Could California’s Pot Taxes Reach 45%?
If California pushes through with plans of taxing cannabis by as much as 45%, and the only people this news is good for are the black market dealers.
A new Fitch Ratings report says that these high taxes may prevent consumers from buying cannabis legally especially once recreational sales hits California by January 1, 2018, says a CNN Money article. “High effective tax rates on California cannabis may complicate the state’s efforts to establish legal markets,” says Stephen Walsh and Karen Ribble, analysts for the Fitch Ratings report.
The 45% tax increase is a result of a combining state and local taxes, which differ based on municipality. Growers and sellers also have to pay their own taxes. The taxes will range from 22.25% to 24.25%, inclusive of the 15% state excise tax, plus state and local sales taxes that go up to 9.25%. Additionally, local businesses will be required to pay taxes which may be anywhere from 1% to 20% of gross receipts, or $1 to $50 for each square foot of cannabis plants. Farmers will have to pay $9.25 in taxes per ounce of flower, as well as $2.75 per ounce of leaves.
“California’s black markets for cannabis were well established long before its voters legalized cannabis in November 2016 and are expected to dominate post-legalization production,” says the report. When you compare all other states where recreational cannabis has been legalized, only Washington surpasses California’s high taxes at 50%, followed by Colorado and Nevada at 36%.
Although California has legalized medical cannabis since 1996, it’s only now that retail markets are getting ready for recreational sales which are set to start on New Year’s Day. According to Van Bustic, a Berkley’s College of Natural Resources specialist in the environmental impact of cannabis cultivation, registering and compliance for state laws can cost around $100,000 and it’s likely that many Humboldt farmers will prefer to operate with the black market to avoid paying these high costs.
The Fitch report also says that the black market could be a “formidable competitor” to legal cannabis if the tax increases continue, making illegal pot tax-free and therefore much more affordable. “If taxes increase the price of cannabis beyond a certain point, the legal market becomes less competitive than the illicit market and then consumers become less likely to make the transition from the illicit market to the legal market,” says New Frontier Data analyst John Kagia.
The Fitch Ratings report says that this kind of market behavior already resulted in Washington, Colorado, and Oregon to lower their tax rates. “It’s almost certain that all of the states with recreational marijuana still struggle with the black market for marijuana because of its prevalence before legalization,” says Morgan Scarboro, Tax Foundation Center for State Tax Policy analyst. Scarboro says that high tax rates “will prevent the minimization of the black market”, and that state governments “need to be open to evaluating their marijuana tax structures.”
Kagia says, “The only state that we know of that has undertaken a radical tax transformation is Washington.” He adds that Washington still has the highest sales tax in the United States. Eight states have already legalized recreational cannabis but three including California still haven’t started operating in retail markets. The Fitch report predicts that Massachusetts’ tax rate will be at 24% when retail markets begin operation in July 2018, although Maine hasn’t set its tax rates yet.
The Fitch report also says that legalization could bring consequences for certain parts of California, especially the Emerald Triangle where Mendocino, Shasta, and Trinity counties are located; areas that make up the epicenter of the US cannabis cultivation market. It says that legalization could turn the worst fear of small cannabis farmers into reality: promote the development of large-scale cannabis farms that will end up undercutting the many small and family-run businesses who have thrived in the area for decades now. However, an issue in California is that the state as well as numerous municipalities still haven’t released regulations, which means that businesses are still treading an unfamiliar path weeks before legalization. San Francisco is among the cities that say they won’t have regulations in place yet by the time recreational cannabis is legal on January 1.