Study: California needs to eliminate cultivation tax so legal cannabis can compete with the illicit market

California's high cannabis taxes, as much as $90 per ounce, are hurting farmers and businesses while the illicit market captures two-thirds of cannabis sales. 

LOS ANGELES, May 6, 2022 /PRNewswire/ -- California could increase legal cannabis sales and bring in 123% more in total monthly cannabis-related tax revenue by 2024 by eliminating its cultivation tax, according to a new study by Reason Foundation, Good Farmers Great Neighbors, and Precision Advocacy.

"High taxes are undermining California's legal cannabis market," says Geoffrey Lawrence, director of drug policy at Reason Foundation. "California could double monthly cannabis tax revenues by 2024 by eliminating the cultivation tax. Without the cultivation tax, our data show lower cannabis prices would increase sales of legal products, increasing the state government's general sales tax revenue and more than replacing losses from the eliminated cultivation tax."

Due to high taxes, California's legal cannabis market has failed to meet expectations and is just one-third the size expected based on its population and adult usage rates.  Nearly two-thirds of cannabis sales in California are still taking place on the illicit market, the study estimates.

California's state and local taxes on legal cannabis are as high as $90 per ounce, or $1,441 per pound. By comparison, cannabis taxes average $340 per pound in Oregon and $526 a pound in Colorado. Due to lower taxes and greater access to legal products, residents in Oregon spend 378% more per capita on legal cannabis and residents of Colorado spend 335% more per capita on legal cannabis than Californians spend, the report shows.

"We are experiencing first-hand a serious price compression in the California supply-chain in part as a result of the illegal market, high taxes and fees and a patchwork of inconsistent local taxes driving legal operators to the brink of a financial cliff," says Amy O'Gorman Jenkins, president of Precision Advocacy and legislative advocate of the California Cannabis Industry Association. "We cannot allow the largest cannabis market in the world to fail. This study provides a roadmap of tax policy solutions for the governor and state legislative leaders to consider immediately."

"California's cannabis farmers are experiencing the biggest challenges of their time. Many farmers are considering going fallow this year. Busy Bee Organics, one of the first woman-owned, sun-grown farmers in Santa Barbara, has already declared she's not planting this year," warns Sam Rodriguez, policy director of Good Farmers Great Neighbors. "California's cultivation tax is regressive and has only contributed to uncertainty about the future of the state's cannabis farmland economy and whether it can survive. The immediate elimination of the cultivation tax would be a first step in addressing critical issues impacting the state's legal cannabis market from seed to sale."

The study also recommends reducing retail excise taxes and encourages policies that could incentivize California's local governments to stop banning the sale of legal cannabis products. Oregon has one legal cannabis retailer for every 6,145 residents and Colorado has one legal retailer for every 13,838 residents while California has just one legal cannabis retailer for every 29,292 residents, the study finds.

Reason Foundation is a non-profit think tank that advances a free society and promotes free minds and free markets.

Good Farmers Great Neighbors is an alliance of mostly outdoor, sun-grown cannabis farmers and auxiliary businesses throughout the central coast.

Precision Advocacy is a lobbying firm with over two decades of experience in state legislative and regulatory development, and public affairs at the state and local levels.

SOURCE Reason Foundation