Pot Taxes Could Blunt The Budding Industry In California

By Keri Blakinger 11/03/17

Recreational pot buyers in California could pay up to nearly 25% sales tax on their green purchases.

marijuana and money

Sky high tax rates on legal marijuana could keep the black market for greenery alive and well in California, even in the wake of legalization, according to one report. 

Soaring state and local taxes could be more than 45% in some parts of the state, the Los Angeles Times reported.

“High tax rates raise prices in legal markets, reinforcing the price advantage of black markets,” credit ratings firm Fitch Ratings said in a report issued Monday. “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.”

Medical marijuana has already been legal in the state for more than two decades, but now California is slated to put out licenses to grow and sell recreational pot staring Jan. 1, with a patchwork of different taxes already in place for consumers, growers and sellers.

Pot buyers will fork over 22.25% to 24.25% sales tax, a figure that includes a 15% state excise tax and a range of local and state sales taxes. 

On the production side, farmers will be forced to pay $9.25 per ounce for flowers and $2.75 per ounce for leaves. 

But even if high tax mark-ups dampen sales, pot demand is expected to be enough to offer a boost to local treasuries, if other states are at all an indicator. 

“In the handful of states that legalized nonmedical cannabis prior to 2016, tax receipts have generally outpaced initial revenue estimates and have shown strong year-over-year gains,” the report said. 

In Washington, the tax rate on pot products is around 50%, while Nevada and Colorado come in at around 36% and Oregon around 20%. 

But aside from high tax rates, the high costs attached to becoming a legal seller could keep some existing businesses underground. Registering with the state and becoming compliant with regulations could carry a $100,000 price tag, CNN Money reports. As a result, the Fitch report predicted black market pot sales could become a “formidable competitor” to the fledgling legal market. 

"If taxes increase the price of cannabis beyond a certain point,” said John Kagia of New Frontier Data, “the legal market becomes less competitive than the illicit market and then consumers become less likely to make the transition from the illicit market to the legal market.” 

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Keri Blakinger is a former drug user and current reporter living in Texas. She covers breaking news for the Houston Chronicle and previously worked for the New York Daily News and the Ithaca Times. She has written about drugs and criminal justice for the Washington Post, Salon, Quartz and more. She loves dogs and is not impressed by rodeo food. Find Keri on LinkedIn and Twitter.