High Cannabis Taxes Could Help Grow California’s Black Market

As California gears up to issue the first set of adult-use cannabis licenses on January 1, 2018, state and local taxes on adult-use cannabis may reach as high as 45% in some parts of the state. According to a recent report by Fitch Ratings, cannabis consumers are expected to pay a sales tax ranging from 22.25% to 24.25%, which includes an excise tax of 15%, and additional state and local sales taxes ranging from 7.25% to 9.25%. Local cannabis businesses will have to pay taxes ranging from 1% to 20% of gross receipts, or $1 to $50 per square foot of cannabis plants, and farmers will be taxed $9.25 per ounce for flower, and $2.75 per ounce for leaves.

These rates are considerably more than in other states that have already legalized adult-use cannabis.  Colorado and Nevada, for example, each have a tax rate of 36%. Oregon comes in at 20% and Alaska has a rate of up to 20%. Massachusetts, which legalized adult-use cannabis, and should begin retail cannabis sales in July 2018, is expected to have a tax rate of 24%. Maine has not established a tax rate yet. Washington is the only other state with higher taxes, at an effective tax rate of approximately 50%.

The legitimate cannabis industry in California has a projected value of $7 billion with the potential to collect $1 billion per year in tax revenue. However, industry leaders in California believe that a higher effective tax rates on consumers, retailers and growers could potentially divert sales to the already well-established cannabis black market. For example, the black market price for an eighth of an ounce of cannabis is approximately $20, as opposed to approximately $50 at a licensed dispensary. High taxes, coupled with a cheaper source of product, could ultimately hamper California’s efforts to legitimize the cannabis industry.  However, since legal cannabis is subject to stringent quality assurance testing which will be overseen by the California Bureau of Cannabis Control, consumers may be willing to pay a premium to ensure that they are getting a better, safer product than they would on the black market.