top of page

The Problems Caused By Over Taxation Of The Cannabis Industry

One of the cannabis industry’s most often-used arguments for its continued growth is its overall willingness to be taxed. Even in its medical form, states and local jurisdictions choose to impose taxes on the growing and selling of cannabis since at least 2010. For many, the adoption of adult-use cannabis is acceptable primarily because of the ability to impose taxes on the industry. Some California cities now carry cannabis tax measures on their books without having any cannabis businesses to tax within their jurisdiction - they have been passed preemptively, in the off-chance that should legal cannabis arrive in their neighborhoods, city council boards won’t be caught flat-footed.

Tax Rates On Legal Cannabis Varies Greatly From State To State

The tax rate on legal cannabis varies greatly from state to state, with some creating an effective tax rate as high as 50% (see below). This makes it a cash cow for local government, as they can rake in a large amount of revenue from the sale of cannabis. Municipalities that have legalized cannabis are often able to use the money to improve infrastructure, create new jobs, and fund other projects that benefit their residents. In some cases, this has even led to the revitalization of struggling towns and cities.

Independent analysts have remarked about the unintended consequences of overzealous taxation, many of which are currently being played out in California. The sticker shock experienced by longtime customers towards an effective tax rate of 40-50% has buoyed the fortunes of unregulated market operators. It may also gnaw deeply into the estimated (USD) $1B in state tax revenue the state of California expects to collect from the industry this year.

It is true that holders of a state-issued medical cannabis card - about 3,000 in a state of 35 million - can skip the sales tax for some ever-so-slight relief. But there is no end in sight. Even a bill that recently reduced California’s cultivation tax to 11% is unlikely to change prices at the dispensary and new markets coming online continue to add high levels of consumer taxes to purchase tested, regulated products.

Overtaxation And The Black Market

Moreover, it continues to force austerity measures upon regulated operators and deter consumer participation in adult-use markets.

Taxation is one of the most important factors in controlling the use of illicit activities. When taxes are too high, people are more likely to engage in criminal activities to avoid paying them. This is especially true for people who are poor or who have low incomes. In fact, a study has found that high taxation rates are one of the main reasons why the black market exists - it provides incentives for people to engage in illicit activities in order to save money.

Taxation rates should be designed based on the socio-economic needs of a country. For example, high taxation rates in developed countries may be necessary to fund important public services. In contrast, low taxation rates in developing countries may be necessary to help reduce the poverty rate and increase the cash flow of low-income families.

It's important to remember that tax collection is an important part of government policy. However, governments should make sure that their tax collection systems are effective and efficient, especially when it comes to a new industry like cannabis, so that they can raise the necessary resources to fund their important public services, while removing incentives for black market activity.

In contrast to California, Nevada has sped past its initial revenue estimates, and while it also struggles with its own resilient illicit market, the state has managed to serve its new industry far better.

Within the state, Nevada levies three taxes: a 15% excise tax based on the fair market value of cannabis, paid by the cultivator in an “arm’s length transaction.” This is a median estimate for most categories of cannabis, and the 15% is levied upon the fair market value of a given quantity of cannabis (for instance, 15% * $2799, the fair market value of cannabis flower = $419.85/lb). An additional 10% is applied to retail sales, although this is waived for medical cardholders. Local Nevada sales taxes are also applied at the retail level. This top-down approach has prevented local overreach and imposed an order which is sadly lacking in many states bottom-up approach.

Some States Are Restricted In How They Can Reform Their Cannabis Tax Model

It’s important to note that many states, such as California, are constitutionally restricted from taking a top-down approach with taxes. In fact, some California city cannabis taxes, such as the 45% electricity bill tax the city of Arcata imposed on illegal and legal indoor grows, have proved highly effective in controlling undesired cannabis-related activity. Conversely, recent tax data from both cultivation and retail excise taxes alongside statewide taxable sales suggests Nevada’s cannabis sales are beginning to plateau. This stasis, coming as it is far earlier in Nevada’s evolution than it has for Colorado, may be price-related.

The difference here, between top-down and bottom-up lies in the dialogue state and local governments can establish with industry stakeholders. Developing the fair market value for cannabis is an ongoing work-in-progress, which requires that state and local governments be good stewards to both the industry and the surrounding community. Moreover, it demands that they move quickly, to adjust to new information, which is rare in government bureaucracies. But it is not unprecedented: both Colorado and Washington pulled back on their initial tax structures when they found them impractical and counterproductive. And so can other states.

Cannabis Legalization With Reasonable Taxation Will Help Decrease Black Market Activity And Increase Tax Revenue

Reasonable taxation on legal cannabis will help decrease black market activity AND increase tax revenue. Currently, the black market for cannabis is thriving, as taxes and regulations on the plant are inconsistent and often unfair. This results in many criminals profiting from the illegal trade, while the public is exposed to low-quality marijuana that may not be safe or effective.

If cannabis were to be legalized and taxed reasonably, this would change. This would prevent criminals from distorting the market by adulterating marijuana with other substances, and it would also ensure that only high-quality, safe products reach consumers. In addition, this would increase tax revenue for governments, since illegal cannabis sales are untaxed.

To do this successfully, government officials and cannabis operators should work towards engaging each other consistently. On the cannabis side, operators should drive their top line with strategic expenses, continually distinguishing between necessities and desires when it comes to their businesses. They should also attend their city halls and determine who their allies in local politics are.

For government officials and regulators, they need to continually assess their tax rates as well as their fees. They should also strike the proper balance with licenses: too few can lead to a thriving black market such as in California, but too many can also lead to oversaturation and potential diversion issues, as in Oregon. Finally, legitimate operator concerns need to be addressed. As business owners, they have the same concerns as any other business owners within a district but are uniquely vulnerable to confusion and poor judgment on the part of regulators and authorities. Their success or failure very much rests on elected and agency decisions and they are willing to help find the right balance for all concerned.

As we all know, real tax reform will not come before 280E is repealed for the legal cannabis industry. Until then, city officials will find validation for placing a premium on the industry and forcing upon it terms which will condemn it to survive on the thinnest of margins. If states are sincere in wishing their newly legal medical or adult use programs to support equity and opportunity, they will need to stay as nimble as cannabis stakeholders, impose order upon overzealous regional decision makers and work with the industry to determine best practices in each district. The challenge is directly proportional to the reward in getting it right.


bottom of page