Minnesota could raise tax on cannabis products before marijuana market launches

Minnesota’s tax on recreational cannabis products could go up before the state’s marijuana market fully launches in the next year.

As part of a budget deal, Gov. Tim Walz and legislative leaders agreed to hike the state’s tax on recreational cannabis products from 10% to 15%. Legislators are also pushing to repeal language in the law that requires the state to share 20% of cannabis tax revenue with local governments. The two changes would generate more revenue for the state as it seeks to head off a possible multibillion-dollar budget deficit a few years from now.

“I know the Legislature faced a tough budgetary reality and had to make a lot of hard choices around how to balance the budget and ensure a number of different priorities are met,” said Eric Taubel, interim director of Minnesota’s Office of Cannabis Management. “I understand the frustration of cannabis advocates [about] the tax increase, but I’m also pretty clear-eyed about the tough choices the Legislature faced.”

(Sign up for Nuggets, our free weekly email newsletter about legal cannabis in Minnesota.)

Cannabis advocates rallied outside the governor’s office at the State Capitol on Wednesday to protest the tax increase. Kurtis Hanna, a longtime cannabis lobbyist, said the higher tax could deter people who buy marijuana on the illicit market from purchasing it legally.

“We’re taking an industry that hasn’t even gotten up off the ground and making it more difficult to transition the illicit market to the legal market,” Hanna said. “It’s extremely concerning.”

As it stands, Minnesota’s 10% tax on retail sales of cannabis products is among the lowest in the nation, according to data compiled by the Tax Foundation. Just three of the 21 states that collect a percentage for each marijuana sale — Connecticut, Missouri and Maryland — have lower cannabis tax rates.

At a news conference about the budget deal last week, GOP House Speaker Lisa Demuth described the cannabis tax increase as a “right-sizing.”

“It was very low,” said Demuth, R-Cold Spring. “We were one of the very low-tax states on cannabis.”

If the Legislature approves the proposed hike, Minnesota will have one of the higher cannabis tax rates in the nation, behind only Arizona, Oregon, Illinois, Montana and Washington.

Minnesota also collects state sales taxes on cannabis products.

State Rep. Nolan West, R-Blaine, expressed frustration with the proposed tax increase during a House floor debate this past weekend.

“Before a single [cannabis business] license is issued, the tax rate’s going to go up 50% because Gov. Walz wouldn’t sign a budget without tax increases,” West said.

Legislators held an informal meeting on Tuesday to negotiate a tax bill that includes the two cannabis provisions. Senate fiscal analyst Casey Muhm said increasing the cannabis tax would generate more than $140 million in additional revenue over the next four years.

Muhm said repealing the state’s sharing of cannabis tax revenue with local governments “would result in $64.6 million of revenue for the general fund.”

Representatives from the League of Minnesota Cities told lawmakers earlier this month they opposed repealing the local government cannabis aid.

“This aid was created in recognition of the regulatory work cities with cannabis retailers will be doing. This aid will provide cities with retailers a resource for age verification requirements, local registration, and other important compliance work,” the league wrote in a letter to legislators.

Without the share of tax revenue, Hanna said local governments could have a more difficult time with enforcement.

“That’s going to be much more difficult for municipalities and counties to do,” he said.