California officials at the state and local level are eager to cash in on the potential $1 billion cannabis industry in that state—maybe a little too eager. Sales taxes at the state, county, and municipal levels are accumulating, causing fears that prices for legal products may end up being higher than black market products.
Today, for about $35, you can get a few grams of quality medical marijuana. In 2018, when California’s recreational market launches, pot prices will include a 15% state tax on purchases of all cannabis products, including medical marijuana. When that happens, the price is expected to increase by as much as 70%, to $60, in some places, putting them in range of black market prices.
In 2018, California state sales tax on medical marijuana will go from zero up to 5%. L.A. city sales tax is 6% at the counter. The city also taxes each business another 10% on total sales. Then there’s the usual state and local sales taxes, which add up to about 10% in L.A. All totaled, sales taxes will push retail prices to over $50 for an eight ounce (3.5 grams).
Taxes aren’t just being aimed at consumers. Some places in California get you coming and going. When marijuana buds are trimmed, the leaves—which are typically sold for use in making cannabis concentrates used in edibles, vapes, etc.—are a valuable byproduct. Or at least they used to be. Growers currently sell trash bags full of the trimmings for about $50. With new production taxes, that price is going to go up by a whopping $44 per pound in January, pushing trimmings prices by as much as 500%, making it no longer cost-effective to use them for extraction, and sending them to the compost heap.
Because every county and city in California is allowed to set their own rules, there are huge differences in tax rates across the state. The difference could drive growers to either relocate or stay in the black market. In Salinas, for instance, production tax, calculated by cultivation space, is going up to $25 per square foot. That comes out to a staggering $1 million per acre. In Humboldt County, however, rates will be as low as $1 a square foot. The decisions mean that compliant growers in Humbolt County should thrive, while in Salinas, it’s the black market that could be doing the thriving.
It’s worth pointing out that when Apple announced it would start selling rights-protected music for 99¢ a pop, there was a lot of speculation that people would rather not pay good money for something they can download for free, and so stick with pirated copies. We all know how those predictions turned out. People took to iTunes like flies on compost, completely turning the industry upside down and changing it, forever. Even if sales and production taxes lift legal market prices to be comparable with black market prices, legal weed is going to take a large portion of the cash flow currently going into the black market and bring it into the state economy.
Over time, taxes are likely to level out to more reasonable rates as they have in some other states such as Washington and Colorado.