It has long been evident that California’s high taxes have limited the legal cannabis industry’s ability to compete with cheaper products in illicit markets. But now, with a growing number of cannabis growers and licensed marijuana businesses warning that large parts of the state’s legal marijuana industry could collapse, it’s clear California lawmakers must remove some of the taxes and regulatory barriers they have put in place. For starters, California should remove its cannabis cultivation tax.
No other agricultural property is subject to a cultivation tax similar to that imposed on marijuana. Eliminating the grow tax would allow licensed cannabis farmers and retailers to lower prices, making the legal marijuana market more competitive with illicit markets. Since the state collects several other marijuana-related taxes, including general sales taxes on cannabis sales, California could eliminate the grow tax and bring in another 123% more in total monthly marijuana-related tax revenue. marijuana by 2024 than it does now, according to my new Reason Foundation study.
Eliminating 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 replace losses from the removed cultivation tax.
Based on its population and adult use rates in other states with legal marijuana, California’s legal cannabis market is only one-third the size one might expect. Even after legalization, nearly two-thirds of marijuana sales in the state are still in the illicit market, where the products are untaxed and therefore much cheaper.
California state and local taxes on legal cannabis can be as high as $90 per ounce, or $1,441 per pound, which is considerably higher than in other states. For example, taxes on legal marijuana average $340 per pound in Oregon and $526 per pound in Colorado. These lower taxes make legal cannabis products more competitive against black market products in these states. As a result, Oregonians spend 378% more per capita on legal cannabis and Colorado residents spend 335% more per capita on cannabis than Californians spend per capita.
What was once supposed to be a thriving legal cannabis market now has small businesses wondering how they can survive in the state. “We are experiencing severe price squeeze in the California supply chain first hand, in part due to the illegal market, high taxes and fees, and a patchwork of inconsistent local taxes driving legal operators to the brink of a financial cliff,” says Amy O’Gorman Jenkins, legislative attorney for the California Cannabis Industry Association. “We can’t let the world’s largest cannabis market fail.”
Marijuana industry experts are sounding the alarm over complete market failure as California taxes and regulations prompt more cannabis growers and small businesses to consider exiting the California market licensed cannabis.
“Cannabis growers across the state are facing the greatest challenges of their time. Many farmers plan to fallow this year. For example, Busy Bee Organics, one of the first sun-grown farmers in Santa Barbara County, has already said they will not be planting this year,” says Sam Rodriguez, Policy Director of Good Farmers Great Neighbors, a Santa Collective Barbara County Cannabis Businesses.
Eliminating the cannabis cultivation tax would help growers, retailers and consumers. Reducing the retail excise tax would further help the legal cannabis market. And state lawmakers should also consider revenue-sharing opportunities or other incentives that could encourage local California governments to stop banning the sale of legal cannabis products in their jurisdictions.
Most local governments still prohibit the sale of marijuana, so an underestimated problem is the few legal cannabis storefronts in California. Oregon has one legal cannabis retailer per 6,145 residents and Colorado has one legal retailer per 13,838 residents while California has only one legal marijuana retailer per 29,292 residents.
California voters overwhelmingly approved the legalization of cannabis. Eliminating the cultivation tax and opening up more cannabis businesses would begin to bring California closer to the legal, safe, and licensed cannabis market that voters envisioned.
Geoff Lawrence is director of drug policy at the Reason Foundation and author of the new study, “The Impact of California Cannabis Taxes on Participation in the Legal Market.”