The Higher You Get the More You Could Pay
A recent report from California’s Legislative Analyst’s Office (LAO) has proposed a change in the way cannabis is taxed. Rather than the current approach of multiple taxations, including at the cultivation point and a later excise tax. The report suggests dropping the cultivation levy and simply setting a tax rate based on the THC potency of the product. THC is the compound that gives consumers a ‘high’. While this would be a first in the U.S., it is already being practiced in Canada on edibles, concentrates, and other products.
According to LAO, this THC cost pegging would help to reduce cases of marijuana abuse and offer a more stable revenue source for required state budgetary targets. The taxes collected are used to fund all cannabis-related programs including rehabilitation, education, and research. Early estimates indicated that full legalization of marijuana would result in tax revenues of about $1 billion a year. Sadly, this target has been proven elusive with California having collected just $345.2 million in 2018 and a cumulative total of $845.3 million to date.
This proposal recommends taxing the THC on marijuana products at a rate of between $0.006 and $0.009 per milligram. An alternative tax arrangement suggested by the state is the ‘tiered ad valorem’ excise tax. This would see cannabis products taxed according to the sale price, with rates dependent on product type and potency. The report does prescribe setting a rate on the lower end of the spectrum if the state wants to quash the illegal market and setting a rate on the higher side if tax revenue collection is deemed more important. By setting these increases in THC cost that target high potency consumers, LAO estimates that the state could raise $350 million in revenue per year, matching the current level of collection.
Current industry estimates put the effective cannabis tax rates in California at about 40-50%. This is made up of the current 15% excise tax, 10% sales tax on recreational marijuana sales, and the cultivation levy of $2.75 per ounce for dry leaves and $9.25 per ounce on dry buds. To add insult to injury, local governments do add their own taxes that range between 5-10%.
The idea of taxing cannabis based on the high it gives has not been altogether welcomed. According to advocacy groups like Legal Cannabis for Consumer Safety, the high tax rates are helping to grow the black market which puts consumers’ health at risk. The National Organization for the Reform of Marijuana Laws (NORML) is equally not pleased, noting that many of the consumers that require high potency marijuana are medical users and would be penalized for that need.
The report does acknowledge that tax cuts should help to expand the legal market. With higher taxes, retailers would be forced to push their prices upward, resulting in cost-conscious consumers seeking out more affordable options in the black market. A lack of regulations and avoidance of taxes has helped illicit operators keep costs down and offer their products at cheaper prices.
The California Cannabis Industry Association has taken a different view, supporting the recommendations put forward by the report. The removal of the cultivation levy is particularly welcomed as an issue the association has long advocated for and given recent tax increases announced by the California Department of Tax and Fee Administration, one can surmise that their position still stands to today. Clearly, there is hope that if the proposal were to be implemented, the state would opt for the lower rates to allow the legal market to offer prices that will attract more consumers. Other industry advocates were also encouraged by the proposal to have the said tax, collected from retailers, rather than growers and distributors.
With varied reactions to the report, California lawmakers will need to work closely with industry stakeholders on cannabis regulation changes, that will support rather than harm the legal market against losses in revenue and jobs. Besides careful consideration of how taxes will be applied, the state will also need to review such rules as having to keep recreational and medicinal stocks separate. This and local bans by some cities against licensed shops within their borders have created a challenging business environment for cannabis entrepreneurs. Fortunately, these entrepreneurs have support from online social cannabis platforms sprouting across the web.
If you’re a cannabis entrepreneur, tell us if and how the business environment has become challenging or if you’re cruising high with a robust future, all thanks to this industry.