A global credit rating agency says taxes on recreational marijuana in California could reach 45 percent in some places, high enough to keep the thriving black market in business despite legalization.
The report by Fitch Ratings, “Local Taxes May Challenge Cannabis Legalization in California,” warns that state and local taxes may combine to threaten the government revenue expected from the sale of legalized cannabis and cannabis products. The recreational use of the drug will be legal in California starting Jan. 1 under Proposition 64, the Control, Regulate and Tax Adult Use of Marijuana Act, passed by voters last November.
The state will levy a tax of 15 percent on the purchase of all marijuana, including the sale of medical pot. Many local governments are still working out how best to cash in. Voters in the city of Salinas approved a tax of up to $25 per square foot of space used for cultivating, while further north, Humboldt County is more grower-friendly with a the cultivation tax that tops out at $3 per square foot.[related_articles location=”left” show_article_date=”false” article_type=”automatic-primary-section” curated_ids=””]In last Tuesday’s elections, voters in Palm Springs extended the city’s 10 percent tax on medical marijuana to cover recreational marijuana when legal sales begin in January. Voters in Pacifica approved a 6 percent sales tax that could rise to 10 percent in two years.
More than 60 cities and counties have now passed new taxes on marijuana businesses with rates between 7.75 percent and 9.75 percent. Added to the state marijuana tax, state and local sales taxes and other business taxes, the tax rate on marijuana in California is likely to be the highest of any of the states that have adopted a policy of legalization.
“California’s high taxes are likely to keep black market prices competitive into the long term,” Fitch analysts wrote in September.
California growers produce an estimated 13.5 million pounds of marijuana per year, but the state Department of Food and Agriculture estimates that only about 2.5 million pounds of it are consumed within the state’s boundaries. Roughly 11 million pounds of the crop are exported out of state annually. Because of this well-established infrastructure for shipping illegal marijuana, it’s unlikely that regulations and inspectors from the Bureau of Cannabis Control will be able to halt the transportation of the drug across state lines.
The U.S. Drug Enforcement Administration has been trying for 44 years, and we can see how well that’s worked out.
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The text of Proposition 64 promised, “By legalizing marijuana, the Adult Use of Marijuana Act will incapacitate the black market and move marijuana purchases into a legal structure.” Exactly how that could be accomplished was not made clear.
Here’s a hint: Tax cuts. Fitch reports that in Colorado, Washington and Oregon, a thriving black market after legalization forced state lawmakers to lower cannabis taxes in order to be more competitive with illicit sellers.
California officials are projecting that marijuana sales will yield up to $1 billion in annual tax revenue. Because of federal banking regulations that prohibit banks from having marijuana-related businesses as customers, the state is making plans to accept the massive tax payments in cash. Treasurer John Chiang suggested that the money may have to be picked up by a fleet of armored cars.
Looks like everybody in government is thinking about highway robbery.
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