The flat eight percent tax in Virginia’s cannabis legalization proposal is primitive and weak.  The cannabis industry must be delighted.    

Problem:  Under the Virginia proposal, when the price is $200 an ounce, the state gets $16; when the price is $100 an ounce, the state gets $8.   But taxes need to go up over time.  Think tanks left (ITEP) and right (Tax Foundation) agree.  Pre-tax prices will be high at first, then they’ll crash.  (In every state, the market matures, and industry gets more efficient.)  

Let taxes go up:  The after-tax price is what matters in battling the black market. 

Weak solution:  New Mexico ratchets up its 12 percent price tax to 18 percent by 2030, and the leading Congressional legalization bill ratchet ups from 5 percent to 8 percent.

Strong solution:  Tax by grams of THC, the intoxicating molecule.  That’s state of the art, and what Canada and Connecticut do.  Then when prices collapse, the tax doesn’t collapse, too.

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Taxes are the caboose on the train of legalization, and they don’t get much attention.  

For the record: https://www.canada.ca/en/revenue-agency/services/tax/technical-information/excise-duty/excise-duty-memoranda/edm6-3-imposition-and-payment-of-duty-on-cannabis-products.html (a lesser ad valorem tax has seen its day come and go).

Question #3 of our seven “Policy Questions” is about “how the state issues licenses (e.g., through a lottery or competitive application process).”

Reasonable minds can differ.  Here’s some speculation.  

There are trade-offs.  One factor among very many is how licensing affects timing and amount of revenue needed to regulate the market.  (Maybe revenue is the caboose on the train of regulation, and cash flow is the taillight on the caboose, but you have to start somewhere.)

Cannabis can bring in government revenue to pay for the regulation that legalization entails– but unluckily, not at first.  So the market starts off chaotically if appropriators and agencies don’t pre-fund cannabis regulation adequately somehow.  Bad for folks in the market.  Bad for the public.  

No answers, but here are some sticks to throw on the fire – options for licensing – ranked according to earliness of cash flow.  But see three undesirable Downsides to this approach at the end. 

Options

1.     Application fees for limited licenses 

MARKET STRUCTURE SUBCOMITTEE

Policy Questions

• Do you recommend a vertically integrated model (i.e., a single company controlling the process from seed to sale)? If so, do you have recommendations on what size or level?

• Do you recommend the state includes existing CBD and hemp retail entities in this new regulation model?

• Do you have any recommendations on how the state issue licenses (i.e., through a lottery or competitive application process)?

• Do you recommend the state limits the number of licenses available?

• Should there be a residency requirement for licensees?

• Should there be a capital requirement for licensees?

• Do you recommend any social equity provisions, such as license prioritization, fee waivers, or business support programs?

Pending Congressional restriction of Farm Bill Hemp THC Drugs will tax them.   Proposals before Congress would classify these drugs as “marijuana,” and put them into Schedule I of the Controlled Substances Act, at least for now.  All Schedule I substances are subject to the 280E selling expense tax.  

Will the Joint Committee on Taxation score this revenue gain?

Must this kind of back door revenue raising bill originate in the House?

Does this legislation violate Grover Norquist’s No Tax Pledge — and set up primaries for the bill’s supporters? Grover famously tolerates “marijuana” taxes, since they involve a liberating move from prohibition to taxed sales.  But cracking down on Farm Bill Drugs means moving from a free market to regulation and from untaxed sales to taxed sales. Is there some exception to the No Tax Pledge for “loophole closers”? Lots of tax increases that need to happen are loophole closers.

Now I suspect that the 2018 Farm Bill “loophole” that carved hemp drugs out of taxed “marijuana” was not scored as a revenue loser.  But supposedly no one knew that that bill was legalizing intoxicants.

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Schedule III and tax scoring, from 2015:  

Farm Bill Drugs:

https://www.marijuanamoment.net/congressional-researchers-detail-divergent-opinions-on-hemp-as-lawmakers-debate-thc-ban/

https://www.kslaw.com/news-and-insights/congressional-crack-down-on-hemp-loophole-significant-changes-loom-for-hemp-industry

There’s speculation that the Trump Administration might reschedule cannabis into Schedule II rather than the predicted Schedule III.  That sounds doubtful.  To exhaust the possibilities, here’s another doubtful option — a little light-hearted speculation.

President Trump has said the following about cannabis—

“I’ve heard great things having to do with medical, and I’ve had bad things having to do with just about everything else. But medical, and, you know, for pain and various things.”

What if he wanted rescheduling for only medical cannabis into Schedule III, while leaving adult-use in Schedule I? It sounds crazy, but anything can happen these days, and President Trump calls the shots.

I’m as big a fan of a potency tax as you can find, so I’m sad to say that New York repealed its THC tax in 2024. https://mjbizdaily.com/most-new-york-marijuana-operators-save-big-without-potency-tax/  Legal sellers in New York were having so much trouble  competing with illicit sellers that they succeeded not only in reducing the tax burden but in changing the tax base from milligrams of THC to an ad valorem (percentage of price) tax. I think people in state government were desperate to give legal sellers any relief they asked for.

Still, Connecticut continues its THC tax, as does Canada.  Bravo.  Illinois’s weird little combination tax is still on the books. It taxes products more heavily if they cross the 35% THC line with a higher ad valorem rate. The intent was to tax flower at a lower rate than concentrates, which would have been doable, but they somehow landed on this bright line 35% threshold, which is not ideal technically.

Here’s the full report, all 320 pages of it, without the necessity of clicking a couple of times and trying to “prove you are human.”

Sure, a state marijuana monopoly would be federally illegal.   I used to think it would be bulletproof as a practical matter, in light of Louisiana’s experiment.   But President Trump might pick on states that he disfavors, as he does with California localities and ICE. https://www.msn.com/en-us/news/politics/ar-AA1GMkuT

Louisiana’s two land grant state universities had a state monopoly to produce medical marijuana for years before private industry shoved them aside.  Here’s a photo from the HBCU, whose inclusion in legislation may have helped with social equity concerns:

https://www.subr.edu/news/southern-launch-thc-line-of-medical-marijuana-products

In a 2013 North Carolina poll, state marijuana sales beat private sales by 3-to-1.  The full poll with cross-tabs is at https://newrevenue.org/wp-content/uploads/2013/03/nc-marijuana-polling-march-2013.pdf.  Not only do monopolies work best for public health, avoid all kinds of litigation by disappointed license applicants, maximize public revenue, and allow nimble pricing (unburdened by inflexible taxes) to compete with the illicit market; as our Stanford friend Keith Humphreys says, in light of the poor track record of social equity licensing, “In general retail monopolies (that’s where the industry still produces the product; the state sells it) have a better record of hiring diverse employees than do private companies.”   

President Trump might leave state marijuana sales in Red-State New Hampshire alone, but he might pick on North Carolina, with our Democratic Governor. It’s about how much risk a state wants to face.

“Pat Oglesby Appointed to Marijuana Legalization Commission

“The governor of NC, Josh Stein, has come out in favor of marijuana legalization and formed a commission, on which my co-teacher, Pat Oglesby, has been tapped to serve, to study the issue and make recommendations.

“This is an outstanding choice! Pat knows more about marijuana legalization, taxation, licensing, and related issues than anyone I know. We co-taught a course, Cannabis Legalization, at UVA Law that was a huge success, due to Pat’s knowledge and connections to industry experts, regulators, and researchers (and to our excellent students, of course).

“The official press release is here, which includes the full list of commission appointees.”

That’s from University of Virgina law Professor Kim Krawiec. https://www.thefacultylounge.org/2025/06/pat-oglesby-appointed-to-marijuana-legalization-commission.html. I hope I can be useful and live up to her expectations.

From the National Cannabis Policy Summit in D.C. April 28, 2025.

The cannabis tax and markets panel at starts at about the 10’55’’ mark; there’s very weak audio until about 16’40”. Closed captioning may help.

I say, Pre-tax cannabis prices go down over time. What about tax burdens set from the start to go up over time, like NJ and NM?

Grover: “It’s a dirty trick by politicians to have tax increases take place when they’re not in office.” 32′ mark.