California Cannabis tax collections are down 20% over two years
Debate Over California's Cannabis Taxes Intensifies as Groups Clash Over Raising Rates.
California’s cannabis taxes have long been attacked for being unsustainably high, to the point that even state Attorney General Rob Bonta has called for lowering the burden. However, at least one powerful group in Sacramento is calling on the government to raise pot tax rates even higher.
A coalition of nearly 60 nonprofit leaders is proposing increasing pot taxes to fully fund child care for low-income youth as well as substance abuse programs, according to a letter sent last month to Gov. Gavin Newsom, as well as the state Senate president pro tem and the state speaker of the Assembly. Lynn Silver, a program director at the Public Health Institute and a signatory on February’s letter, said in an email to SFGATE that pot taxes are not too high and increasing tax rates would benefit the state by increasing investing in necessary programs.
The letter is now setting up a fight with the cannabis industry and some economic experts, who say raising tax rates will have the opposite effect: further reducing overall cannabis tax revenue by making legal cannabis more expensive and driving customers to the illicit market, where they don’t pay any taxes at all.
“We should be focusing on how to increase the overall legal, regulated sales,” said Emily Paxhia, a San Francisco-based cannabis investor, in an email to SFGATE. “The problem will fix itself and we will see both a thriving market and improved and growing tax revenue to the state.”
The debate over the future of cannabis taxes comes as the size of the legal industry shrinks and tax revenue from legal weed sales continues to fall. Cannabis tax collections are down 20% over the last two years, according to the latest data released last month by the California Department of Tax and Fee Administration. The state collected $1.08 billion in 2023, down from $1.36 billion in 2021.
This falling cannabis tax revenue has blown a $150 million hole in the state budget, according to February’s letter from the nonprofits. The budget shortfall is putting state programs at risk that depend on cannabis tax for funding, including programs that fund low-income child care, youth substance abuse programs and environmental cleanup programs, according to February’s letter. Proposition 64, which legalized cannabis in 2016, linked pot tax revenue directly to these programs.
Silver said funding these programs fully should take precedence over reducing taxes to help the cannabis industry. She also said high taxes are not hurting the industry, and instead wrote that the legal market is struggling because of “vast overproduction in both the legal and illicit markets.” Silver added: “Lower taxes won't solve an illicit market driven by overproduction and will just serve to increase industry profits.”
Some economic analyses have found that high pot taxes are hurting the legal market and sending customers to illicit cannabis stores, where pot is cheaper and tax-free. Peter Rupert, an economics professor at University of California Santa Barbara, agreed with this assessment and said increasing tax rates for cannabis will likely reduce overall tax revenue for the state.
“Consumers will buy less at the higher price and more ... from the illegal market,” Rupert said in an email to SFGATE.
California already made one major change to cannabis taxes in recent years, removing a cultivation tax in 2022 that pot growers said was unfairly regressive and putting them out of business. That measure was described as “revenue neutral” at the time because it increased the excise tax rate by levying it at the point of retail sale instead of on wholesale retailers. But two years later, tax revenue is falling, and no one appears to be happy.
