California’s cannabis legalization measure has been hailed by most as a timely, if not long overdue, step into the future. However, not all cannabis fans supported the measure. Many pro-cannabis opponents took issue with the new tax system, and the ways it could affect businesses and low-income patients. For many consumers, the hype surrounding legalization was obscured by the substantial tax hike on cannabis products instituted through prop 64. To make matters worse, the high costs also applied to medical patients who saw no change in their ability to purchase cannabis, but still faced a massive tax hike.
For those that are still unclear on these tax rates and what they mean for consumers, let’s break it down before discussing how this affects patients and business, and finally, what to expect for the future of the industry.
California Cannabis Taxes
Starting this past January, Prop 64 added several new layers of taxes to cannabis purchases in California. To start with state taxes alone, there is a 15% excise tax, in addition to the preexisting 9.75% retail sales tax. That adds up to about 25 percent for consumers – similar to Nevada’s taxes and lower than state taxes in Washington and Colorado.
On its own, this wouldn’t be so bad, but Prop 64 has also allowed local municipalities to put in place their own taxes and fees. These taxes were offered as a way to help localities absorb regulatory and enforcement costs, and were key to raising political support for the measure, especially in some of the less overtly cannabis-friendly corners of the state. Arguments surrounding tax income are essential to gaining the support of non-smokers in legalization efforts.
But in some cases, these measures are forcing consumers and patients to pay massive amounts of taxes. In other states, local taxes usually total between 2 and 4%. In San Diego, consumers will pay an additional 15%. In Santa Barbara, 20%. This means some Californians are looking at tax rates as high as 45%. For a 35-dollar eighth, this would mean paying an additional 16 dollars. In a state with a still-flourishing black market, which accounted for three quarters of cannabis sales immediately before legalization, taxes on that level present serious problems for cannabis businesses.
What about medical patients?
It would seem pretty heartless to slap such a steep price increase on medical cannabis patients simply because recreational adult-use cannabis now legal. Prop 64 takes this into account…sort of.
With a state-issued, Medical Marijuana Identification Card (MMIC), patients can avoid state sales tax entirely. The card is issued by county health departments. How much this will save you varies, but generally will hover just under 10% in state taxes - not an insignificant amount.
Unfortunately, the MMIC program is vastly underutilized. These are not the same as the plastic cards issued by doctors. You don’t need these cards to participate in medical cannabis programs, and they cost significantly more than standard recommendations. Only 2 in 10 qualifying Californians participate in the MMIC program.
The card will run you 100 dollars, unless you are a low-income Medi-Cal patient, in which case you will pay half that amount. For the standard fee, according to the Berkeley Patients Group, it makes financial sense to buy an MMIC if you spend 100 dollars or more on cannabis each month. Applications must be filed in person at your local county program office. You will need a copy of your doctor’s recommendation, proof of identity, proof of residence, and your application fee.
With high fees and the requirement for in-person applications, the MMIC is way off the radar of most California medical patients – leading them to owe the same exorbitant taxes as adult-use, recreational consumers. While the card may help save patients money, the fees and application process may be a hard pill to swallow for many patients – few of whom are likely to be aware of the program in the first place.
What about businesses?
As we discussed, patients and consumers in California still have a lively and widely available black market to turn to. This is bad news for businesses in both the medicinal and recreational sectors in the era of legalization.
Steve DeAngelo, co-founder and CEO of Harborside Dispensary in Oakland, told CBS:
“I’m very happy about – thrilled really – to see the legalization of cannabis in California. At the same time, I’m terrified about what’s going to happen with these taxes…In our shop here, the tax rate has gone from 15 percent all the way up to almost 35 percent for adult consumers. That is a huge hit. And it’s going to mean that a significant number of people, less affluent consumers, are going to turn to the lower prices of the underground market.”
Some patients will be willing to pay for the selection, quality control, and lab-tested protections of regulated cannabis. But some, with limited money to spend on cannabis in the first place, won’t have that option.
The new regulations have put additional financial pressure on businesses themselves, according to DeAngelo, and losing customers is the last thing these operators need. Dispensaries themselves, in addition to paying the corporate tax shared with all businesses, pay additional taxes to states and localities specific to cannabis operations. Some cannabis operators pay effective tax rates as high as 57 percent. Cultivators pay a tax of $9.25 per ounce of flower and $2.75 per ounce of leaves. The burden of taxes and regulations is extremely high – and that’s before considering that some customers will turn to the black market, or not smoke altogether, in the face of high taxes.
When you consider that the state won’t earn any taxes at all from consumers who opt out of the system entirely, it’s unsurprising that state legislators are already trying to change the laws. A bill introduced last month, by assembly members Tom Lackey (R-Palmdale) and Rob Bonta (D-Oakland), would lower the state excise tax from 15% to 11% for a three-year period. The bill would also temporarily remove the per-ounce cultivation tax altogether. According to a statement from Lackey:
“Criminals do not pay taxes, ensure customers are 21 and over, obtain licenses or follow product safety regulations. We need to give legal businesses some temporary tax relief so they do not continue to be undercut by the black market.”
Colorado’s market, which initially saw effective tax rates as high as 33%, went through a similar process. California attorney Hilary Bricken noted in an interview with Forbes that the size of the California market may mean it takes longer to stabilize than markets in places such as Oregon and Washington.
In some ways, the market will go through a process similar to what we’ve seen in these other legal states. In other ways, however, California is in uncharted waters, given the vast size of its economy and population. Right now, as cannabis continues to remain illegal on a federal level, high taxes on cannabis may be a political and regulatory necessity. It may be too much, for the moment, to hope for taxes along the lines as those for alcohol (state taxes run just 20 cents per gallon of beer). We can’t yet pretend that cannabis is a commodity like any other. But with recent developments on a federal level, hopefully that goal is not too far off.