Operating a licensed and regulated cannabis business is an extremely tough endeavor. After working towards drug policy reform for about 20 years before living in a state with legal cannabis commerce among all adults, I have received a crash course in the last four years about the ins and outs of running a cannabis business from clients, friends, and regulators. The truth of the matter is that profiting from legal cannabis sales is an extremely difficult task because of regulatory hurdles and tax burdens. The federal 280e tax code that prohibits cannabis entrepreneurs from deducting normal business expenses (rent, payroll, etc.) is the most damaging. High (I know, pun intended) taxes on cannabis are another serious barrier, making prices unaffordable for those with lower incomes, and encouraging people to shop on the illicit market.
California, already hurting businesses with a heavy tax burden, are raising taxes even further. The Golden States should reverse course, and other states should not follow suit, they should look to go in the opposite direction and keep taxes law to benefit local businesses and allow the regulated market to keep pace with the prices in the unregulated economy. The San Jose Spotlight reported on the tax hike:
The California Department of Tax and Fee Administration “stunned and outraged” the business side of California’s cannabis market when it announced in November that taxes would go up in January, the California Cannabis Industry Association said in a statement.
The association said California adding more taxes, as the state’s nascent recreational cannabis market “spirals towards collapse” would “drive consumers to the illicit market at a time when illicit products are demonstrably putting people’s lives at risk.”
California collects a 15% excise tax from cannabis consumers and San Jose collects an additional 10%. Every transaction also includes a sales tax that is at least the 9.25% charged by the state on all consumer transactions and maybe more when cities and counties have their own sales taxes. Those rates will remain the same in 2020, but retailers will face a 12.5% bump in taxes and farmers will see an increase of more than 4%.
Like many consumers, the cannabis community is very price conscious. Further, cannabis consumers are comprised of many patients on limited incomes and with plenty of people that know how to acquire flower and other products through underground connections. Too heavy of a tax burden will disproportionately hurt sick and disabled patients and mom-and-pops, as the wealthy and multinational companies can easily handle price increases.
Keeping taxes low will better help everyday citizens and the small businesses that truly power and invest in our local communities and neighborhoods. California was the first state to legalize medical cannabis and I’m pleased that they helped show the way, but let’s not follow the state’s example on taxes, unfortunately, as the Golden State is going completely in the wrong direction.