Marijuana Shutterstock

In the campaign playbook for legalizing marijuana, one of the most potent arguments from proponents is the potential explosion of big tax dollars. Bringing the recreational market out of the shadows and taxing it, advocates say, will provide millions of dollars—maybe billions—for drug treatment, public schools and a host of other programs.

But just how high should that tax rate be? It’s a question more and more states are grappling with as they extend approval for medical marijuana use to adult recreational consumption.

Just this week, the two houses of the Massachusetts legislature passed competing bills overhauling the state’s recreational-use law. The House of Representatives wants a 28 percent retail tax and plans to spend the resulting revenue on substance abuse treatment when sales go legal on Jan. 1. State senators approved a 12 percent tax, worried that the House’s higher rate would drive users to the black market or to nearby Maine, where recreational cannabis will carry a 10 percent tax. A conference committee will try to find a compromise by July 1.

“The tricky part is, how do you take into account what you consider to be necessary revenue generation with the realities” of market forces, said Taylor West, deputy director of the National Cannabis Industry Association. “There is just a remarkable amount of variables and we don’t have a lot of historic data.”

Read more: Legal Marijuana: Budding Industry, Burning Questions

The authors of Proposition 64, California’s November 2016 ballot measure that legalized recreational marijuana, included a 15 percent excise tax on the retail price. Consumers will also pay state and local sales taxes and any additional levies approved by local governments when legalized operations launch on Jan. 1. Cultivators will pay a $9.25-per-ounce tax on marijuana flowers and $2.75-per-ounce tax on leaves.

Jason Kinney, a consultant who worked on the Proposition 64 campaign, said setting the tax rates was an issue of “intense deliberation,” especially since political and constitutional constraints would make it difficult to change them in the future.

“Our objective was the Goldilocks standard—set the tax rate too high, the black market flourishes; set it too low, you flood the market with cheap product and it gets into the wrong hands [and] you don’t collect enough revenue to offset the community impacts of the new industry,” Kinney said. “The goal then was to set a rate that was ‘just right.’”

Given that cities and counties could add on additional taxes “15 percent seemed like the fairest, most balanced approach,” he said.

Pioneer legalization states have chosen different taxation paths.

The state of Washington imposes a 37 percent excise tax on retail sales in addition to the standard 6.5 percent sales tax. Washington originally imposed a 25 percent tax at three stages of the marijuana supply change. But in 2015 lawmakers moved to the single 37 percent tax to eliminate the complexity of the previous system. The state expects to collect more than $304 million in excise taxes for the fiscal year ending this month.

Colorado imposes a 15 percent excise tax on wholesale transfers of cannabis, a 10 percent special sales tax on marijuana plus the state sales tax of 2.9 percent. To generate more money for the state’s roads and schools, the governor recently signed legislation that will boost the 10 percent special sales tax to 15 percent while scrapping the 2.9 percent state sales tax on marijuana.

Alaska forgoes special sales taxes for a $50-per-ounce tax on marijuana buds when they’re transferred from a grower to a retailer or manufacturer.

Oregon collects a 17 percent sales tax on marijuana. Cities and counties can impose an additional tax of up to 3 percent tax if local voters approve.

Because the legalization of recreational marijuana is so new, the analysis is thin on what taxation approach works best, West said.

“That research is basically going on right now with these real-world attempts to get this right,” she said.