Tax burden on California marijuana may encourage black market

Elias Hubbard
November 1, 2017

The Farmacy, a California medical marijuana dispensary.

"High effective tax rates on California cannabis may complicate the state's efforts to establish legal markets" analysts Stephen Walsh and Karen Ribble in a Fitch Ratings report.

Marijuana use for medical purposes had been legal since 1996.

California is scheduled to begin issuing licenses to grow, transport and sell medical and recreational marijuana on January 1 and will charge a 15% excise tax, as well as a state cultivation levy of $9.25 per ounce for cannabis flowers and $2.75 per ounce for leaves.

The fourth annual Cannabis World Congress & Business Expo was held in Los Angeles Sept. 14.

The report found that marijuana consumers will pay a sales tax ranging from 22.25 percent to 24.25 percent, including a state excise tax of 15 percent, and additional state and local taxes between 7.25 percent and 9.25 percent.

Marijuana is legal in California, but the state's taxes could be so high that illegal purchases will be more attractive to buyers, according to a report released Monday.

If California governments don't temper taxing, it could hamper sales by driving consumers to the black market, according to the report.

According to CNN, of the eight states that have legalized recreational marijuana, only Washington state - at 50 percent - has a higher tax rate.

"High tax rates raise prices in legal markets, reinforcing the price advantage of black markets", the firm said. Colorado and Nevada tax marijuana at 36 percent, followed by OR at 20 percent. Cities including Tulare, Coalinga, Del Rey Oaks, and others have stated that they will use local marijuana tax collections to pay for rapidly increasing public pension contributions that are threatening their solvency. Parts of Alaska tax marijuana up to 20 percent as well.

"These arrangements magnify the uncertainties surrounding cannabis legalization and may contribute to disparate impacts for local governments", analysts wrote.

Other reports by Click Lancashire

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