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California Budget Officials Recommend Switching to Potency-Based Cannabis Taxes

December 20, 2019

California has earned a reputation for imposing exorbitant cannabis taxes, and it looks like there might be more changes in-store for 2020. The California Legislative Budget Office is floating a new concept to increase revenue for the state in the coming fiscal year. They want to implement potency-based cannabis taxes in an effort to stabilize the incoming revenue and deter consumers from abusing high-THC cannabis products.

Potency-Based Cannabis Taxes

The California Legislative Analyst’s Office released a report outlining their stance on the current cannabis tax structure. They suggested a tiered ad valorem tax to ensure the revenue would cover the cost of running state required cannabis programs. Budget officials are drawing inspiration from Canada and Illinois to improve the cannabis tax structure 

Canada’s tax structure imposes a C$0.01 tax per milligram of THC on top of sales tax. If California adopts potency-based cannabis taxes this will create different tax rates on products that contain above a specific potency level of THC. The state of Illinois is charging a 10% tax on all products below 35% THC such as dried flower, a 20% tax on infused marijuana products like edibles, and a 25% tax any product containing more than 35% THC, such as concentrates.

These type of potency-based cannabis taxes will probably raise the retail cost significantly, but the proposed plan would in turn eliminate the cultivation tax based on weight. This could balance out at the checkout counter for low level THC products but the price of concentrates would likely go up even more. 

California’s Marijuana Tax Structure

Many industry professionals have been consistently advocating for lowering California cannabis taxes but these calls have fallen on deaf ears. Currently, the 15% excise tax rate is on par with marijuana taxes in other legal states, however the state sales tax can reach 10% for recreational cannabis.  Local municipalities are permitted to charge their own taxes ranging from 5% to 20%. 

California licensed cultivators are charged a rate of $9.25 per ounce for dry flower or $2.75 per ounce for leaves. This tax rate changes come January 1st, when growers will see the cultivation tax raised from $9.25 to $9.65 on flower. Cannabis leaf per dry-weight ounce will be changed from $2.75 to $2.87, and live marijuana plants will go from $1.29 to $1.35.

Budget Report Tax Recommendations

The new California budget report evaluated 4 different tax structures and found that, while a potency tax would be helpful for reducing harmful use and raising stable revenue, the current model is better for generating the funds needed for administration and compliance.

A weight-based tax is also effective in raising lucrative revenues but is ineffective for reducing harmful use. The state budget agency found that a tiered tax structure is at best just average at reducing harmful use, raising stable revenues, and funding administration. 

Deputy director of NORML’s California chapter Ellen Comp can’t believe the state is considering raising cannabis taxes. She lamented that her organization, “expected them to recommend, or at least discuss, the benefits of lowering the state tax.”