California agency suggests state marijuana tax system shift to potentially lower rates, address illicit-market threat

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marijuana taxes

An independent California state agency issued a long-awaited report about the state’s cannabis tax system, and its recommendations include a major overhaul that would simplify and possibly reduce marijuana tax rates.

The goals of the report were to assess how California’s marijuana taxes can best undercut the illegal market, discourage cannabis use by youth and also generate enough tax revenues to allow the state to properly oversee the legal cannabis industry.

Industry watchers suggest stakeholders will reference the report heavily during heated debates in the upcoming legislative session over whether to lower state marijuana tax rates.

The report from the state Legislative Analyst’s Office (LAO) suggested several dramatic policy changes to California’s current marijuana tax structure, including:

  • Doing away with the weight-based cultivation tax entirely.
  • Replacing the state’s 15% excise tax with one based on either a tiered percentage of product sales price or one based on product potency.
  • Simplifying the tax-collection process so that all marijuana-related taxes are collected by retailers at the point of sale to customers instead of the current system – under which most taxes are collected and remitted to the state by distributors.

In a statement, the California Cannabis Industry Association (CCIA) said the recommendations “mirror legislative priorities that CCIA’s membership have been advocating for over three years.”

“Comprehensive tax reform will incentivize consumers to purchase regulated cannabis products, ease administration and compliance and increase and stabilize revenues for the state,” the CCIA noted.

State Assembly Member Tom Lackey, a Republican from Palmdale who’s backing marijuana tax reduction, said lawmakers must make undercutting the illicit market a top priority when they reconvene in Sacramento in January.

He argued that unless California successfully quashes the illegal cannabis market, then the other two LAO goals of ensuring state revenue and preventing youth cannabis use will prove “irrelevant.”

“This tax structure – we’re killing ourselves with it, and we’re killing the industry with it,” Lackey said. “We need to focus on simple, practical solutions.”

No silver bullet

The report, which was issued less than a month after state regulators announced that marijuana taxes will go up Jan. 1, echoed many of the talking points that industry insiders have hammered on for months, including that higher state taxes only empower the illicit market.

But it also cautioned that lowering state taxes could have offsetting impacts, depending on state lawmakers’ goals.

“Reducing the tax rate would expand the legal market and reduce the size of the illicit market,” the report notes. “On the other hand, such a tax cut would reduce revenue in the short term, potentially to the extent that revenue could be insufficient.”

The report asserted that state marijuana tax revenues needed to hit $350 million in the 2021-2022 fiscal year to be “sufficient” to cover mandated expenditures under California law and suggested that lowering the tax rates might not be enough to hit that revenue benchmark.

The LAO offered up a range of tax possibilities and changes and found that if the Legislature wanted to go with a potency-based tax – which is what the Canadian federal government uses – that a rate of $0.006 to $0.009 per milligram of THC would be advisable.

If lawmakers wanted to prioritize undercutting the illicit market, the report concluded, then they should adopt a tax at the lower end of that range. If legislators want to focus on preventing youth marijuana use, they should adopt a tax at the higher end.

The LAO also warned that a tax reduction won’t offer a silver bullet against the illicit marijuana market:

“Under current market conditions, changes in the state tax rate likely would not make legal cannabis less expensive than illicit cannabis.

“Even if the state eliminated its cannabis taxes entirely, other costs – such as regulatory compliance costs and local taxes – likely would keep legal cannabis prices higher than illicit market prices.”

The report further noted that local governments across California could respond by raising their own tax rates even if the state lowered its rates, making the situation a zero-sum game for the industry.

Regardless, the report was immediately hailed by industry stakeholders as a win.

‘Lower and simplify’ taxes

State Assembly Member Rob Bonta, a Democrat from Oakland, wrote on Facebook that the report “delivers a clear message that the status quo is not working” and promised to reintroduce legislation he carried in 2019 to temporarily lower marijuana taxes.

“We must lower and simplify the taxes on cannabis if the regulated cannabis industry in California is to survive, let alone thrive,” Bonta wrote.

Assembly Member Lackey said that both he and Bonta in the 2020 legislative session will be “very motivated to try to get (marijuana tax reform) to happen as soon as possible because the market (is) headed in the wrong direction.”

The United Cannabis Business Association (UCBA), another California marijuana trade group, wrote in a statement that the report “represents the foundation for the work that we must now do to identify an appropriate level of taxation that will move buyers away from the illicit market.”

Legislative advocate Max Mikalonis of Sacramento-based K Street Consulting was a bit more circumspect and said the report is “no slam dunk.”

“The report could have been stronger on acknowledging the size and impact of the unlicensed market and acknowledging how not price competitive the legal market is with the illicit market,” Mikalonis said.

He added the illegal market is still “three times the size” of the legal one.

But, he noted, the report “gives me real hope” that serious marijuana tax reform can get pushed through the California Legislature next year.

“Whether or not we get an overall reduction in rates … that remains to be seen,” Mikalonis concluded.

John Schroyer can be reached at