How Potent Will California’s Cannabis Taxes Get?

A new state report suggesting pot be taxed by THC level fails to grasp the heart of the issue

It may be a new year, but for California’s cannabis industry, the problem remains the same.

Despite Governor Jerry Brown’s prediction that the newly minted legal market would earn $643 million in cannabis taxes in 2018, the final result that year was just north of $345 million. In fact, the state has yet to clear $1 billion in tax revenue despite having two full years of adult-use sales now on the books (California’s Department of Tax and Fee Administration reports tax revenue of just over $845 million since the start of 2018).

Meanwhile, California’s illicit market continues to thrive. 

At the moment, the ratio of licensed operators to unlicensed in the state is 1 to 3. On top of that, less than one-fifth of cities in California currently permit retail pot shops to operate. In 2020, an on-going battle over the rights of delivery businesses to service state municipalities that have banned brick-and-mortar dispensaries risks even further reducing Californians’ access to safe, regulated cannabis.

Simultaneously, licensed operators are expressing outrage at the state’s continued failure to either reduce the tax rates or ramp-up enforcement efforts against illegal businesses. In defiance of industry demands for lower excise tax rates that have only grown louder with each passing day, California’s Department of Tax and Fee Administration said in December that it would actually raise taxes on cannabis in 2020.

In the midst of all this madness, a new report from the California Legislative Analyst’s Office (LAO) published in December recommends that the state consider shifting its tax structure to instead calculate rates based on THC potency.

This would be a significant departure from the current system, which currently taxes cannabis by weight at two stages in the plant’s voyage from soil to shelf. At present, taxes are derived based on the plant’s weight post-harvest and then compounded with an excise tax levied at the retail phase. 

The LAO report, authored by legislative analyst Gabriel Petek — cheekily titled “How High? Adjusting California’s Cannabis Taxes” — instead suggests that one alternative possibility the state should consider is doing away with cultivation taxes altogether and instead calculating rates based on a plant’s THC potency. The report does not, however, fully endorse a potency-based tax as a full solution but rather as something equivalent to the least worst option.

“No individual type of tax performs best on all criteria,” Petek states, while also noting that a potency-based tax would be optimal as a tool of harm reduction and that the current weight-based system is “generally weakest” of the four tax models analyzed in his report.

It’s important to clarify that the concept of harm-reduction — at least in the case of LAO’s report — is largely in reference to concerns over the potential dangers of consuming high-potency cannabis.

“The negative effects of cannabis use seem to be particularly high for high-potency products, high-frequency use, and youth use,” Petek asserts, though he is careful to qualify his analysis by noting that harm reduction by means of eliminating the unregulated market (a goal most easily accomplished by lowering or outright eliminating the cultivation tax, even temporarily) is also a valid approach to consider.

Unsurprisingly, news of LAO’s potency-based tax suggestion was met mostly with disapproval by industry leaders. Glass House Group’s Graham Farrar and California Cannabis Delivery Alliance president Zachary Pitts both expressed their displeasure with the concept to the Sacramento Bee, with the latter confessing he was “stunned” that the state would “think [this] is an acceptable solution for anything.”

The editorial board for the Los Angeles Times agreed. In an op-ed published on Dec. 29, they argue that “the sweet spot remains elusive” when it comes to taxing cannabis in California.

One of the main issues, as they see it, stems from the counterintuitive nature of attempting to achieve harm reduction through taxes when an untaxed market three times its size is currently operating throughout the state as well.

“Taxing THC to discourage harmful use is pointless if Californians continue to buy high-potency cannabis products tax-free from the black market,” the Times board writes.

The op-ed does not end with a firm prescription for the right course of action, which is rather fitting for a situation largely devoid of neatly-packaged answers. Instead, the Times board seems to have landed in the same quagmire as lawmakers: able to see the various issues surrounding California’s current taxes on pot but unable to thread together a solution that satisfactorily addresses them all.

Taxing by potency may be a concept to revisit down the road, but for now, to enact such a system would be a myopic fix to a problem of a much grander scale.

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