Cannabis industry leaders say that Maryland’s planned marijuana tax hike will drive customers back to black market sales. But legal cannabis prices recently hit a record low, and a new wave of businesses are entering the growing market, possibly softening the jump to a 12% tax on recreational cannabis, from 9%, analysts said.

The state projects that the increase on cannabis taxes will bring in an additional $39 million in revenue to help close a $3.3 billion deficit. But it’s hard to predict how consumer behavior will respond to the tax increase and how the state’s growing legal cannabis market will adjust, experts said.

Industry advocates cautioned that a tax increase too high could scare investors, hurt smaller firms, and chase customers away from recreational cannabis, which Maryland legalized in 2023. They could go back to the illicit cannabis market that existed for decades or federally legal, intoxicating hemp products like delta-8, despite Maryland lawmakers’ efforts to curb that industry. Those products and sellers don’t face the slew of testing and regulations that Maryland lawmakers set up to safeguard public health.

But at the same time, customers are paying less for legal cannabis than they did a year ago — about a dollar less per gram, according to Maryland Cannabis Administration data. That means that even if the tax went to 12% at the start of 2025, the median cost per gram, plus tax, would still be less than it was last year at the lower tax rate.

Mario Macis, an economics professor at the Johns Hopkins University’s Carey Business School, said that the increase passed by the House on Thursday is “not as dramatic” as the originally proposed jump to a 15% cannabis tax.

Out of states that have legalized recreational cannabis, Maryland’s 9% excise tax — the same amount it places on alcohol — is at the lower end. The increase to 12% would place Maryland around the middle. Washington State has the highest tax, at 37%, while Connecticut has the lowest, at 3%.

The median cost remained flat at $9 per gram from January to February this year, the data shows. New competition from the state’s social equity licensees could help drive down costs, but any tax hike “will certainly not encourage growth” in the cannabis industry, Macis said.

If it chases customers away, smaller firms will be hit the hardest — and many of them are just setting up shop.

“They’re going to have to redo their math,” Macis said.

In the short term, demand for recreational cannabis might not drop much, and people may stick with regulated cannabis. But in the long run, if the demand is elastic enough, customers could end up going to alternatives, Macis said.

That’s what everyone in Maryland’s legal cannabis industry has been worrying about, said Jon Lassiter, chief revenue officer for Maryland-based cannabis company CULTA.

“We’ve all had our eye on this,” he said. “It’s on everyone’s mind.”

Aaron Smith, CEO of the National Cannabis Industry Association, said in a statement that the tax hike would “undoubtedly drive price-sensitive consumers into the illicit market.”

“That not only hurts the small businesses in the regulated industry, it creates a public health hazard since the underground market does not test its products or adhere to the strict safety protocols that are standard to the legal industry.”

Maryland lawmakers have been “very cognizant” of the fact that they’d be competing with illicit markets, said Mathew Swinburn, a cannabis law and policy expert with the University of Maryland Francis King Carey School of Law.

He noted that legal cannabis is heavily regulated and a higher-quality product. Licensed cannabis products have to disclose their test results on their packaging, have to be grown in Maryland, and can’t have marketing that’s attractive to children.

And licenses are highly valuable, meaning that firms are unlikely to violate the rules.

“You don’t know what you’re getting” with illicit products, said Lassiter. He said the state’s cannabis market is “starting to mature a little bit,” and that the decline in the state’s cannabis prices are because savings are being passed to consumers.

Carter Elliott, a spokesperson for Maryland Gov. Wes Moore, said that the governor and state lawmakers “have been consistent in their concern about the illicit market.”

He said that both were “confident” the tax hike wouldn’t undercut legal sales because “unlawful dealers can not match the convenience, standards, and peace of mind offered by legal dispensaries.” He noted that prices have dropped and said that “the state’s cannabis industry has been recognized as “one of the most effective, equitable, and economically successful markets in the entire nation.”

Taxes on legal cannabis products have netted the state over $82 billion since July 1, 2023, when the state legalized sales to all adults over 21.

A Washington Post-University of Maryland poll indicates that a majority of Marylanders support a tax increase on cannabis to combat the state’s budget deficit. The poll, undertaken in January, asked Marylanders about the higher tax rate of 15%.

The Maryland Cannabis Administration said in a statement that on top of the growth of the state’s cannabis market, it’s hopeful that new licenses, such as micro-dispensary licenses that include delivery services, “will entice people to utilize the legal market and ensure that individuals who are choosing to consume cannabis in the state, are consuming safe, tested, and regulated products.”

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