California’s high cannabis taxes, as much as $90 per ounce in some areas, are hurting legal farmers and businesses while the black market continues to capture two-thirds of cannabis sales. California could increase legal cannabis sales and bring in 123 percent more in total monthly cannabis-related tax revenue by 2024 by eliminating its cannabis cultivation tax, according to a new Reason Foundation study.
“High cannabis taxes are the biggest reason California’s legal cannabis market is struggling,” said Geoffrey Lawrence, director of drug policy at Reason Foundation and author of the study. “Eliminating the cultivation tax is how the state can start to fix State leaders could double current monthly cannabis tax revenues by 2024 by eliminating the cultivation tax. Without the cultivation tax, our data show that lower cannabis prices would increase sales of legal products, which would increase the state government’s general sales tax revenue and more than replace losses from the eliminated cultivation tax.”
As a result of its high taxes, California’s legal cannabis market has failed to meet expectations and is just one-third the size that would be expected based on its population and adult-usage rates found in surveys by the Substance Abuse and Mental Health Services Administration. Nearly two-thirds of cannabis sales in California are still taking place on the illicit market, estimates the report published by Reason Foundation, Good Farmers Great Neighbors and Precision Advocacy.
California’s state and local taxes on legal cannabis can be as high as $90 per ounce, or $1,441 per pound. For comparison, legal cannabis taxes average $340 per pound in Oregon and $526 a pound in Colorado. Due to lower taxes and greater access to legal cannabis products, residents in neighboring Oregon spend 378 percent more per capita on legal cannabis and residents of Colorado spend 335 percent more per capita on legal cannabis products than Californians spend.
“We are experiencing first-hand a serious price compression in the California supply-chain in part as a result of the illegal market, high taxes and fees and a patchwork of inconsistent local taxes driving legal operators to the brink of a financial cliff,” said Amy O’Gorman Jenkins, president of Precision Advocacy and legislative advocate of the California Cannabis Industry Association. “We cannot allow the largest cannabis market in the world to fail. This study provides a roadmap of tax policy solutions for the governor and state legislative leaders to consider immediately.”
“Cannabis farmers throughout the state are experiencing the biggest challenges of their time,” warned Sam Rodriguez, policy director of Good Farmers Great Neighbors, a collective of Santa Barbara County cannabis businesses and leader. “Many farmers are considering going fallow this year. For example, Busy Bee Organics, one of the first woman-owned, sun-grown farmers in Santa Barbara County, has already declared she’s not planting this year. California’s cultivation tax is regressive and has only contributed to more and more uncertainty about the future of the state’s cannabis farmland economy and whether it can survive. The immediate elimination of the cultivation tax would be a first step in the right direction in addressing critical issues impacting the state’s entire legal cannabis market from seed to sale.”
“The report provides a helpful roadmap for cannabis tax reform in California.” Dale Gieringer, director of California NORML, wrote in the study’s foreword. “In the end, it projects that even with substantial tax reductions, the state can expect total revenues to rise substantially in the next two years due to increased consumer demand. Substantive tax cuts therefore seem to be a feasible strategy for reducing demand for the illicit market, while still retaining reasonable revenues for the state programs funded in Prop. 64.”
The study also recommends reducing retail excise taxes, which, combined with eliminating the cultivation tax, would help legal cannabis products better compete with the illicit market. It also encourages state leaders to examine revenue-sharing options and other policies that could incentivize California’s local governments to stop banning the sale of legal cannabis products in their jurisdictions.
Oregon has one legal cannabis retailer for every 6,145 residents and Colorado has one legal retailer for every 13,838 residents while California has just one legal cannabis retailer for every 29,292 residents, the study finds. And since the vast majority of California localities have banned the sale of cannabis, more than half of the state’s legal storefronts are located in just 18 cities.
“California’s voters legalized cannabis, but there are massive sections of the state, basically large cannabis deserts, where adults have no access to legal cannabis products and still have to turn to the black market,” Lawrence added.