As of January 1st, 2020, 11 states and Washington D.C. have legalized recreational cannabis use, while New York, Arizona, New Mexico, and New Jersey are all pushing to get legal recreational Cannabis use on the 2020 ballot.
But what does legal cannabis mean for the state and its residents? Most states charge both an excise tax and a wholesale & cultivation tax, which can provide a boom for the state economy. But, if a state raises the taxes too much, it can drive recreational users to purchase cannabis from the black market, decreasing the state’s tax revenue. State taxes can greatly influence the recreational cannabis industry, by either creating a profitable market to enter into, or driving customers away through excessive taxation.
Here’s a look at two new Cannabis taxes in 2020 and what they mean for the industry:
California Cannabis Taxes Increase January 1, 2020
On January 1st, 2020, California increased the wholesale tax on cannabis from 60 percent to 80 percent as well as the cultivation tax rates. In addition to the taxes on retailers, customers of medical cannabis are charged a 15 percent excise tax. This increase in taxes is a catch-22 for local businesses; they can either keep their prices the same and cut down on already-slim profit margins, or raise prices and drive customers to a booming Cannabis black market.
The black market for cannabis in California is booming, with some estimates saying that as much as 80 percent of the cannabis market is illicit. California is the only state which has a cannabis black market that is growing faster than its legal cannabis market. This increase in taxes puts greater pressure on recreational cannabis store owners that were already dealing with high taxes and a booming black market.
Cook County, Illinois Will Increase Cannabis Tax by 3 Percent
On July 1, 2020 a Cook County retail tax will take effect that will tax recreational cannabis retailers 3 percent. In Cook County, where Chicago is located, taxes on cannabis products could be as high as 40 percent. According to the Chicago Sun-Times, county commissioners passed the tax in order to pay for potential increases in health and policing costs.
While the tax only applies to recreational cannabis retailers, the burden of the tax will likely be placed on the consumer. Chicago will have the second highest tax rate among cities where recreational cannabis use is legal, behind only Seattle. Couple the high tax rate with cannabis shortages, and many consumers may find it both easier and cheaper to get their cannabis products from the black market.
What can businesses and consumers do?
One way that recreational cannabis retailers can increase their profit margins despite higher taxes would be to increase their efficiency. Using seed to sale software can increase the efficiency of a business throughout the cannabis supply chain, lowering business costs and combatting cannabis shortages. This is a win for both businesses and consumers, providing stable price-points as well as a constant supply.
Consumers can make a difference by petitioning local and state officials to lower recreational cannabis taxes. They can also make a difference by only purchasing cannabis from legal retailers. Buying from your local legal cannabis retailer will help show support for the cannabis industry.
