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California City Cuts Cannabis Taxes, Others Expected to Follow

February 23, 2018
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.

Chris Roberts's Bio Image

Chris Roberts

Based in New York City, Chris Roberts has been writing about cannabis since spending a few months in Humboldt County in 2009. His work has been published in SF Weekly, Cannabis Now, The Guardian, High Times, and San Francisco Magazine, among others.

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  • Rod is on the Gas

    California’s politicians are now beginning to understand what they couldn’t perceive…Consumers and cultivators ain’t gonna welcome government middle-men into our fold.

    Veteran growers have always sold at a fair price/cost ratio or exported out of the area. Now is the same business model. It’s called survival.

    The legal dispensaries had a good run, they could set the wholesale market paid to growers and pump out huge markups to the consumers. Now those same racketeers can cry boo-hoo-hoo.

    Maybe, just maybe, the small-scale cultivators can see pound prices revert back to $4,000. Why not? Politicians don’t collect taxes…fools pay them.

  • JIMMYLIMO

    When someone buys LEGAL cannabis and pays the taxes, they get a product of known potency, that has been tested for chemical adulterants and other dangerous drugs, and they are helping their local municipality pay for drug education in schools, and other things that the taxes pay for. You can buy legal alcohol, or you can buy bootleg whiskey or bathtub gin and risk getting poisoned or going blind… Same with pot… You usually get what you pay for.

    • The Dank Farmer

      The bootleg pot I buy is far better than the rec weed and 1/4th of the cost…

    • Grow Your Own

      Just Grow your Own. It’s very cheap to do so & you know the Quality of the harvest. Tax Free to boot.

    • Jackson Shredder

      That’s why it’s best to grow your own after all it’s legal at least here.

  • jontomas

    Not only do taxes need to be strongly reduced, so do the outrageously high prices. – Most of the price of black-market marijuana is comprised of the “prohibition premium” – that amount which compensates the grower for risk of going to jail. — With legalization, that risk disappears and so does prohibition premium. – After the dust settles on re-legalization, average quality marijuana will sell for $50 an ounce, or less. – It’s just a plant.

    As long as taxing authorities and sellers fight to maintain the fiction of black-market pricing, the black-market will always win. – Once we recognize reality and put the logical, rational price to marijuana, employing economies of scale that come with legalization, there will be no room underneath for the black-market to exist. — And consumers will finally cease to be price-gouged.

  • Alysa Rivers

    For everyone is still utilizing black market cannabis in CA…enjoy it while it last… bc that is all about to change on paper in a few months. Which means enforcement is not to far behind. Go check out the State Regulations. They are available to the public. Still don’t believe me well Leafly’s competitor is may get shut down if they don’t get themselves in order with the state regs. and they don’t even sell, grow, or make products containing weed …. Just like Leafly, they provide info on weed and how to obtain it. Unlike Leafly, they are not follow regulations. Also there are regulations limiting potency as well. No different from Alcohol Prohibition… actually the 2 are very similar. once again go look it up. If you are still not convinced beverages like absinthe and four loko change up there products to sell and continue selling in the USA. And we still don’t have the real absinthe… I digress … one last thing be happy that you don’t live in any of the southern states bc it is still illegal and if you are chillin’ on that quality grade cannabis then you a paying about $65-75 an eight… and for you medical ppl topicals and tinctures (less that .3% of THC from hemp plants) all $90+ for 1oz or less not including taxes. So back to what I said in the beginning ENJOY IT WHILE IT LAST…

  • kona ohana

    Greedy polititians can screw off. Grow your own to hell with taxes. Medical supplies are none existant. Many have been forced underground again/still.

  • kona ohana

    DECRIMINALIZE CANNABIS LIKE TOMATOES AND STAY OF OUR LIVES