In an effort to keep buyers away from the black market, one California city has lowered its sales tax on recreational cannabis.

Berkeley, California, has lowered its sales tax on recreational cannabis.  Economics 101 students know that supply and demand dictate any market.  However, with California’s heavy tax program on marijuana dispensaries, these businesses are not able to compete with the low prices offered on the black market.

More evidence is proving that legalization of marijuana disrupts and breaks down the black market.  It decreases the number of illegal drugs smuggled across the border and nearly eliminates the likelihood of violence when purchasing cannabis.  When excessive taxes are placed on legal items, such as marijuana, historically, the need for lower priced items are filled by the black market.

 

Tax Cuts in Berkeley

The city of Berkeley cut their city-level tax on recreational marijuana from 10 percent to 5 percent in an effort to bring down the total cost of marijuana in their city.  When state taxes are factored in, the total amount of tax paid, before the cut was 35 percent.  With the new tax cut, it will drop the tax amount to 30 percent. 

Although this still seems exorbitant, Berkeley’s new tax level on marijuana is actually one of the lowest in the country.  In some places in California, the tax on marijuana is a staggering 45 percent.  California law mandates that taxes on cannabis include city tax, sales tax, cultivation tax, and state excise tax.  This makes it difficult for reputable dispensaries to compete with the black market.

As with any new commodity, legal cannabis sales boomed in California after recreational marijuana was legalized.  However, dwindling legal cannabis sales are dwindling in California after only a few months of legalization.  Now that the initial excitement has worn off, consumers are looking for lower prices and finding them on the black market.

A marijuana shopper told CBS he believes that taxes are driving people away from legal marijuana.  “The taxes, I think, are what’s driving people not to come to the club anymore,” he stated, “I know a lot of my friends who used to come to the clubs are going back to the black market.”

Illegal marijuana can be found online for $20 less than what is found at local dispensaries.  Until California drops the taxes on legal marijuana, the black market will continue to boom.  In fact, higher taxes may mean less revenue for the state.

For example, Colorado’s marijuana sales yield a billion dollars in tax revenue for the state.  Most tax rates average around 15 percent in Colorado, with some even higher.  In turn, Colorado is able to collect funds for education and other social endeavors.  California had hoped that raising its tax rate to 35 percent, the state would be able to collect the revenue it so desperately needs.  However, this plan backfired as consumers are going back to the black market leaving California with even less revenue that Colorado.

Berkeley Patients Group worker, Sabrina Fendrick explains, “Everybody wants to generate revenue, we all want to serve our communities, but if everyone is going to the illicit market, then nobody is generating revenue, and nobody is being helped.”

 

Too Much of a Good Thing

Can there really be too much marijuana grown in California?  Another basic economic principal is that too much of a product in a market will drive prices down.  California’s cannabis production is estimated to be eight times more than what is currently consumed in the state.  This leaves literally “tons” of extra marijuana. 

California produces between 14 to 16 million tons of marijuana.  In turn, Californian’s only consume around 2 million tons.  This leaves well over 12 million tons of marijuana on the market.  In addition, this excess cannabis cannot be exported to other states under federal law and the new California state regulations which went into effect in January.

Hezekiah Allen, executive director of the California Growers’ Association said, “In the past, when a product left the farm, there’s a really good chance the grower had no idea where it was going.  But in the future, every single license holder is going to need to know exactly where every gram of product is ending up and so conditions are going to change very quickly.”

It seems he was correct.  In addition to the surplus marijuana flooding the market, the higher price, due to extreme taxation, leaves Californian’s turning to the black market in waves. 

In addition to buying on the black market, many growers are growing their products without state approval.  California enforces strict pesticide regulations on growers.  Since many farmers can’t afford or don’t qualify for a permit stating that they follow the state’s strict environmental regulations, they sell their products on the black market instead of at dispensaries.  This floods the market with lower priced marijuana.

 

Legislators Finally Listen

Berkeley’s cut on city taxes for marijuana is just one measure officials in California are taking to combat high pricing.  Currently, state officials are working on developing legislation that would help to lower the excise tax by 4 percent statewide.  However, it is clear that additional cuts need to be made.

As long as there is demand for lower priced cannabis, and growers are willing to fill that demand, the state of California will be left with two choices.  One, be willing to accept lower revenue in lieu of higher taxes and tight regulations on growers; or two, lower taxes, lighten up on growing regulations and allow growers and dispensaries the ability to compete with the black market.

Experts believe that over time, if patrons are used to purchasing their products from dispensaries and come to expect a certain level of quality, then, the black market will dry up and raised taxation on marijuana can be slowly increased without consumers leaving the market.  For example, how many black-market cigarettes are being sold today even though there are higher taxes placed on tobacco?  There are not many farmers growing tobacco nationally to sell to the black market.  This is because taxes on tobacco have been slowly raised over time. 

Maybe California lawmakers need to take a page from other states who have a positive revenue surplus and still have a sizeable tax on marijuana.