How Is Marijuana Tax Revenue Used?

The legalization of recreational cannabis across almost half of the U.S. has generated significant tax revenues that state governments have used to support public services and programs. As cannabis tax revenues continue to increase, these funds are becoming increasingly important to state budgets and often fund critical social goods such as education, healthcare, community reinvestment, and infrastructure.

Here, we will explore some of the meaningful ways states are using medical and recreational marijuana tax revenues and how these funds benefit these states’ local communities.

How States Use Marijuana Tax Revenue

The allocation of cannabis tax revenue is different for each state depending on the priorities and policies of a given jurisdiction. As the legal cannabis industry continues to expand and public attitudes toward cannabis shift, the potential future marijuana tax revenues generated will likely play an even more significant role in state budgets.  

Education Funding

One of the most common uses for marijuana tax revenue is education. States like Colorado and Nevada are known to have allocated a significant portion of their cannabis tax funds to public education systems, including K-12 schools, vocational training, and higher education programs.

In Colorado, for example, the state’s marijuana excise tax includes a 15% wholesale tax, with the first $40 million of that revenue exclusively reserved for spending on public school construction. Between 2020-21, Colorado’s overall spending on education using marijuana tax revenue totaled $175.4 million. Since the legalization program’s inception in 2014, the state has allocated over $500 million of marijuana tax revenue toward the Colorado Department of Education.

While this money does not solve all education funding issues, only representing a small fraction of the state’s $5.8 billion total annual education budget, it nevertheless serves as an important supplement to state funds that would otherwise be unavailable.

Nevada also allocates a portion of its 15% wholesale cannabis tax revenue paid by cultivators to fund public education. In 2022, Nevada directed $147 million of its adult-use cannabis tax revenues into the state’s K-12 education system budget. Oregon also allocates 40% of its state marijuana tax toward the state school fund.

Social Equity and Community Investment

Certain states are also using cannabis tax revenue to attend to systemic social inequities and support historically disadvantaged communities. In states like Illinois, Alaska, California, New Jersey, and Colorado, a portion of cannabis tax revenue is specifically distributed for the benefit of social equity programs that provide financial assistance to minority-owned businesses, support workforce development in disadvantaged communities, and fund affordable housing and homelessness-prevention initiatives.

Denver, Colorado has invested over $15 million, about half of the region’s cannabis retail and licensing tax income, into homelessness services and affordable housing initiatives. The city invested a further $3.7 million of these taxes into a fund supporting business owners who traditionally lacked access to resources for growth. The fund focuses on strengthening Denver’s economic diversity while providing job and entrepreneurial opportunities for historically disadvantaged communities. 

Illinois, in particular, has committed 25% of its cannabis tax revenue to the Restore, Reinvest, and Renew (3R) program, which provides support to local community organizations devoted to developing programs that benefit disadvantaged communities. The state of Illinois has distributed over $380 million to this fund since legal cannabis sales began in 2020. 

California also directs a significant portion of its cannabis tax revenues to local nonprofit programs that benefit people adversely affected by cannabis prohibition laws. By 2023, more than $150 million had been distributed to community groups and community reinvestment grants. 

Alaska also invests in repairing the injustices brought about and perpetuated by the legal prohibition of cannabis. The state has invested over $80 million into a Recidivism Reduction Fund, which finances reentry programs for currently and previously incarcerated people.

Last, New Jersey’s legal cannabis market is aimed at promoting social equity goals by providing a notable amount of its cannabis tax dollars to social services. State law requires that 70% of cannabis tax revenues be used for providing economic assistance and services to social “impact zones,” which are areas of the state disproportionately affected by cannabis criminalization laws. 

Public Health and Substance Abuse Prevention

Another significant portion of certain states’ marijuana tax revenues is allocated to public health programs, such as those aimed at addressing substance abuse and mental health issues.

States like Oregon, Illinois, and Nevada are using cannabis tax income to fund addiction recovery and mental health treatment services to promote safe substance use and overall community health. 

For example, in Illinois, the state has allocated 20% of its cannabis tax revenues to organizations that offer support to individuals struggling with mental health and substance use disorders. Oregon also allocated 20% of its 2021 state marijuana tax revenue into mental health and substance abuse services, and a further 5% of these funds into the state authority for drug abuse treatment and prevention.

In Washington, where marijuana taxes are among the highest in the nation, cannabis taxes have generated over $4.1 billion since adult-use sales began. For every $1 billion in revenue collected from the cannabis sales tax in Washington, $600 million is channeled into public health initiatives, one of which funds health insurance for low-income families.

Infrastructure

In some states, a small amount of cannabis tax revenue is used for infrastructure improvements and public works projects. For example, in 2023, Massachusetts brought in over $263 million in marijuana state tax revenues, outpacing the state’s alcohol tax income.

Since the opening of the Massachusetts legal adult-use market, the state has invested millions of state cannabis tax revenue dollars into public transportation. The state uses a portion of marijuana tax revenue for other infrastructure projects that support local governments.

The state of Michigan also sets aside 35% of its adult-use cannabis tax revenues for the Michigan Transportation Fund for roads.

Law Enforcement and Regulatory Costs

While the legalization of marijuana has generated substantial tax revenues, some of that money is also used to cover the costs associated with regulating the cannabis industry and enforcing new laws.

States must establish regulatory agencies to oversee the licensing, compliance, and taxation of cannabis, all of which come with operational expenses. For example, in Denver, about 9% of cannabis sales tax was directed toward regulatory expenses, such as licensing, inspections, community planning, and collaboration with public services.

Final Takeaway

While marijuana tax revenue alone provides a marginal amount of funding that is not a panacea for state budget challenges, these funds have opened up new opportunities to provide further support for pressing social, economic, and public health issues across the country. From funding education and public health programs to financing social equity initiatives and infrastructure projects, cannabis tax revenues are playing a significant part in addressing both modern challenges and historical inequities in legalized states.

As more U.S. states legalize cannabis and adjust their tax policies, the potential for marijuana tax revenue to make meaningful contributions to society continues to expand, offering states unique new opportunities to reinvest in communities and promote long-term economic and social growth.