California's New Cannabis Tax May Kill Legal Market and Fuel Black Market

California officials just announced that taxes on legal cannabis will go up on January 1, 2020.

High state and local tax rates have already made legal businesses less competitive with the illicit market: Unlicensed retailers attract customers with lower prices, since illegal shops don’t pay any taxes.

In announcing the move, the California Department of Tax and Fee Administration (CDTFA) revealed that the cannabis excise tax will increase from 60% to 80% on New Year’s Day.

The California Cannabis Industry Association (CCIA) put out a response blasting the move.

"Today’s announcement by the California Department of Tax and Fee Administration to increase tax rates on the cannabis industry has left the membership of the California Cannabis Industry Association stunned and outraged," the organization wrote.

"As California’s regulated market spirals towards collapse from taxes on cannabis consumers, local bans, onerous regulations, slow growth, and a thriving illicit market, we believe that the CDTFA’s decision to increase tax burdens on compliant cannabis operators is counter to developing a safe industry. Widening the price disparity gap between illicit and regulated products will further drive consumers to the illicit market at a time when illicit products are demonstrably putting people’s lives at risk," the CCIA wrote.

Other industry insiders agreed.

“At the very least, this is tone deaf, given what the legal industry is going through right now and the lack of control of the illicit market,” Adam Spiker, the executive director of the Southern California Coalition, a Los Angeles-based cannabis trade group, said in a report.

The increase will also raise the state cultivation tax to adjust for inflation, raising those taxes as well:

• $9.65 from $9.25 for an ounce of flower, or an increase of 4.3%.

• $2.87 from $2.75 for an ounce of leaves, or an increase of 4.3%.

• $1.35 from $1.25 for an ounce of fresh marijuana plant material, or an increase of 8%.

The CDTFA’s markup rate is based on the wholesale average market price of cannabis, and can be adjusted each 6-months.

To date, legislative efforts to lower state taxes have fallen short, which has hurt the legal cannabis industry and given fuel to the black market as customers seek lower priced products.