Excessive cannabis taxes will make legalization’s ‘problems’ much worse

Paul Armentano (Courtesy photo)

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In justifying its recent about-face against cannabis legalization, the New York Times editorial board claimed that the onerous taxes currently imposed on state-legal marijuana products aren’t high enough.

What are they smoking?

In response to perceived problems caused by marijuana legalization – which the Times enthusiastically endorsed in 2014 – the nation’s most prestigious newspaper called upon state governments to significantly raise their marijuana-related taxes.

The New York Times’ cannabis tax obsession

In case that’s not enough, the Times recommended an additional federal tax on marijuana goods (a move that at least would require national legalization). And finally, the editorial board urged Congressional lawmakers to reject legislative changes that would potentially lower the costs of doing business for state-licensed cannabis businesses.

This includes prohibiting legal marijuana operators from taking standard business deductions and other tax write-offs currently available to businesses in every other commercial industry – benefits that industry players have been anxiously anticipating following the President’s executive order directing the Justice Department to reschedule cannabis from Schedule 1 to Schedule 3.

In essence, alarmed at a steady increase of adults self-reporting cannabis use now that the substance is legal in much of the country, the Times believes that artificially raising the prices of legal cannabis through excessive taxes and fees will dissuade adults from consuming it.

Here’s why they’re wrong.

High cannabis taxes only hurt the legal market and promote the illicit

Excessive taxation doesn’t discourage consumers from obtaining cannabis, but it does discourage consumers from purchasing state-legal cannabis from regulated markets – a phenomenon we see time and again but most recently in California and Michigan, where tax spikes sent legal sales tumbling.

To disrupt the unregulated cannabis market and permit legal markets to thrive, state-licensed retailers must offer competitive pricing. But in today’s environment, few can. That’s because most legal states tax cannabis products at rates that far surpass levies on other goods, including alcohol. In some states, consumers face a tax burden of nearly 40 percent on retail cannabis.

That’s on top of the artificially high base prices associated with legal marijuana products, which are already inflated because state-licensed business cannot utilize traditional banking, financing, business tax deductions, or incentives.

Placing additional tax burdens on legal cannabis will only steer more consumers back to the unregulated market where they can purchase sketchier products that aren’t subject to laboratory testing at far cheaper prices.

What the Times proposes undermines the primary goal of legalization, which is to provide adults with safe, affordable, above-ground access to reliable products of known purity, potency, and quality.

High cannabis taxes are bad for business – and bad for state and local government

Excessive taxation also hurts state-licensed businesses and their employees. Higher prices result in fewer customers visiting legal stores. Fewer customers equate to fewer jobs and less profits. Less profits result in fewer entrepreneurs willing to invest in the legal cannabis industry. After all, who is going to risk their capital on a business that relies upon selling a product that consumers can buy for far less on any street corner?

Again, this 101-level economic theory was proven by California, where a short-lived hike in the state excise tax led to a decrease in overall sales revenue. More recently, in Michigan, a new tax 24 percent hike — which took effect on Jan. 1 — has led to plummeting sales and industry-wide layoffs.

You would think that other states would learn from these examples. But most aren’t getting the message.

Many states are choosing to sacrifice the long-term health and sustainability of the legal cannabis market for theoretical short-term gains reaped by sky high taxes. In Maryland, for example, state lawmakers last year raised the special cannabis sales tax of adult-use products by 25 percent. They weren’t alone. Minnesota lawmakers raised their state-specific cannabis sales tax by 50 percent.

And in Maine, lawmakers increased cannabis sales taxes by 30 percent.

Some state lawmakers grasp the cannabis tax conundrum

California at least seems aware of the folly.

Last fall, Gov. Gavin Newsom and state lawmakers rolled back a 25% increase on the cannabis excise tax. In addition, state legislators imposed a moratorium on any future tax hikes until 2030.

“We’re rolling back this cannabis tax hike so the legal market can continue to grow, consumers can access safe products, and our local communities see the benefits,” Newsom, an architect of California’s legalization experiment and a likely contender for the 2028 Democratic Party presidential nomination, later explained.

He’s right.

Imposing excessive taxes on legal cannabis strengthens illicit markets while weakening legal ones. It encourages consumers to seek out unlicensed sellers who don’t check IDs, who lack the means or the desire to test their products for quality or purity, who operate without any regulatory oversight, and who don’t redistribute their revenues back into their local communities.

The New York Times ought to know better.

Paul Armentano is the Deputy Director of NORML, the National Organization for the Reform of Marijuana Laws.