From ‘sin taxes’ to potency pricing: Modern approaches to excise tax policy

OG Article By Thomas Andersen, Guest Columnist Watch Today's LIVE Episode on X, and Rumble and Youtube

August 21 2025

Excise taxes have evolved far beyond their early use as simple revenue tools. Today, they are strategic levers for shaping consumer behavior, funding targeted programs and addressing social or environmental costs. From funding infrastructure with fuel levies to discouraging tobacco use with sin taxes, excise duties have long been tools of fiscal policy and social regulation. For example, the U.S. federal gasoline tax is 18.4 cents per gallon, which is included in the pump price.

This article explains how various excise taxes function, with examples from mainstream industries, and then examines how these taxes are applied within the regulated cannabis sector.

Part 1: Excise taxes in general

What are excise taxes?

Many states cap sales and use tax rates by law, limiting revenue options. Excise taxes on specific goods such as fuel, alcohol and cigarettes are not counted toward that cap, so governments often use them to raise additional funds without exceeding statutory sales tax limits or requiring voter approval.

Unlike general sales taxes, which apply at the retail checkout on nearly all goods, excise taxes focus on a narrow list of items — often those deemed harmful (tobacco, alcohol), luxurious (high-end vehicles) or environmentally impactful (fuel, carbon-emitting activities). Many excise taxes are charged upstream to manufacturers, importers or wholesalers and embedded in the price before retail.

1. Common structures• Unit-based (specific) taxes: A fixed fee per unit (for example, $0.184 per gallon of gasoline).• Ad valorem taxes: A percentage of the price (for example, a 15% retail excise on certain products).• Hybrid models: Some jurisdictions combine unit and ad valorem to balance simplicity with responsiveness to value.

2. Policy objectives• Revenue generation: Excise tax revenues are often earmarked during the legislative process for specific purposes, with the bill specifying exactly how the funds will be allocated (for example, fuel taxes supporting transportation funds).• Behavioral modification: By raising prices on sin goods, governments aim to reduce consumption.• Externality regulation: Excise taxes can internalize broader social or environmental costs such as pollution. This may be accomplished by generating revenue to offset costs associated with negative externalities or to fund related programs.

3. Economic considerations• Regressivity: Unit-based taxes can be regressive, taking a larger share of income from lower-income consumers.• Illicit markets: Excessive rates can push buyers to untaxed and illegal alternatives.• Market competition: Policymakers balance revenue needs against keeping legal products competitively priced.

Part 2: Cannabis excise taxes

As more regions legalize cannabis for medical or adult use, excise taxes have become central to regulating the market and funding related public programs. Below are several real-world models.

1. Dual-level taxation• Wholesale excise (upstream): 15% applied to the contract price when the first transfer is between unaffiliated licensees. If the transfer is between affiliated licensees, or if no contract price exists, the tax is based on the state’s average market rate.• Retail tax (checkout): A 15% special retail marijuana sales tax applies to adult-use sales in place of the 2.9% general state sales tax. Local taxes may also apply. Medical marijuana remains subject to the 2.9% general sales tax.

Outcome: This structure captures revenue at both production and retail points while clarifying tax bases for vertically integrated and arm’s-length transactions.

2. Retail-only ad valorem (California)• Retail excise: 19% of the cannabis retailer’s gross receipts, effective July 1, 2025 (up from 15%). Retailers collect from customers and must list it separately on receipts. The excise is also included in gross receipts subject to sales tax.• Cultivation tax: Repealed for all cannabis effective July 1, 2022.

Outcome: The collection process is focused on retail, streamlining administration compared with multi-point systems, while receipts make the tax burden transparent to consumers.

3. Quantity and potency hybrid (Ontario, Canada)• Dried/fresh cannabis: The combined duty generally equals the greater of CA$1 per gram or 10% of the dutiable amount (federal CA$0.25 per gram or 2.5% plus Ontario additional duty of CA$0.75 per gram or 7.5%). Ontario also applies a small adjustment factor to the provincial additional duty.• Edibles/extracts/topicals: CA$0.01 per milligram of THC in total (federal CA$0.0025 per mg plus Ontario CA$0.0075 per mg).

Outcome: By taxing both weight or value (for flower) and potency (for processed products), the system aligns liability with product characteristics.

4. Flat-rate cultivation tax (Alaska)• First sale (cultivator to retailer or processor): $50 per ounce of flower, $25 per ounce of immature or abnormal bud, $15 per ounce of trim, $1 per clone.

Outcome: This system generates predictable per-unit revenue that is independent of wholesale price swings. However, as market prices fall, the fixed amount becomes a larger percentage of value.

Concluding thoughts

Excise taxes, whether on fuel, tobacco or cannabis, are powerful tools for raising targeted revenue and shaping consumption. By choosing among unit-based, ad valorem or hybrid structures, and by deciding where in the supply chain to collect (upstream versus retail), policymakers can tailor excise taxes to fiscal, public health and social objectives.

The range of cannabis models — Colorado’s dual-level system, California’s retail-only approach, Ontario’s combined weight/value and potency framework, and Alaska’s flat-rate cultivation tax — shows how design choices influence transparency, compliance costs and market behavior. Potency-based duties and rate structures that adjust with market conditions promise closer alignment between tax burdens and risks or externalities. Ultimately, industry success depends on ongoing evaluation and calibration to meet goals without fueling illicit trade or overburdening consumers.

Thomas Andersen is Vice President of Operations for BTA Cannabis CPA Tax, a practice area of the Andersen CPA Firm, overseeing accounting, tax, and compliance for cannabis and hemp clients in 20+ states.

With 20+ years in the regulated cannabis industry and 19 years in accounting, tax, audits, and compliance, he specializes in federal tax strategy, including IRC 280E, IRC 471(c), and Form 8300. Thomas provides fractional CFO advisory, authors industry analysis for WeedingTheNews.com, and serves on the NCIA State Regulations Committee.