Michigan legislators introduced a bill to suspend the state's 24% wholesale cannabis excise tax for one year after revenue collections failed to meet projected targets.
The proposed legislation comes as Michigan's cannabis market faces pressure from multiple directions—including competition from unlicensed operators and price compression that has squeezed both retailers and cultivators since adult-use sales launched in 2019.
Michigan's excise tax applies to wholesale transactions between growers and processors or retailers. The state projected the tax would generate roughly $287 million in fiscal year 2024, but actual collections have fallen short, prompting lawmakers to reconsider the levy's impact on the legal market.
The Revenue Gap
The shortfall reflects broader challenges in Michigan's cannabis economy. Wholesale prices have dropped precipitously over the past two years as the state issued hundreds of cultivation licenses. Average wholesale flower prices fell from around $1,500 per pound in 2021 to under $800 per pound by late 2023, according to state regulatory data.
That price decline directly impacts excise tax revenue, which is calculated as a percentage of wholesale transactions. Lower prices mean less tax collected per transaction—even as the total volume of legal cannabis sold continues to grow.
The one-year suspension would give operators breathing room while state officials reassess the tax structure. Michigan collected over $3 billion in total adult-use cannabis sales in 2023, but the wholesale tax has become increasingly controversial as operators struggle with thin margins.
Industry Response
Michigan's Cannabis Regulatory Agency has licensed over 1,800 businesses statewide, creating one of the most competitive markets in the country. But that competition has come at a cost. Dozens of operators have closed or consolidated in the past year, unable to sustain profitability amid falling prices and high regulatory costs.
The wholesale tax adds another layer of expense at a time when many cultivators are already operating at or near break-even. Unlike retail taxes that consumers pay directly, the excise tax comes out of operator margins—making it particularly painful when wholesale prices drop.
Some industry advocates have pushed for permanent excise tax reform rather than a temporary suspension. They argue the current structure penalizes legal operators while unlicensed sellers face no such burden.
What Happens Next
The bill now moves to committee for review. If passed, the suspension would take effect for fiscal year 2025, running from October 2024 through September 2025.
Michigan isn't alone in reconsidering cannabis tax structures. California reduced its cultivation tax to zero last year after similar revenue shortfalls and industry complaints. Washington State has also debated adjusting its excise tax rate as markets mature and prices stabilize.
The proposal arrives as Michigan prepares for the 2024 legislative session, where cannabis policy is expected to feature prominently. Other pending measures include social equity licensing reforms and potential changes to municipal opt-out rules that currently allow cities to ban cannabis businesses.
State budget officials will need to account for lost excise tax revenue if the suspension passes. Michigan's adult-use cannabis program has generated over $1 billion in total tax revenue since 2019, funding schools, roads, and municipalities where dispensaries operate.
This article is based on original reporting by mjbizdaily.com.