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New Report Says California Will Institute a 40 Percent Tax on Marijuana

On January 1st, California will officially legalize recreational marijuana. Obviously when the largest state in America with one-eighth of the country's populations makes such a drastic move, there will be some growing pains. But it turns out cannabis consumers will be feeling the pain in their pockets.

A report from Fitch Ratings says that taxes on marijuana in California could reach as high as 45 percent in some areas of the state. Customers will pay a sales tax around 23 percent, a state excise tax of of 15 percent and then a local sales tax that can be anywhere from 7.25 percent to 9.25 percent. When added together, that's nearly 50 percent in taxes on marijuana products when legalization begins. In addition, dispensaries will pay anywhere from 1 to 20 percent of their revenue to the state government, and farmers will also have a $9.25 tax on every ounce of flower they produce.

These rates are considerably more than in most states that have already legalized marijuana. Colorado and Nevada's tax rates are at 36 percent, while Alaska and Oregon have only 20 percent rates. Only Washington is comparable, with a tax rate nearing 50 percent.

The high tax rates in California are worrisome because it may mean that legalization of marijuana will not change anything, and people will continue getting cannabis from the black market because it's far cheaper. 

"California's black markets for cannabis were well established long before its voters legalized cannabis in November 2016 and are expected to dominate post-legalization production," said the Fitch report.

Experts say these tax rates could actually sabotage legalization. While Fitch says these tax rates will allow the black market to remain competitive with the recreational one, some say it could actually lead to more people embracing the black market.

"If taxes increase the price of cannabis beyond a certain point, the legal market becomes less competitive than the illicit market and then consumers become less likely to make the transition from the illicit market to the legal market," said John Kagia, an analyst for New Frontier Data.

To be fair, Colorado, Oregon and Washington all had to play around with their tax structure until they found one that worked. So it may just be a case that California goes too aggressive early on, and lowers rates if legalization isn't the instant success they planned.

But when you take this into account with all the other stories about California's messy legalization plans, it's starting to look like the state may need a little more time to iron out the kinks in the plan.


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