Marijuana

Illegal Cannabis Market Continues To Thrive Because Of High Taxes On Legal Weed

The higher cost of legal weed is so significant that most users are continuing to buy from illegal sources.

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weed moneyIn 2016, California voters legalized the sale and use of cannabis in the state, with some exceptions. The problem is that the price of legal weed is so expensive that most people are still getting their weed illegally.

Why is the price of legal weed so … high? All kinds of state and local taxes which are passed on to the final user.

First, there is the general sales tax, which is on average 9%. And then there is the state excise tax of 15%. And there is a cultivation tax paid by licensed cultivators. Dispensaries will also pay a local business tax which is on average 7% (major cities charge around 10%). Lastly, there is a disguised excise tax from the federal government — Section 280E of the Internal Revenue Code prohibits business deductions against income for cannabis-related business activities.

So if you add it all up, somewhere between 40 to 50 percent of the price of legal weed goes to taxes.

And prices are likely to go even higher in the future. There will be additional regulations on growth and cultivation in order to minimize environmental damage and health risks, the costs of which will be passed onto consumers as well.

The higher cost of legal weed is so significant that most users are continuing to buy from illegal sources. Not only are they cheaper, they are also generally easier to obtain since some cities in California ban dispensaries.

The high taxes are also affecting dispensaries that are considering either leaving the state or joining the black market themselves. Some are even thinking about protesting by not paying taxes.

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So the continued proliferation of the underground weed market has negative side effects. First, state and local governments will lose out on cannabis tax revenue which was supposedly part of the reason for legalization. Second, many of the societal problems associated with illegal marijuana growth and trafficking — such as crime and environmental damage — will continue.

Why has legalizing cannabis turned into a policy failure in California? Quite simply, the government wanted revenue in exchange for allowing people to use what many people still consider a harmful substance and possibly a gateway drug to something harder. The problem is that they got greedy and sought to profit a little too much from legalization. California already has one of the highest sales tax rates in the nation. Adding additional excise taxes and fees is a buzzkill.

The outcome is nothing new. In the case of cigarettes, states with high excise taxes are more likely to have a black market for them. This defeats the purpose of these taxes: raising revenue and discouraging smoking in general, particularly to minors.

Another observation is that people who constantly shout “legalize, tax, and regulate” only care about the legalize part. When it comes to taxes and regulations, they turn in to laissez-faire Republicans faster than you can say Manchin and Sinema.

Or maybe the black market sells the best chronic.

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So what are the solutions?

State and local governments can reduce or eliminate cannabis-specific taxes in the hopes that it will reduce prices on the street. The city of San Francisco temporarily suspended its cannabis tax until the end of this year. But will cost reduction be passed on to consumers? Maybe. Businesses are profit-oriented and may be slow to reduce prices, doing so only if they absolutely have to.

Or the state can be very aggressive about shutting down illegal cultivators and distributors. In other words, shut down the black market competition. But this can turn into another War on Drugs, resulting in more people being imprisoned.

In California’s case, its power to tax has turned into the power to destroy the sale of legal weed. A narrow majority of voters want cannabis legalized but will only tolerate a certain amount of tax. But simply reducing the tax rates may not be enough. The state and local government should consider how much legal weed they want in their borders and revise their tax laws accordingly.

Steven Chung is a tax attorney in Los Angeles, California. He helps people with basic tax planning and resolve tax disputes. He is also sympathetic to people with large student loans. He can be reached via email at [email protected]. Or you can connect with him on Twitter (@stevenchung) and connect with him on LinkedIn.

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