Analysis: Ohio Cannabis Taxes in Line with Other Adult-Use Markets

This story was republished with permission from Crain’s Cleveland Business and written by Jeremy Nobile.

Among two dozen states that have legalized recreational marijuana, the current effective tax rates for adult-use cannabis in Ohio—which will be between approximately 16% and 18%, depending on the county—are right in the middle of the pack, according to a new analysis by The Ohio State University’s Drug Enforcement and Policy Center.

DEPC’s report comes as Ohio lawmakers consider adjusting proposed tax rates for recreational marijuana following the passage of Issue 2 earlier this month.

While the state’s adult-use law is slated to go into effect Dec. 7, the soonest rec sales are expected to commence is September 2024. This is due to several procedural steps that must be addressed first. Regulators must still draft some rules for the rec program, for example, and adult-use licenses must be awarded to cannabis businesses.

In the meantime, Ohio Gov. Mike DeWine has called on the state legislature to review various aspects of the adult-use law. This includes finding a “sweet spot” for tax rates, which the governor doesn’t want to be too high as to dissuade people from buying legal marijuana here but also not too low.

But according to DEPC’s research, Ohio’s taxes for legal marijuana seemingly are already in a sweet spot when compared with other markets.

Issue 2 levies a 10% excise tax on adult-use sales. Coupled with state sales tax of 5.75% plus local sales tax, which varies by jurisdiction, the effective tax rate at the point of sale on rec products in Ohio should be between about 16% to 18%.

DEPC notes that comparing tax rates among all legal marijuana markets is complex due to so many variations. Depending on the state, those taxes could include a special marijuana sales tax as a percentage of price; general state sales tax; applicable local sales tax; weight-based sales tax; and a tax based on THC potency.

Nonetheless, when looking at 19 states with a percentage-of-price retail tax at the point of sale, the median and average tax rate among those states are 17% and 18%, respectively.

Among those 19 states, just two charge less than 10%. Eleven states charge between 10% to 19%. And six charge 20% or more.

Meanwhile, Michigan—where many Ohioans go to purchase legal marijuana—has an effective tax rate of 16% (there are no local sales taxes there).

A concern among industry stakeholders is that some Ohioans may still go to Michigan for recreational marijuana if taxes and overall prices are lower.

An even higher tax rate, it is feared, could have the effect of pushing consumers away from legal shops here, whether those people are crossing state lines or buying from the illicit market.

“In respect to the tax rate, the Ohio General Assembly will need to balance their desire to maximize tax revenue and maximize deterrence of problematic use with their desire to curtail the illicit cannabis market as much as possible,” according to the DEPC report. “A higher tax rate might theoretically bring in additional tax revenue, but it can also incentivize adult customers to purchase their cannabis product from unsanctioned sellers if the higher tax results in uncompetitive prices for legal cannabis product.”

As of this March, taxes and fees related to the medical marijuana program have generated an estimated $183.33 million for Ohio’s state and local government entities since sales began in 2019, according to DEPC. With an adult-use program in place, Ohio could see approximately $276 million to $404 million in additional annual tax revenues in the fifth year of rec sales.

Those projections could be more or less on target contingent on a host of factors that may shape consumer demand, of course, including pricing and taxes.

DEPC’s latest analysis also takes a look at how tax proceeds are expected to be disseminated here and how that compares with other markets. How proceeds are presently set to be allocated is another aspect of the adult-use law under consideration by Ohio lawmakers.

Industry stakeholders are waiting anxiously for clarity on rules and regulations that will shape the market as they attempt to prepare for adult-use sales.

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