California can start to fix legal cannabis market by ditching the cultivation tax

It’s long been obvious that California’s high taxes were limiting the legal cannabis industry’s ability to compete with less expensive products on illicit markets. But now, as a growing number of cannabis farmers and licensed marijuana businesses warn that big parts of the state’s legal marijuana industry could collapse, it’s clear that California legislators need to remove some of the taxes and regulatory obstacles they’ve put in place. For starters, California should eliminate its cannabis cultivation tax.

No other agricultural good faces a cultivation tax similar to the one imposed on marijuana.  Eliminating the cultivation tax would allow farmers and licensed cannabis retailers to lower prices, making the legal marijuana market more competitive with illicit markets. Since the state collects several other marijuana-related taxes, including general sales taxes on cannabis sales, California could eliminate the cultivation tax and still bring in 123% more in total monthly marijuana-related tax revenue by 2024 than it currently does, according to my new Reason Foundation study.

Eliminating the tax would lower prices and increase the sales of legal cannabis products, which would then increase the government’s general sales tax revenue and more than replace the losses from the eliminated cultivation tax.

Based on its population and adult-usage rates in other states with legal marijuana, California’s legal cannabis market is just one-third of the size that would be expected.  Even after legalization, nearly two-thirds of marijuana sales in the state are still taking place on the illicit market, where products aren’t taxed and, thus, are far cheaper.

California’s state and local taxes on legal cannabis can be as high as $90 per ounce, or $1,441 per pound, dramatically higher than other states. For example, taxes on legal marijuana average $340 per pound in Oregon and $526 a pound in Colorado. Those lower taxes make legal cannabis products more competitive with black market products in those states. As a result, Oregonians spend 378% more per capita on legal cannabis and Coloradoans spend 335% more per capita on cannabis than Californians spend per capita.

What once was expected to be a thriving legal cannabis market, now has small businesses wondering how they can survive in the state. “We are experiencing first-hand a serious price compression in the California supply-chain in part as a result of the illegal market, high taxes and fees, and a patchwork of inconsistent local taxes driving legal operators to the brink of a financial cliff,” says Amy O’Gorman Jenkins, legislative advocate of the California Cannabis Industry Association. “We cannot allow the largest cannabis market in the world to fail.”

Marijuana industry experts are sounding these alarms about total market failure because California’s taxes and regulations have more and more cannabis farmers and small businesses considering giving up on California’s licensed cannabis market.

“Cannabis farmers throughout the state are experiencing the biggest challenges of their time. Many farmers are considering going fallow this year. For example, Busy Bee Organics, one of the first woman-owned, sun-grown farmers in Santa Barbara County, has already declared she’s not planting this year,” says Sam Rodriguez, policy director of Good Farmers Great Neighbors, a collective of Santa Barbara County cannabis businesses.