A new tsunami of regulations and tax requirements is about to reshape California’s legal cannabis marketplace, influencing where it grows, the production of edibles, and what just about everything will eventually cost. Marijuana consumers in the state should prepare for severe sticker shock when retail sales start in 2018.
At retail level currently, consumers in Los Angeles pay roughly $35 for a small bag of high quality medical marijuana, which is about enough for five or six joints. However, when recreational sales begin and the new tax laws kick in next year, that same little bag will cost as much as $60 at retail counters in the state’s new marketplace.
That astronomical increase equates to about 70 percent at the high end, and according to industry experts, the cost of medical marijuana will likely rise too, albeit not as shockingly. Not even the debris used to make bottom-shelf products will escape the state’s all-encompassing taxes, including the trimmings used to lace foods, ointments, concentrates, and candies with cannabis.
Now, manufacturers pay growers roughly $50 for a trash bag of leftover clippings, but in January, those leaves will generate $44 a pound in taxes for the state. Donnie Anderson, a medical retailer and grower based in Los Angeles, believes that the high rate of state taxation is “just going to help the illicit market thrive.” The state should be doing more to cut costs, especially for patients, many of whom are simply unable to absorb any further price increases.
Rising tax rates is just one of California’s many plans to transform its decades-long medical and illegal markets into a single, well-regulated, multibillion-dollar economy, or one massive legal pot shop. The sheer scale of reshaping such an expansive illegal market into legal industry is one not seen since the prohibition of alcohol ended in 1933.
Change has been slow, however. It is unlikely that cities will be ready to issue operating licenses to marijuana businesses by the January 1 deadline. In fact, most are behind schedule, and businesses will need these licenses to operate in the emerging market. There are also major systematic flaws in the regulation of distribution, particularly from field to manufacturer to laboratory to retail outlets.
The road to a legal pot trade started when voters in California approved Proposition 64 last year. The ballot measure paved the way for recreational sales of marijuana to adults. It had nothing to do with medical marijuana, which has been legal in the state for two decades already. When January comes, state taxes will include a levy of 15 percent on all cannabis purchases, including medical products.
However, local governments have the authority to add their own taxes onto sales and cultivation too, over and above those the state already demands. This has created a patchwork of extremely confusing tax rates that change from city to city and county to county. In Salinas, for example, San Francisco’s southeastern agricultural hub, voters approved cutthroat taxes.
Marijuana businesses in Salinas will eventually pay tax of $25 per square foot of cultivation space, a rate that generates about $1 million per acre for government. In the north, however, in the cannabis-growing heartland of Humboldt County, tax rates will be a huge bargain in comparison: Tax will range between $1 and $3 per square foot of growing space.
Some estimate that Humboldt County has nearly 15,000 illegal marijuana grows. Supervisor Ryan Sundberg is particularly eager to design a tax scheme that encourages growers to join the legal marketplace and comply with environmental and industry regulations. This would mean that taxes on a seven- or eight-pound bag would exceed current market prices by as much as six times.
Having such high taxes will force massive price hikes or, perhaps just as possible, render the entire market valueless. Ryan Jennemann of Los Angeles-based THC Design, which makes concentrated oils from cannabis leaves, said of the market, “All it would become is compost.” Governments are struggling incessantly to fund their massive and expensive projects, and they need tax money to do it.
Looking to generate a cascade of new funding, governments want to cash in on the lucrative promise of commercial marijuana sales, which financiers predict could top $1 billion statewide eventually. However, higher business and consumer taxes provide an advantage for the state’s illegal market instead. Those operating legally are demanding aggressive shutdown of rogue operations.