It has long been clear that California’s high taxes limited the ability of the legal cannabis industry to compete with cheaper products in illegal markets. But with a growing number of cannabis farmers and licensed marijuana companies warning that large swaths of the state’s legal marijuana industry could collapse, it’s clear California lawmakers need to remove some of the taxes and regulatory hurdles they’ve put in place. For starters, California should abolish the tax on cannabis cultivation.
No other agricultural product faces a cultivation tax comparable to that on marijuana. By doing away with the cultivation tax, farmers and licensed cannabis shops could lower prices, making the legal marijuana market more competitive with illegal markets. Since the state collects several other marijuana-related taxes, including general sales taxes on cannabis sales, California could abolish the cultivation tax and still bring in 123% more in total monthly marijuana-related tax revenues by 2024 than it currently does, according to my new survey from the Reason Foundation.
Abolishing the tax would lower prices and increase sales of legal cannabis products, which would then increase the government’s general sales tax revenue and more than offset the losses from the abolished cultivation tax.
Based on population and adult use in other states with legal marijuana, the legal cannabis market in California is only a third of the size that would be expected. Even after legalization, nearly two-thirds of marijuana sales in the state still take place in the illegal market, where products are not taxed and thus much cheaper.
California’s state and local taxes on legal cannabis can run as high as $90 an ounce, or $1,441 per pound, dramatically higher than other states. For example, taxes on legal marijuana average $340 per pound in Oregon and $526 per pound in Colorado. Those lower taxes make legal cannabis products more competitive with black market products in those states. As a result, Oregonians spend 378% more per capita on legal cannabis and Coloradoans spend 335% more per capita on cannabis than Californians per capita.
What was once a thriving legal cannabis market is now asking small businesses how to survive in the state. “We are experiencing first-hand severe price compression in the California supply chain, due in part to the illicit market, high taxes and fees, and a patchwork of inconsistent local taxes that are driving legal operators to the edge of a financial cliff,” he said. Amy O’Gorman Jenkins, legislative advocate for the California Cannabis Industry Association. “We cannot allow the largest cannabis market in the world to go bankrupt.”
Marijuana industry experts are sounding alarm bells about total market failure as California’s taxes and regulations cause more and more cannabis farmers and small businesses to consider giving up California’s licensed cannabis market.
“Cannabis farmers across the state are experiencing the greatest challenges of their time. Many farmers are considering setting aside this year. For example, Busy Bee Organics, one of the first sun-grown farmers in Santa Barbara County, has already declared it will not plant this year,” said Sam Rodriguez, policy director for Good Farmers Great Neighbors, a Santa Barbara County collective. cannabis companies in Barbara County.
Abolishing the cannabis cultivation tax would help growers, retailers and consumers. Reducing retail taxes would help the legal cannabis market further. And state legislators should also look at revenue-sharing opportunities or other incentives that could encourage California local governments to no longer ban the sale of legal cannabis products in their jurisdictions.
Most local governments still prohibit the sale of marijuana, so one understated issue is how few legal cannabis stores there are in California. Oregon has one legal cannabis store for every 6,145 residents and Colorado has one legal store for every 13,838 residents, while California has only one legal marijuana store for every 29,292 residents.
California voters overwhelmingly approved the legalization of cannabis. Eliminating the cultivation tax and opening more cannabis businesses would bring California closer to the legal, safe, licensed cannabis market voters had in mind.
Geoff Lawrence is director of drug policy at Reason Foundation and author of the new study, “The Impact of California Cannabis Taxes on Legal Market Participation.”