Should California Raise Cannabis Taxes?

By Kyle Swartz

November 6, 2017

States that are eager to start rolling in revenue from legalized cannabis might be too quick to tax. Take California, for instance.

Voters in the Golden State approved recreational marijuana last year. Like elsewhere in the country where pot has become legal, the California government is preparing for a financial windfall from all the new tax revenue generated by this newly launched, large-scale, state-run industry.

But is the government expecting too much? Is it too fast to ratchet up the price of products by increasing taxes? A new set of laws set to take effect in 2018 would significantly raise the taxes on many marijuana products, greatly increasing the cost of these products. This could potentially affect how many products are made, given the thinning of margins for growers, producers and retailers.

According to a news report by the Associated Press, a small bag of high-quality cannabis — enough for five or six servings — currently costs, on average, $35 in California. In 2018, that could rise to $50-$60. Higher-end products may face an even steeper spike in price: upwards of +70%.

Bags of cannabis trimmings — sold by growers to producers of edibles — currently go for around $50 per garbage bag. But California reportedly plans to tax that product at a rate of $44 per pound. The margin on cannabis trimmings could shrink to the point that the product becomes obsolete. What that means for the edibles market moving forward is inauspicious.

Taxes on medicinal cannabis are also expected to go up, though not as significantly.

No doubt California could use the extra revenue. Like many states it’s grappling with budget shortfalls, meeting the monetary obligations of outdated pension systems, and addressing aging infrastructure. Cannabis revenue is, understandably, looked upon as a new, much-valued source of cash to help alleviate the financial burdens of what ails the state.

But overtaxing the industry has many industry pros concerned. On one hand is the shrinking margins. On the other is the customer’s frustration, and what they may do if prices become too high. After all, if legal pot becomes significantly more expensive than black-market marijuana — which many people were already comfortable purchasing — will consumers go back to buying the product illegally?

Complicating matters is that local governments in California can still create their own tax laws regarding cannabis. Thus there are unevenly weighted fees throughout the state. Growers in Salinas, a hot area for cannabis cultivation near San Francisco, are taxed at a rate of $25 per square foot. Up in another popular spot for growing pot, Humboldt County, the same tax is but $1 to $3 per square foot.

Rather than overtaxing the industry, or allowing for such uneven laws based on individual towns, the California government would be wiser to promote industry growth through reasonable taxes and consistent laws. Otherwise, the state risks damaging an emerging industry in its delicate early stages, stymying the growth of what could become a reliable source of tax revenue for years to come.

Kyle Swartz is editor of Cannabis Regulator. Reach him at kswartz@epgmediallc.com or on Twitter at @kswartzz. Read his recent piece: This is Who Buys Legal Cannabis in Washington D.C.

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