California Lawmakers Propose Reducing Cannabis Taxes to Compete With Black Market
High taxes may be making the cannabis industry unprofitable for legal businesses, allowing illicit growers to undercut their prices with unregulated product.
Published on March 16, 2018

Photo via iStock/ juanmonino

Proponents of cannabis legalization often argue that legal retail marijuana sales will put an end to black market weed dealers, but some canna-legal states are finding that shutting down illicit sales is easier said than done. In Oregon, local law enforcement have been struggling to control cannabis overproduction and black market sales ever since cannabis was legalized in 2016. Some of this excess product ends up getting smuggled out of state, leaving officials concerned that federal law enforcement anxious to continue the War on Drugs will interfere with state-legal cannabis industries.

California also has a serious overproduction problem, with an estimated excess of 11 million pounds of weed reportedly being grown in the state every year. Even though it is now fully legal to grow marijuana in the Golden State, many cannabis farmers have decided to bypass the fees and paperwork necessary to jump into the business legally. Many of these illegal farmers are cutting costs by using banned pesticides on their plants, which pose health risks for consumers as well as local wildlife.

State officials are hopeful that these cultivators will eventually transition to the legal market, but these growers are having no trouble selling their crop illegally. Not only is there money to be made in shipping marijuana to states where pot is still prohibited, but California stoners are still buying black market bud because it is significantly cheaper than the taxed legal alternative.

The state levies a 15% excise tax on cannabis sales, along with a cultivation tax of $9.25 an ounce on cannabis flower. On top of this, buyers must pay regular state sales tax of 7.25 to 9.25%, in addition to local sales taxes, which can bring the total tax up to 45% in some areas. Black market sellers are able to offer weed without this significant upcharge, and can also afford to cut prices even lower because they can avoid the licensing and regulatory fees required to sell weed legally.

In order to resolve the situation, California legislators have proposed temporarily lowering the sales tax rate on cannabis in order to help the fledgling legal market compete with cheap, unregulated black market grass. A new bill, proposed by legislators Tom Lackey and Rob Bonta, would lower the state excise tax from 15% to 11% and suspend the cultivation tax. The bill would only lower these taxes for three years, which legislators hope is time enough for the legal industry to get on its feet.

“Criminals do not pay business taxes, ensure consumers are 21 and over, obtain licenses or follow product safety regulations,” Assemblyman Lackey said, according to KHTS Radio. “We need to give legal businesses some temporary tax relief so they do not continue to be undercut by the black market.” Assemblyman Bonta said that the new bill would reduce “the tax burden on the licensed cannabis market during this transition period, keeping customers at licensed stores and helping ensure the regulated market survives and thrives.”

Cannabis advocates have voiced their support for this new legislation. "This a huge step in the right direction," Hezekiah Allen, executive director of the California Growers Association, told the Los Angeles Times. "Right now, thousands of California businesses are struggling with one-time costs of regulatory compliance. These businesses are at a significant disadvantage to unregulated operators who are continuing to operate in the unregulated market and are not incurring their costs."

“One of the biggest threats to workers in the emerging legal cannabis industry is diversion of cannabis into the illegal market, which undermines our employers and our jobs,” Jennifer Schwab, Representative of the International Brotherhood of Teamsters, said to KHTS. “Lowering the tax rate on cannabis will encourage cannabis businesses to choose the legal market, which helps the entire industry and protects our members’ jobs.”

Chris Moore
Chris Moore is a New York-based writer who has written for Mass Appeal while also mixing records and producing electronic music.
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