Black market cannabis sales have long been a problem in the United States. States that have legalized medical and/or recreational cannabis hoped to stamp out the illicit drug markets, and to a large extent have reduced or eliminated their influence. Still, some states continue to struggle with black market marijuana growers, dealers, and distributors.
California is one of those states. To combat black market sales of marijuana, two state legislators have proposed reducing the cannabis tax rate for a period of three years. In this article, we will explore California’s tax proposal, contrast California’s cannabis tax revenue with other legal states, and discuss the future of taxes on ridding the legal weed industry from black market competition.
California’s Cannabis Tax Proposal
Assemblyman Tock Lackey, a Southern California Republican, and Rob Bonta, a Democratic lawmaker from Oakland, are co-sponsors of a proposal to reduce California’s cannabis tax rate for a period of three years. The bipartisan bill was written with the help of additional Democratic lawmakers. This proposal was designed to allow licensed marijuana retailers to lower their prices on products, helping both to spur sales and to undercut the influence that black market dealers enjoy on the cannabis consumer market. Analysts peg the reduction in taxes as effectively cutting retail prices across the board by an average of 9%, including both medical and recreational cannabis products.
Currently, the cannabis excise tax is set at 15%. Under the provisions of the bill, the excise tax would be lowered to 11% for three years, with the time period ending in June 2021. The bill also suspends collection of cultivation taxes that California’s licensed growers must now pay. Under current legislation, growers must pay a cultivation tax of $9.25 per ounce of flower and $2.75 for “trim”, or the leaves resulting from manicuring cannabis buds for retail sale. Combined, the cultivation tax averages to about $150 per pound, a significant expense for licensed California growers.
Both of these tax-suspension measures are seen by cannabis industry analysts as creating a more favorable environment for legitimate cannabis businesses. Black market growers and sellers do not have to worry about the expenses associated with licensing or taxes, giving them a competitive advantage over licensed producers. By being able to sell their products more cheaply, they represent a lucrative portion of the overall cannabis market – a portion that can stifle legitimate sales and cultivation.
California and Legal State Cannabis Tax Revenue
When discussing cannabis taxes, it can be useful to understand how much tax legal states are taking in. In a large part, tax revenue was pitched to state voters during the legalization initiatives as a means of improving social and public services funded by tax dollars.
Taxes on medical and recreational cannabis have been quite substantial, allowing otherwise cash-strapped states to pay for a wide range of services. Some tax revenue is earmarked for law enforcement and cannabis regulation uses, while others is mandated to be spent on youth cannabis use prevention programs at the school or community levels. Other tax dollars are spent on marijuana impact studies by universities and law enforcement agencies.
California’s cannabis tax revenue for the past six months is estimated at $175 million. In its first full year of legality, industry analysts indicate that the state’s cannabis excise taxes could bring in $643 million. Local sales taxes, particularly in California, add millions more to government coffers. In other legal states, millions upon millions of dollars are being collected in taxes. Colorado, for example, collected $67 million in taxes, licenses, and fees collected in the state’s first year (2014) of legalization. In 2017, the state raked in $247 million in taxes, licenses, and fees. As in other legal states, these taxes are helping to fund a variety of state efforts including research, law enforcement, and youth cannabis use prevention programs.
To make the tax revenue picture even more enticing, a cannabis industry analysis firm called New Frontier Data conducted a study that suggests that if the federal government were to legalize marijuana, it could add $132 billion in tax revenue by the year 2025.
There’s an incentive to keeping taxes high, but some states are discovering that their tax rates are not only hurting licensed businesses, but spurring the growth of black market cannabis operations. Other financial hurdles for legitimate producers include exorbitant licensing and cultivation fees. Licensing in some parts of California may exceed $17000. It is generally believed that a combination of tax reform and reduction in licensing fees will help the legal cannabis industry thrive by limiting the advantage black market dealers currently have. The future is uncertain, but the fact remains that California’s tax reduction proposal is being met with accolades by those in the industry that know change is needed.