High Taxes Killing California Recreational Marijuana Tax Collection

California expected state and local tax bonanza from legalizing recreational marijuana sales is drastically under-performing forecast due to a high tax burden.

The California Department of Tax and Fee Administration reported that collection for the state’s first three months of legal sales that began on January 1, only produced $32 million of excise taxes and $2 million in cultivation tax on about $213 million in sales.

The voter-approved Proposition 64 tax collection trend is running at about a third less than the recently revised down forecast of $175 million for the first 6 months of 2018 and at about 50 percent less than the $630 million expected in the first 6 months of 2019.

The State of California Bureau of Cannabis Control originally projected that California’s $2.79 billion of illegal cannabis sales in 2017 would grow when legalized by the same 28 percent compounded rate for the roll-out of Internet broadband access. The BCC initially estimated that the first year legalized recreational pot would generate $6.6 billion in sales, produce $1 billion in taxes and support 100,000 private sector jobs in 2018.

But on top of the state’s 15 percent excise tax and about 1 percent cultivation tax, legal marijuana is subject to an average of 9.5 of a percent in sales tax and a 10 percent local tax for cities like Los Angeles. That works out to a tax burden of 38.6 percent for the privilege of buying legal marijuana.

But on top of legal marijuana’s huge state and local taxes, IRS federally taxes legal marijuana sales on revenue, minus only the cost of cultivation. Unlike every other retail business, the IRS does not allow company deductions for rent, advertising, and payroll.

According to the High Times website, the marijuana tax revenue shortfall is motivating cities like Los Angeles to crack down on “black market” businesses.

After a February Los Angeles raid on a high visibility illegal dispensary, Los Angeles Police Department Deputy Chief John Sherman told HT: “We have several hundred, probably somewhere in the neighborhood of 200 to 300, of what we believe are these unlawful and illegal establishments operating throughout the city.”

With the state, cities and legal pot businesses complaining that exorbitant tax rates are hurting tax collection, the California State Assembly’s Committee on Business and Professions voted unanimously on May 9 to move AB-3157 that would lower the legal excise tax on legal pot sales from 15 to 11 percent.