The state tax revenue generated by marijuana sales in states where it is legal is usually high but California may be pushing too hard. In some places around the state, up to 45 percent sales tax may be placed on the plant which could ultimately backfire as people lean on the black market more. One of the benefits of legalizing marijuana in many states is the reduction in crime that usually occurs as a result. Once prohibition comes to an end, many are hoping to find it easier to just go to the store for their cannabis products as opposed to relying on the black market. The exorbitant tax will make this challenging.
California’s Enormous Role in America’s Cannabis Industry
California residents chose to end prohibition and legalize cannabis for personal, recreational use last December and the infrastructure for that industry is estimated to be up and running by 2018. California was the first state to legalize medical marijuana in 1996. Now it joins 7 other states and Washington D.C. in legalizing the plant for recreational use although the state is already home to a large black market industry. A lot of the cannabis that goes around the country is grown in California and, in order to tame the black market, the regulations need to support this transition.
High Taxes Will Likely Feed the Black Market
The main issue now lies in the fact that taxes may rise too high to support this and the black market will continue to operate as though it is business as usual. There is estimated to be a high sales tax, between 22.25 percent and 24.25 percent depending on the location, which includes a 15 percent excise tax and then on top of this there are extra state and local fees that range between 7.25 percent and 9.25 percent. This brings the total up to 45 percent in some areas. This kind of high tax rate may be too much for those who are already used to purchasing the plant on the black market and, therefore, the anticipated reduction in crime may not come to pass.
“High tax rates raise prices in legal markets, reinforcing the price advantage of black markets,” says global credit ratings firm Fitch Ratings. “California’s black markets for cannabis were well established long before its voters legalized cannabis in November 2016 and are expected to dominate post-legalization production.”
Temptation to Stay Off the Grid
Fitch states that local marijuana businesses will need to pay tax that is between 1 and 20 percent of gross receipts or $1 to $50 per square foot of cannabis plants. This kind of high tax rate may also entice retailers and growers to stay off the grid. Ultimately, a balance would need to be struck in the same way that other states such as Colorado, Washington and Oregon have successfully structured their recreational cannabis industry. If all parties do not benefit and consumers can’t afford the product, then the industry will have a tough time, according to Fitch.
The regulations for recreational marijuana are still being written and there is a lot of work that still needs to be done. It is due to be available for sale next year.