California cannabis excise tax revenue tops the nation, study says

California — among nearly a dozen states with legalized recreational cannabis — ranks first among states that are taking in more cannabis taxes than in levies on booze.

But it comes at a time when the cannabis industry might not be pleased at how much it pays in taxes on its product. The Golden State collected $832 million from cannabis sales last year, according to a recent think tank report.

By a 7-to-4 ratio, the Washington, D.C.-based Institute on Taxation and Economic Policy released April 19 a report highlighting how a majority of the 11 states where cannabis is legal collected more in excise taxes on the drug than what was paid on alcoholic beverages. The 11 states cashed in taxes totaling nearly $3 billion on cannabis sales.

If and when pot becomes legal nationwide, the institute’s Research Director Carl Davis believes “prices will come down a lot” for the fast-growing industry.

As the largest market of the 11 states, California voters approved adult, recreational use in 2016.

“It’s what we’ve been saying the whole time. The industry is a major economic contributor. At the same time, we need to make sure (cannabis) businesses will survive. There’s a strong push for tax reform,” California Cannabis Industry Association Executive Director Lindsay Robinson said.

Taxation on cannabis on the state and local levels has been a growing complaint in the cannabis industry. Cannabis business operators feel they’re overtaxed and face many challenges including too much product with a lack of places to sell it and a thriving illicit market that competes for the slice of the market pie.

Robinson’s trade group also released a report by the Reason Foundation this month titled “The Impact of California Cannabis Taxes on Participation Within the Legal Market.” This report examines the relationship between how imposing fewer taxes leads to better industry growth.

The passage of Prop. 64 led to an initial wholesale tax on cultivation at $9.25 per ounce. After inflation adjustments, that rate has risen to $10.08 the state collects, beyond the other hits on the substance through the supply chain. The retail excise tax assessed stands at 15% of the estimated value of a retail sale to the consumer. In Sonoma County, indoor canopy cultivation operations must shell out $12.65 per square foot in taxes. Outdoor growers pay $2.25 per square foot, based on county data.

All in all, the state has collected a cumulative $3.44 billion in cannabis taxes from January 2018 to December 2021.

“California’s tax rates are high compared to other states with mature markets”…and that “policymakers may wish to consider a reduction in California’s cannabis taxes for reasons beyond economic or fiscal impacts,” the study concludes. It suggests high taxes and fewer dispensaries push “consumers and producers into the illicit market.”

Shryne Group President Tak Sato opened a Stiizy cannabis dispensary two weeks ago in Sonoma County and plans to continue with that growth to launch 15 more.

“The industry has seen tremendous growth as consumers have learned how to treat pain and insomnia with cannabis. It’s now seen as a legitimate business, but sure, the taxes need to be worked on. Things just take time,” Sato said, addressing a common industry complaint the drug still considered illegal by the feds is overtaxed where it's legal.

Within the state’s total number of cannabis retailers including delivery services (1,331), Santa Rosa has 21 dispensaries, according to the Reason Foundation study using California Department of Cannabis Control data. That’s about a fifth of what Los Angeles has.

The Reason Foundation study also recommends repealing the suspension of the cultivation tax, reducing the retail excise taxes and promoting more participation in the retail market. This advice has been promoted before in letters to lawmakers and Gov. Gavin Newsom, who was due to release a revised budget on May 13.

“I hope we hear something (in relief) from that,” Robinson said.

Susan Wood covers law, cannabis, production, tech, energy, transportation, agriculture as well as banking and finance. For 27 years, Susan has worked for a variety of publications including the North County Times, Tahoe Daily Tribune and Lake Tahoe News. Reach her at 530-545-8662 or susan.wood@busjrnl.com