Study: Minnesota missing out on millions in tax revenue by not taxing THC products

Minnesota is missing out on up to $46 million in revenue by not having a special tax on legal THC products, according to a University of Minnesota Duluth study.

Looking at states that have legalized recreational marijuana, the university's Bureau of Business and Economic Research found Minnesota will miss a minimum of $5 million and "possibly closer" to $46 million in revenue in 2023.

"The bill that legalized edibles in Minnesota does not have much in place for the state to reap these benefits," the study said. "The question is, why was the tax not considered?"

Most of the 18 states with recreational marijuana levy an excise tax — similar to alcohol and tobacco products — or taxes based on weight or potency. There are no such provisions for Minnesota's THC edibles and drinks, which became legal July 1.

The products are subject to regular sales tax and could be providing a boost to state coffers in that way. But the Department of Revenue said it cannot separate sales of THC products from sales taxes it collects from businesses, so it's unknown how much cannabis-related revenue is being generated.

To be clear, Minnesota has not legalized recreational marijuana. The legal edibles must be derived from hemp, which is legally distinct from marijuana by containing less that 0.3% delta-9 THC.

THC from either variety of cannabis will still cause a high, however.

The Minnesota House of Representatives passed a measure legalizing recreational marijuana in 2021, and included a 10% excise tax on retail sales of marijuana products. The Republican-controlled Senate did not advance the bill.

Whether a similar tax is added to THC edibles next year could depend on the partisan makeup of state government following November's election. Some Republicans want to claw back the new rules completely, while DFLers may push again for full legalization.

An edible-specific sales tax of 2-3% is being considered, similar to the 2.5% gross sales tax on alcohol in Minnesota.

"I don't want it too high or we will push people to the illegal market and price them out," said Rep. Heather Edelson, DFL-Edina, who led the effort to bring some regulation and legal clarity to the hemp-derived THC market. "I am still considering the excise tax and what we will do there."

Senate Republicans were not made available for comment.

Kurtis Hanna, the lobbyist for the Minnesota chapter of the National Organization for the Reform of Marijuana Laws, said adding an excise or "sin" tax on hemp products "seems about as wise as the government having a sin tax on Vitamin C."

"We're not opposed to the legislature earmarking the currently generated [sales] tax revenue from hemp-derived THC products to help pay for enforcement of the current law," he said, including establishment of a state agency that oversees both medical marijuana and hemp products.

"We have faith that the amount of money being generated from the sale of hemp-derived THC products, and the windfall of cash which is being collected this year from medical cannabis patients fees, will be more than enough."

Recreational marijuana states put their cannabis taxes to a variety of uses, including enforcement, addiction services, schools and public safety.

New Jersey directs 70% of its cannabis tax revenue toward "impact zones," areas disproportionately affected by the enforcement of cannabis criminalization, according to the UMD study.

"If Minnesota were to implement a cannabis tax, the state would have a new source of money that could be used to benefit the state and its residents," the study concluded. "Perhaps the legislature will consider this opportunity in future legislative sessions."

Staff writer Ryan Faircloth contributed to this report.