California Marijuana Taxes Could Push Many To The Black Market

California Marijuana Taxes Could Push Many To The Black Market

One of the most popular legalization selling points is the possible tax revenues marijuana can haul into state and local coffers. But in the Golden State, could California marijuana taxes be too aggressive?

When a formerly prohibitionist politician has a change of heart toward marijuana legalization, it’s typically because he or she gets excited about the potential revenue that can come from taxing the drug. And nowhere in the nation have politicians gotten more excited about taxing pot than in California.

California is notorious for super-high tax rates and convoluted tax codes that have, at times, driven people and businesses out of the state. Not surprisingly, the excessive taxes associated with the state’s burgeoning legal marijuana industry could drive an enormous number of California’s cannabis consumers to the black market.

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California legalized medical marijuana in 1996, and voted to legalize recreational marijuana in November of 2016. And while adult-use weed is projected to bring in an additional $1 billion in California marijuana taxes once pot goes on sale in 2018, the additional taxes that come along with it could also cause many pot purchasers to buy their supplies from less-than-legal suppliers.

As the Motley Fool outlines, growers are subject to a state cultivation levy of $9.25 per ounce of cannabis flowers, or $2.75 per ounce of cannabis leaves. There is also a 15 percent excise tax added onto the final product. Both of those taxes are on top of the nation’s highest base sales tax rate of 7.5 percent, as well as local business taxes that range from 7.75 percent to 9.75 percent.  

According to a report by Fitch Ratings, this stack of state, local, and other taxes could send the aggregate tax on weed to more than 45 percent in some regions of California.

"High tax rates raise prices in legal markets, reinforcing the price advantage of black markets," the report explained, via the Los Angeles Times.

Taxes aren’t only thing helping to propel California’s black market, however. As we’ve discussed previously, the number of growers trying to cash in on California’s pot market has resulted in the annual production of some 12.5 million to 14 million more pounds of pot than the state’s buyers need. As a result, the executive director of the California Growers Association says, state-licensed growers “are going to have to scale back” their marijuana surplus.

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Since current federal law bans interstate trade of cannabis, and California law will ban the export of pot after January 1, California’s growers can try to reduce their crops — as well as try to compete with other legal growers with similar surpluses — or they can try (like some are already doing) to operate without a license by selling cannabis to buyers in other states via the illegal black market. They could also try, as some have proposed, converting their cannabis into oil. Or they just they could just decide to quit.

There is plenty of pot in California, plenty of people who want to sell it, and plenty of people who want to buy it. What seems to be lacking, however, is common sense about dollars and cents when it comes to California marijuana taxes.

While California’s lawmakers are just as excited to get their hands on pot profits as the growers are, strangling the industry with excessive taxes and regulations isn’t helping anyone — anyone except the barons of the black market, that is.