The legalisation of weed has created opportunities for governments and local authorities to raise huge sums of money in taxes from cannabis sales. Ironically, however, this can also play into the hands of unlicensed dealers, as high tax rates make it difficult for many craft growers to gain a foothold in the legal market. Creating a successful and sustainable cannabis industry therefore depends on finding a fair level of taxation that meets the needs of all parties.
Cannabis Taxes in the US
The high taxes placed on cannabis products in the US reflects a need to cover the societal impacts of using weed, and helps to fund educational campaigns and treatment programs for kids or problematic users. Many states also use cannabis taxes to invest in communities that have been disproportionately affected by the War on Drugs. This includes initiatives such as providing professional training to people from minority communities and subsidising cannabis business licenses for certain demographics.
The state of New York, for instance, has pledged to reinvest 40 percent of all cannabis taxes in these communities, while California plans to set aside $50 million per year for this purpose. Clearly, this is an appropriate and essential use of funds, and taxes need to be high enough to cover the cost of these social equity programmes.
The challenge, however, lies in finding the sweet spot that allows these goals to be met without crippling the industry. In the case of California, for example, over $800 million were collected in cannabis taxes in the 2020/21 fiscal year, with cities like Los Angeles charging retailers 34.5 percent on every gram sold. As a consequence, many traders simply can’t afford to stay in business, so it’s hardly a surprise that the illegal market continues to dwarf the licensed industry, wracking up an estimated $8 billion in illicit sales last year[i].
In Seattle, meanwhile, cannabis sales are taxed at a rate of 47.1 percent – the highest in country – while Denver is currently considering raising its cannabis retail tax from 26.4 percent to around 33 percent. The proposed hike – which will be put to a vote in November – would pay for after-school reading classes for children in the Mile-High City. While this is obviously a worthy cause, many would argue that it shouldn’t be the cannabis industry’s responsibility to foot the bill for the initiative.
Examples like this illustrate a major problem with the current system, as politicians are using cannabis taxes as a pot of gold that can be raided to fund services that should really be paid for by other means.
Fortunately, however, some local councils are waking up to the fact that continual tax rises are unsustainable and will eventually destroy what is a very important industry. In Long Beach, California, for example, councillors have recently committed to subsiding eight new dispensary licenses for minority owners, yet rejected a proposed increase in cannabis taxes as a means of funding the initiative. Recognising the difficulties this would create for the very businesses they are trying to help, the council has instead decided to pay the shortfall using grants and other sources.
Cannabis Taxes In Canada
The problem of unrealistic cannabis taxes is becoming increasingly visible in Canada, where recreational weed has now been legal for three years. When the government first drafted its legislation, cannabis was expected to sell for between $8 and $10 (CAN) a gram. Based on this assumption, a flat excise tax of $1 per gram of cannabis sold was introduced.
In the years since, large companies with plenty of financial reserves have become embroiled in a race to the bottom, slashing their prices in order to dominate shelf space in legal dispensaries, despite the massive short-term losses that such an approach entails. As a consequence, retail prices have dropped to around $4.50 a gram, meaning that excise tax now sucks up 20 to 30 percent of all revenue.
While this may be tenable for large corporations, craft growers have been falling by the wayside as a direct result of the country’s high cannabis taxes. Smaller businesses without major cash reserves simply can’t afford to operate in the legal market, and many illicit dealers who would like to go above board are deterred from doing so.
In response, a group of microcultivators, craft growers and small businesses have launched a campaign called Stand For Craft, which calls on the Canadian government to reform cannabis taxes. According to the group, many of these smaller companies now pay more in excise tax each month than they do on their teams’ salaries.
They therefore ask that the $1 per gram flat rate be removed and replaced by a floating percentage, while also calling for a four-tiered system that sets different rates for different types of business, with larger corporations paying more tax than small independent traders.
Elsewhere, Uruguay has the longest-running legal cannabis market, having allowed recreational sales since 2013. Unlike its north American counterparts, however, the country imposes no taxes on cannabis sales other than those that are placed on other agricultural goods. That being said, the South American nation only allows a handful of companies to grow and sell weed, while the state controls the retail price, so taxation is much less of issue here than it is in countries with open markets.
With more governments expected to legalise recreational cannabis sales in the coming years, though, the US and Canada serve as highly useful case studies that should be looked at very carefully in order to devise appropriate taxation policies.