Taxes are a necessary part of the legal cannabis market and an incentive for governments to legalize. On anything, the amount of tax affects our buying habits, and in cannabis, we are at a tipping point. Cannabis operated in a very successful illicit market for a long time, and that means it’s easy to go back to if that point is reached. The illicit market is still thriving, and we are dangerously close, in California, for the legal cannabis market to collapse and to move back underground.
License holders in California are already struggling with the combination of the over taxation of cannabis and the growing hemp market. Tax on the retail transaction at a dispensary is currently a city cannabis tax (sometimes 10%), with a 15% state excise cannabis tax compounded on top of that and then sales tax (could also be 10%) compounded last. That’s what they mean when people talk about paying tax on tax on tax in California, and it means the total taxes on cannabis are already almost 40% in many cases (San Jose + several cities in LA County.) . We’ve known for a while that the state excise tax is likely to increase to 19% in July of this year, and experts predict that many license holders will need to exit the market if/when that happens.
San Diego is currently looking to find ways to address our budget crisis, and it was announced recently that Mayor Todd Gloria is suggesting a 2% increase to the city’s cannabis tax. This is also in response to declining tax revenue from cannabis, which demonstrates the challenges in a new industry that should be growing. But cannabis can’t grow as businesses should because operators face challenges normal businesses don’t face. They can’t take normal business deductions, get standard loans, or bank at common banks, and retailers are operating on the thinnest of margins, many unable to pay their vendors, taxes, and most operating without profit.
It’s clear that our government at all levels doesn’t get it. We have taken steps backward at the federal level with rescheduling paused and uncertain. We have challenges at the state level that will only get worse if the excise tax increase goes through. We have challenges at the city level where these ridiculous tax hikes are proposed. Do they want some tax money or no tax money? That’s what they don’t understand. Cannabis will go to the illicit market and the hemp market, and no one will be better off because of it. The regulated market has the safety and accessibility that we need, but with a complete lack of understanding at any level, how can we get there?
Back to our local situation in San Diego. This announcement came on the heels of the city’s social equity program getting cut last year. We were given funds from the state for the program, and Gloria decided to give the money back and cut the program. It’s devastating to a community that has been punished for plant medicine to be denied the assistance they deserve to grow this industry in the right way.
Can the cannabis industry survive the 2% tax increase in the city of San Diego? I don’t think so. I think retailers in the city would start to close because consumers will purchase from surrounding cities already with lower cannabis taxes. But does this even matter if the 19% state tax is implemented? I don’t think so. There are too many other options, and people will stop buying from licensed stores in California. There’s always a tipping point with taxes, and we are right there about to see if we can persist.
Dina Nagib is the Founder and Principal Consultant of Grass Goddess Consulting, where they empower dispensaries with data-driven insights. Utilizing biotech industry experience, they assist businesses with making informed decisions to thrive in the ever-evolving cannabis landscape. Leveraging strategic partnerships, they help retailers select software, implement it, and analyze data to propel their growth.
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