainties underlying the revenue estimates include how much illicit activity would convert to the regulated market under legalization, as well as the effect of taxes on consumer purchases.

Legalization would also cause some cannabis workers who are not currently paying income and/or payroll taxes to begin doing so.

“Federal legalization would likely generate income and payroll tax revenue beyond that collected through the excise tax. Workers in the illicit cannabis economy—cultivators, trimmers, distributors, and retail-facing sellers—currently earn income that is neither reported to the IRS nor subject to FICA withholding, because their employers have no lawful basis for establishing formal employment relationships at the federal level. Federal legalization would bifurcate this formerly invisible workforce into two distinct categories for tax purposes. Employees absorbed into licensed, formally structured cannabis firms—the multistate operators, vertically integrated cultivators, and dispensary chains that already operate in the state-legal market—would receive W-2 wages, generating both the employer and employee shares of FICA taxes as well as federal income tax withholding.”

People who own cannabis businesses would also enter into the tax system and be subject to self-employment taxes or federal income tax on net profit—”income streams that are currently entirely outside the federal tax base,” the report says.

“Federal legalization could result in a large-scale transfer of economic activity from the untaxed underground economy into the tax-compliant legal market,” the analysis says. “This shift holds implications for income and payroll tax revenue that is analytically distinct from, and additive to, the excise tax revenues. The scale of the illicit market that would be subject to this transition is substantial.”

Another piece of uncertainty that researchers did not attempt to account for in their calculations stems from the fact that federally legal marijuana businesses would be able to take advantage of tax deductions and credits that they are not eligible for in light of cannabis’s Schedule I status under the law known as 280E.

Despite the uncertainty, the report says, federal legalization would undoubtedly lead to new revenue.

“Federal legalization, by eliminating federal restrictions on banking access, interstate commerce, and formal employment relationships for many illicit operators, would reduce the structural advantages that sustain the black market and pull a meaningful share of that activity into the regulated economy,” the analysis says.

A separately recently published federal report from the U.S. Census Bureau shows that states where marijuana is legal have generated nearly $15 billion in tax revenue from legal cannabis sales since late 2021.

Another report from the advocacy group the Marijuana Policy Project found that states have generated more than $28.4 billion in tax revenue from recreational marijuana sales since the first markets launched over a decade ago.

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