Economists Propose 50% Cannabis Tax Rate to Boost Revenue for States, Suggest Consumers Switch to Mids

Tax revenue from legal cannabis sales in California have so far failed to meet the lofty expectations set by economists and other so-called experts when the sales pitch for Prop 64 was first being passed around.

One glance at Weedmaps or Eaze indicates that there sure hasn’t been any dropoff in demand for cannabis in Cali, until you realize that a significant portion of the dispensaries and delivery services featured on those sites have yet to meet the state’s requirements for licensure.

We always knew that creating one set of rules to govern cannabis commerce in the entire state of California would be difficult. After all, California is the 5th largest economy in the world, and many of the others who had blazed the trail before had total state populations roughly equivalent to Los Angeles alone.

So with the high cost barrier and long delays of entry into the legal industry in a state that had a thriving cannabis market prior to “legalization”, a lot of legacy operators are forced to work in a grey area at best, or the black market to make ends meet.

So that is the supply side struggle that is certainly contributing to the lackluster reefer revenue in Cali thusfar.

On the retail side, the problem is compounded with high sticker prices on a limited and boring selection of product and then hammered one more time at checkout with some of the highest cannabis taxes in the U.S.

This has led to $70 8ths of flower being the new normal for anyone who wanders into a legal recreational use dispensary to buy weed.

But, to be expected, the number of people doing that is not very high. A study released by Eaze earlier this year revealed that 84% of Californians polled said that they’d rather buy from the black market due to lower prices and no taxes.

In general, Californians are getting taxed every time they turn around but cannabis takes it to a whole new level.

When you buy legal weed in Cali, you the consumer pay a bundle of 3 taxes at checkout, on top of the retail price which is already artificially inflated by even more taxes assessed earlier in the supply chain to growers, distributors, etc.

First, Prop 64 allows local jurisdictions (cities & counties) to tack on their own arbitrary tax rate that, so far, has varied between 5-15% depending on where you look. This allows anti-weed local lawmakers to try to ‘starve the beast’ by making cannabis prices unattractive while reaping whatever rewards trickle out of that prohibition-lite 

Next is the state sales tax, which ranges from between 8-10%. This portion can be avoided by showing a valid state-issued medical marijuana card, saving you a few bucks if you keep that card up to date.

Finally, you get hit for the state excise tax of 15% on all recreational weed sales in the state.

So, add ‘em up and you see that the average adult use cannabis consumer will pay at least 28% and up to 40% of tax on top of their skyhigh retail purchase price.

You can tax it at 99% and projected revenues will look great… if you skip the fact that nobody will be willing to pay it.

The only other product that carries something close to this high of a tax rate is cigarettes. The American Lung Association says that every 10% increase in the cost of cigs leads to a 4% decrease in adult consumption.

Surely the cannabis market correlates but the main difference is, there is no robust grey and black market advertising openly for cigarettes.

Simply put, we don’t have to accept these high taxes to get high.

A group of economists has recently come out arguing just the opposite, however, suggesting that states like California could raise their cannabis tax revenues as high as 50% and not see any drop in consumer demand or sales revenues.

Not sure what they are smoking over there but they argue that the consumer will not feel these tax hikes because the retailer will absorb it into their margins to keep sticker shock low at the point of sale.

Bullshit.

But let’s pretend that we don’t have evidence of the exact opposite unfolding before our eyes here in California.

Why should any of us – growers, processors, manufacturers, distributors, or retailers – continue to slash our dwindling profit margins to foot an ever-increasing tax bill that isn’t equally imposed on grapes, or lettuce, or most any other legal product?

Patrick Oglesby is an attorney and founder of the Center for New Revenue. He told Leafly.com that he predicts a coming trend in raising tax rates on cannabis sales. He says that consumers soon will not have a choice since the black market will, in his opinion, be choked out by rapidly falling prices in the legal market.

Oglesby says that the black market assesses a “tax” of their own by figuring in the inherent risk of operating in the shadows into their pricing. What he fails to mention, or perhaps realize, is that the legal model took the established prohibition price points (ie. the $50 8th) and used that as their baseline to start stacking taxes and licensing fees on top of.

You are simply not going to see established, legal, licensed, top shelf cannabis brands selling high quality 8ths of flower that strike that perfect balance of price and tax hit to come out to $50 total for the end user. Not in California, ever.

These economists also suggest that consumers will buffer the incredibly unfair tax rates by substituting top shelf for midgrade.

Oh, my good man, you do not know us very well, do you…

Meanwhile, in a much smaller market, the state of Massachusetts employs a total cannabis tax rate of around 17% – roughly half that found on the average dispensary receipt in California.

They expect to reap over $1Billion in weed revenues in 2019 because they understand that it isn’t “revenue” until the money changes hands at the register.

The late, great, and powerful weed activist Mickey Martin (a Masshole transplanted to Cali) summed it up best for cannabis consumers in California by saying, “If this is your idea of regulate and control, we will pass – thanks.”

Post by Jack Riordan

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