California City Cuts Cannabis Taxes, Others Expected to Follow

Cannabis plants are displayed at the Berkeley Patients Group dispensary Wednesday, Feb. 14, 2018, in Berkeley, Calif., where the City Council recently voted to cut local cannabis taxes in half. (Marcio Jose Sanchez/AP)

Berkeley isn’t so different from the rest of California, at least in that the legendarily laid-back Bay Area city greeted the beginning of the state’s commercial cannabis industry like a near-limitless ATM.

When the first day of adult-use sales began Jan. 1, Berkeley sported some of the highest taxes in the state: 34.25%, which included a 10% local tax on top of state sales and excise taxes. California’s state taxes on cannabis were already among the highest in the nation, and Berkeley’s rate was even higher.

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Once the novelty of buying $24 grams and $75 eights wore off, retailers faced a stark reality.

Many of their longtime medical marijuana customers were gone—buying from underground farmers market-style events or patronizing illegal delivery services rather than forking over 30% to 40% more than they’d done just a few days earlier. The illicit market—the very economy that legalization was designed to topple—was thriving.

“Watch out for the tax rate, because it’ll make the difference between the success of this regulatory environment or its failure.”
Matt Kumin, attorney

It took just six weeks for Berkeley to cave. Citing concerns from existing marijuana businesses that they were being taxed out of existence and expressing a desire to attract new operators—including women and people of color—the Berkeley City Council voted last week to cut the local tax in half, down to 5%.

Berkeley’s tax relief takes effect at the end of March, and experts already predict other cities will follow suit. That’s good news for consumers as well as legitimate, taxpaying cannabis merchants in California, where warnings from experts, howls from the industry, and examples of high taxes in other states defeating legalization’s purpose have been widely ignored by revenue-hungry officials.

All marijuana in California is subjected to state excises and sales taxes, as well as a $9.25-per-ounce cultivation tax. (Medical cannabis patients only can avoid paying state sales tax, but only if they pay up to $100 to obtain a state-issued ID card, and to date, very few patients have.) Cities and counties are also able to levy further taxes, in some cases up to 20%.

When all the taxes are tallied, the effective tax on cannabis ranges from 40% to 60%, as the California Growers Association, a statewide lobby representing marijuana farmers, observed this week.

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Berkeley’s early move towards tax relief “reflects the comparatively high level of state and local taxes on cannabis in California,” according to a report released this week from Fitch Ratings. The current high tax rates in the state aid “the competitive position of illegal markets,” Fitch noted.

Rosy revenue projections, based on figures from Colorado and Washington, where sales of legal marijuana exceed $1 billion annually, helped sell California voters on legalization, Fitch observed. But finding the just-right level of taxation that will steer consumers toward over-the-counter sales rather than the illegal market will take some time—and some restraint on the part of cash-hungry governments.

“We’ve been screaming at these guys for three or four years to really watch out for the tax rate, because it’ll make the difference between the success of this regulatory environment or its failure,” said Matt Kumin, a San Francisco-based cannabis business attorney. “If [Berkeley’s move] is not a trend, the black market is going to win. And the regulations will fail.”

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A few other states have shown more restraint. Oregon’s effective tax rate is 18%, thanks in part to a cap on local tax rates at 3%. And some other cities in California are experimenting with lower tax rates to start. Los Angeles, for example, is levying a local gross receipts tax of 2.5%. San Francisco has yet to institute a local tax.

That’s how it should be done, according to Pat Oglesby, a tax expert who served on a panel convened by Lt. Gov. Gavin Newsom, a legalization supporter, to study the issue.

“Early on, to beat the black market, some cannabis taxes should start low,” he wrote on an op-ed piece published earlier this month at The Hill.

Localities like Berkeley also have to worry about staying competitive. Consumers won’t mind spending a little more on gasoline to save money on marijuana if it’s cheaper a few towns over, he wrote.

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The tax issue is resonating among policymakers in the state Capitol. A citizens’ panel attached to the state Bureau of Cannabis Control will examine the tax issue, and policy groups including the League of California Cities have suggested that a local tax rate of between 4% and 6% is the magic number.

California’s history with taxation is mixed. The state is home to high gasoline and cigarette taxes, but has also seen anti-tax revolts—including 1978’s notorious Prop. 13, which essentially froze property taxes, forcing local governments to search elsewhere for revenue.

California is also in a unique position. Marijuana, albeit for medical use, has been legal in the country’s most populous state longer than anywhere else—and there is more of it here than anywhere on the planet. A study commissioned by the state found that California produces 13.5 million pounds of marijuana a year—five times more than the state’s domestic market consumes. Which is to say, the state’s cannabis sector is bustling—but local governments might tax themselves out of their share.