Michigan’s cannabis industry fears crash over ‘pothole tax’

Lansing and Michigan’s reputation as a national model for accessible and affordable adult-use cannabis is facing its biggest threat since legalization.

In a legislative maneuver that caught the state’s green industry off guard, a 24% wholesale tax on cannabis was signed into law by Gov. Gretchen Whitmer as part of a bipartisan deal to fund road repair. This measure, quickly dubbed the “pothole tax,” has sparked outrage and a landmark legal challenge, sending shockwaves through the Michigan cannabis industry and its communities, including Lansing.

The new levy is applied when a product is sold from a grower or processor to a retailer, and it is in addition to the 10% retail excise tax and the 6% state sales tax. When compounded, analysts warn the effective tax burden could eclipse 40%, transforming Michigan from a low-tax, high-volume market into one of the most heavily taxed in the country. Lawmakers who supported the bill, primarily focused on infrastructure, project the tax will generate an estimated $420 million annually for road and bridge funding.

The industry, however, is unified in its opposition. Business owners argue the tax will crush their already thin margins in a hyper-competitive market. Stuart Carter, founder of the Detroit Cannabis Industry Association, called the measure a “slap in the face” and warned that it will inevitably “devastate smaller businesses” in urban and rural areas alike. The economic reality is stark: an already saturated market is about to absorb a massive new cost, which will have to be passed down the supply chain. One industry operator cautioned that consumers will see price hikes of $3 to $4 per gram for flower, with similar cost jumps on edibles and concentrates.

Critics argue that these steep price increases will severely jeopardize the legal market’s ability to compete with the illicit one, undercutting the very revenue goals the state is hoping to achieve. Robin Schneider, executive director of the Michigan Cannabis Industry Association, stated bluntly: “Everyone knows that a large increase in cannabis taxes drives customers straight back to the illicit market. That means businesses are going to fail, jobs will be lost, and less tax revenue will be collected.”

The opposition quickly mobilized from legislative halls to the courts. Within hours of the bill being signed, the association filed a lawsuit in the Michigan Court of Claims, setting the stage for a major legal battle over the integrity of the citizen-initiated law.

The core argument of the lawsuit centers on a critical constitutional principle. The 2018 Michigan Regulation and Taxation of Marihuana Act —the voter-approved initiative that legalized adult-use cannabis and established the original 10% excise tax — requires  a three-fourths supermajority vote from the Legislature to be amended. The 24% wholesale tax, though embedded in a separate law called the Comprehensive Road Funding Tax Act, did not achieve this supermajority.

Association attorneys are arguing that while the new tax is technically not a direct amendment to the marijuana act, it functionally operates as one by imposing an additional excise tax on cannabis products. They contend this legislative maneuver is an illegal attempt to circumvent the will of the voters and the constitutional safeguards that protect initiated laws from legislative interference.

The timeline for this case is uncertain, but a legal stay on the tax or a final ruling could ultimately reach the Michigan Supreme Court, injecting significant legal instability into the state’s budget and road-funding plan.

For Lansing residents, the consequences of this high-stakes battle are immediate and tangible. The tax will not just squeeze producers; it will be predominantly paid by the final consumer. When the 24% wholesale cost is compounded with the existing taxes, Michigan’s cannabis will become significantly more expensive, accelerating business closures and market consolidation, thereby reducing competition and consumer options in an already crowded market. The Michigan Senate Fiscal Agency has already projected a double-digit decline in legal sales volume, suggesting that the state may not realize the full $420 million in revenue it has promised.

As the industry fights for its financial survival against an unexpected tax hike, an additional legislative debate is brewing that could further shake up the cannabis community: the future of intoxicating hemp-derived beverages. Lawmakers are considering legislation that would clarify the regulation of these low-dose products. Crucially, some proposals aim to allow them to be sold in grocery stores and other retail establishments that do not require a costly cannabis license. The established cannabis industry views this as a significant threat, arguing that these products should be regulated under the same stringent safety and tax structures as traditional cannabis.

Ultimately, the decisions made in Lansing this year — both through the pothole tax’s passage and the ensuing lawsuit — will determine the shape of the Michigan cannabis market for years to come. What was once a symbol of successful legalization is now a market under siege, with consumers and small businesses facing the highest price for the state’s infrastructure woes.