Two years ago, California voters overwhelmingly approved Proposition 64, which legalized adult cannabis use. Fast forward two years later, and the illicit market is “getting worse, not better.”
The legal cannabis market has yet to achieve its desired impact for a number of reasons. More than three-quarters of California’s city and county governments still ban the sale of cannabis within their jurisdictions. Another is based on simple economics that falls on the entire state of California: taxes are too high on the legal cannabis industry and it is stunting the growth of the legal market.
With current tax rates, businesses and consumers are incentivised to turn to the illicit market and medical patients overpay for medicine they need, all while the state is receiving far less revenue than it projected.
Taxes are designed and implemented to discourage buying and spending. The theory goes that the higher the tax on an item, the less likely you are to purchase that item. Taxes that are too high discourage growth, stunt hiring and reduce profit. Economic theory still holds true for the cannabis industry.
The United States has some of the lowest tax rates in the developed world. Businesses — from oil conglomerates to telecom giants — all reap the benefits of low taxes. Right now, the statutory corporate tax rate is 21%. After applying loopholes and tax breaks, there remain American companies raking in billions while paying essentially zero dollars in taxes. It’s not a value judgment, it’s just the structure of our tax code.
In the legal cannabis industry, our tax code is inverted. Retailers and brands, and in turn consumers, are getting taxed at rates that would make Sweden blush. Californians are paying up to 45% tax rates on cannabis purchases — nearly 40% higher than the standard 6% state sales tax.
How do we know high taxes impede entry into the market? Well, for one, California’s legal cannabis market is stagnant. The New York Times reported that California’s legal cannabis sales totaled $2.5 billion in 2018, about $500 million less than in 2017. Despite the state’s desire to expand the legal market, entrepreneurs and consumers aren’t adopting as fast as expected.
Not only is the market stagnant, it’s more profitable to buy and sell illegally. California’s illicit cannabis market is estimated to be twice the size of the legal one, nearly doubling California’s legal market in sales a year ago. Current tax rates and fees hamper legal businesses’ ability to compete.
High taxes also affect the thousands of people who depend on medical cannabis to alleviate chronic pain, mitigate seizures and more. Not only is it expensive to run a compliant medical cannabis company — costs for patients skyrocket as businesses attempt to keep up.
California cannabis policy has yet to meet the promise that once made it so popular: increased tax revenue for the government. Cannabis tax revenue can help thousands of Californians access affordable health care, take advantage of public transportation infrastructure and secure green jobs. Estimates show that cannabis taxes have the potential to generate $8 billion to $20 billion in annual revenue for California. Last November, California’s Legislative Analyst’s Office released a report showing — over six months — retail excise tax revenue and cultivation tax revenue totaled $77 million and $7 million, respectively. This collected tax revenue was $101 million below projections.
Despite the tax burden placed on the legal cannabis industry, we’re seeing bipartisan momentum across cities to incentivise legal entrepreneurship and consumption. Progressive cities like Oakland, San Francisco and Los Angeles understand that exorbitant taxes position the biggest corporate cannabis companies to thrive, while small businesses get squeezed out of the market.
To prevent this, these cities launched cannabis equity programs to help people who were impacted by the failed “War on Drugs” to get a leg up in the growing industry. To protect against unsustainable tax rates and empower equity grantees, the Oakland City Council recently voted to lower the business tax for recreational cannabis enterprises that make less than $500,000 per year, from 10% down to 0.12%. Progressive cities like Oakland realize lower taxes for the time being can actually help the legal market grow and thrive.
The State Assembly has also explored effective solutions. Assembly Bill 286, authored by Assemblyman Rob Bonta and State Treasurer Fiona Ma, proposed a temporary reduction to California’s cannabis excise tax from 15% to 11% and suspension of the cultivation tax altogether through 2022.
Ultimately, the cannabis industry is hamstrung by high taxes but debilitated by a lack of equity. Policymakers must view our industry with an equity lens — equity for entrepreneurs, customers and patients.
Our industry understands we must pay our fair share of taxes, but right now we don’t have that luxury. To gain that equity, call or write to your state representative today to resurface and pass the Bonta Bill (AB286), suspend the cultivation tax and lower the cannabis excise tax until the legal market overtakes the illicit market.
Let’s channel the political will to make the legal cannabis industry look more like the fastest-growing legal industry in the world and less like California’s reality.
Keith McCarty is former CEO/founder of Eaze and CEO/founder of WAYV, a B2B cannabis logistics and compliance platform that delivers inventory to cannabis retailers.