Tackling Cannabis Taxes to Increase Accessibility

There is no doubt that one of the biggest factors allowing the cannabis black market to continue to thrive in many states is the high price of legal cannabis, and one of the main reasons cannabis products sold at licensed dispensaries and retailers are so expensive is taxes.

In fact, one of the key ways to crack down on the cannabis black market is to reduce taxes and prices, which is one of the most significant reasons why some states’ cannabis programs are struggling.

The Cannabis Tax Problem

Every state that has legalized medical and/or recreational cannabis and has a regulatory structure in place taxes it in multiple ways across the supply chain. Cultivators, processors, distributors, dispensaries, retailers and consumers could all be required to pay some type of tax for medical and/or adult-use marijuana products, and those taxes can add up very quickly.

Not only can the state implement taxes on cannabis but so can local jurisdictions. Unfortunately, cannabis taxes can get confusing since local taxes typically vary from one jurisdiction to the next.

Adding up all taxes charged by states to dispensaries, growers, and consumers as well as local government taxes, Massachusetts State Senator Will Brownsberger’s office determined that the states with the highest tax rates on cannabisin January 2019 were:

  • Washington: 47.1%
  • California: 40.3%
  • Colorado: 33.3%
  • Nevada: 33.2%
  • Alaska: 24.7%
  • Massachusetts: 20.0%
  • Oregon: 20.0%
  • Maine: 10.0%

Keep in mind, things have changed in the short 12 months since that data was collected, particularly with the launch of adult-use sales in Illinois and Michigan as well as new cultivation taxes introduced on January 1, 2020 in California. However, it paints a clear picture that legal cannabis prices sold by licensed dispensaries and retailers are going to be expensive, and the reality is those taxes are playing a primary role in making legal cannabis significantly more expensive than what consumers can easily buy on the black market.

Solving the Cannabis Tax Problem

Of course, taxes aren’t the only factor causing legal cannabis prices to be excessively high, but they are a factor that could be controlled through revised cannabis tax schemes. This is something we might see happen in California – where taxes can add up to nearly 50% in some areas of the state – if legislators act on the recommendations in a December 2019 report from California’s Legislative Analyst’s Office (LAO).

The report, How High? Adjusting California’s Cannabis Taxes, was required by Proposition 64. Based on the law, LAO had to publish the report by January 1, 2020 with recommendations to change the state’s cannabis tax rate based on three goals:

  1. To undercut black market prices
  2. To ensure sufficient revenues are generated from cannabis taxes to fund the programs designated in Proposition 64
  3. To discourage youth use

The report makes it very clear that changes must be made to sustain the legal cannabis market in California. Specifically, the LAO recommends removing the state’s weight-based cultivation tax and replacing the 15% state excise tax with a tax based on product price or potency. In addition, the LAO recommends that all cannabis-related taxes are collected at the consumer point of sale by retailers rather than most taxes being collected and paid by distributors. Here’s how the two taxes could work:

  • Tiered Ad Valorem Tax: This tax would be based on the price of the product and with different rates depending on potency or product type. It would be taxed at the retail sale and collected from the retailer.
  • Potency-Based Tax: This tax would be based on potency (e.g., THC content). It would be taxed at the retail sale or wholesale sale and would be collected from the last distributor.

Ultimately, the LAO says in its report that simplifying the state’s tax structure for cannabis and moving to just one level of taxation at the retail level should enable the total tax to drop to “somewhere in the range of 15 to 20 percent.”

However, even with state tax changes, the LAO warns that high prices for consumers will still be a problem in California because local governments could respond to lower state taxes by raising local rates. In other words, it would make sense to set caps on local tax rates for the state’s cannabis industry.

Some areas of California see cannabis taxes add up to nearly 50%, and other states are experiencing similar problems. In Illinois, where adult-use sales began on January 1, 2020, Chicago consumers will pay 48.25% in taxes on some cannabis products when the Cook County excise tax passes.

In Michigan, where adult-use sales began in December 2019, cannabis product prices to consumers (with taxes included) are nearly twice what is charged on the black market. Similarly, taxes have doubled many cannabis product prices to consumers in Nevada where a tax on the cannabis plant can reach 38% in some cities.

This is a widespread problem that not only limits the growth potential of states’ cannabis programs but could also cause a program to fail.

Key Takeaways about Cannabis Taxes and Accessibility

When prices are too high, consumers will forego making purchases or will find substitutions that are more affordable. This is basic consumer behavior. In the cannabis industry, the only available alternative to paying high prices for legal products is to buy through the illegal channels. The problem won’t go away until tax structures change and licensed businesses have an opportunity to compete effectively with the black market.

Discuss On Twitter