When California finally allows sales of recreational marijuana next year, retailers will still be competing with illicit growers for customers. The Golden State’s high cannabis taxes will keep black marketeers in business and stifle government revenues from this new market, according to Fitch Ratings, a credit ratings and research firm.
Fitch Ratings’ research, made available earlier this week, finds that the effective tax rates on non-medical cannabis will be as high as 45 percent when accounting for both state and local levies. Taxes include a 15 percent state excise tax, state cultivation taxes of $9.25 per ounce for cannabis flowers ($2.75 per ounce for leaves), and state and local sales taxes ranging from 7.75 percent to 9.75 percent. Oregon, by way of comparison, taxes non-medical cannabis at about 20 percent and Alaskan taxes range from 10 percent to 20 percent.
According to the Fitch Ratings:
“California’s high taxes are likely to keep black market prices competitive into the long term. The state’s black market will also benefit from its long history as a supplier to states where non-medical cannabis remains illegal. Retail sale of non-medical cannabis is set to begin on Jan. 1, 2018 following California voters’ approval of the Control, Regulate and Tax Adult Use of Marijuana Act (Proposition 64) in November 2016.”
California won’t be the first state to grapple with a massive black market after voting for legalization. The report notes that “Colorado, Washington and Oregon each lowered their cannabis taxes following legalization to address black market competition.”
Tawnie Logan, chairwoman of the board of the California Growers Association, an advocacy group for small-scale marijuana producers, told the New York Times that the black market price for an eighth of an ounce of marijuana is around $20, compared with $50 in current medical marijuana dispensaries.
“All of a sudden they are calling their buddy again,” Logan told the Times, referring to black-market vendors who have thrived in California in recent decades. The only effective remedy to the problem is increased law enforcement who will be tasked with cracking down on established black market outlets, which are prevalent throughout the state but dominant in Northern California.
“You would be turning these law enforcement agencies against their own communities,” said Terry Garrett, a manager at Sustaining Technologies, a marketing company that researches the cannabis market in Sonoma County.
“That’s the conundrum for California.”