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Report: California’s Marijuana Taxes Are Too High

45 percent?!?

Chris Roberts

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How to Build Wealth with Weed

The first shock hits not long after new arrivals leave the airport. 

This is when most visitors to California pass their first gas station—and discover that a gallon of gas costs, on average, 60 cents more than it does back at home

After that crisis subsides, it’s time to pick up a stimulant—and time again for heads to reel following their introduction to the joys of a $10 pack of cigarettes. (Only New Yorkers will find this comfortably familiar.)

You get the picture: Prices are high in California, in no small part because the state’s residents want nice things like roads without potholes and schools with working computers and up-to-date textbooks.

To buy all this requires money. 

California voters have also recognized that addictive commodities like cigarettes and soda incur high costs to public health. More money. Someone has to pay for all of this. And so, the taxes are high. 

Taxes account for about $4 worth of the total price of a pack of smokes—or 40 percent the price of a $10 pack. This sounds like a lot—and it is! Try to find something else that’s taxed at 40 percent. But since cigarettes have nicotine in them, they are addictive. And since there isn’t much of an alternative market for tobacco, smokers will pay it.

California’s Marijuana Taxes—What Will Those Look Like?

A similar formula may soon be applied to recreational cannabis, California’s latest big-time commercial commodity, legal sales of which are scheduled to begin sometime on or after January 1 of 2018—but with one major and potentially problematic difference.

The effective tax rate on legal marijuana sold in California could approach 45 percent, according to an analysis from Fitch Ratings. If this sounds outrageous, consider: That would only be the second-highest levy in the United States. Washington State’s tax rate is close to 50 percent.

California cannabis will be taxed at almost every step of the supply chain.

The state will collect a 15 percent excise tax, plus a per-ounce cultivation tax. Consumers will be charged sales taxes at the register. And cities and counties have the right to levy their own taxes—and 61 cities have already moved to do so, according to the report.

But California is a land awash in weed.

How California’s Marijuana Taxes Could Fuel The Black Market

The state’s marijuana farmers produce about five times as much marijuana as customers currently consume, and such high taxes could drive up the price of legal pot to the point that consumers will start looking for a black-market alternative—of which there is a great abundance.

This price hike comes at the same time that the supply of saleable marijuana could soon constrict. California’s proposed pesticide regulations are the toughest in the country. And not every cannabis farm currently in business will be able to secure a permit—be it due to cost, eligibility or total disinterest. Unpermitted pot won’t be allowed to be sold in a permitted store.

All of this adds up to millions and millions of pounds of off-label pot—and a serious incentive for consumers to start patronizing the black market like never before.

“The existing black market for cannabis may prove a formidable competitor to legal markets if new taxes lead to higher prices than available from illicit sources,” said Fitch’s report, as picked up by the Washington Post, which noted that other states including Colorado and Oregon lowered initial tax rates after a slow start to sales.

Depending on who you ask, California cannabis could be worth as much as $20 billion by 2020.

What California’s Marijuana Taxes Mean For Consumers

High taxes present a conundrum for producers as well as a serious moral and pecuniary choice for consumers. Be it because of high taxes or of a pricing model that more closely resembles an agricultural product rather than a black-market commodity, margins on cannabis could soon become so narrow that the only way to make money in cannabis is off of sheer volume.

This would spell disaster for the small farms in the state’s pot-producing regions, which do not enjoy much in the way of viable economic alternatives. (They might consider growing tobacco, except that the federal government has a tighter grip on that leafy smokable plant than it does on marijuana.)

Did legalization cause more problems than it solved? Try telling that to someone who did time for a pot crime, but it’s a line you’ll absolutely hear repeated in certain circles, along with grousing about all that money cannabis consumers and producers are now sending to the government thanks to California’s marijuana taxes.

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