Why Cannabis Taxes Will Be Hard To Predict
When a state legalizes cannabis, it also needs to decide how to tax the new industry. Should taxes be levied on the sale price of marijuana, or maybe its weight, or potency? How high should taxes be? Here are some ways the financial, social and competitive factors of this young and complicated industry can influence tax decisions:
Cannabis availability can put upward or downward pressure on taxes. When neighboring states begin selling legal cannabis, there’s downward pressure on tax rates because policy-makers don’t want residents driving over the border for their purchases and spending their tax money there.
On the other hand, as a state’s cannabis industry expands, product prices come down as supply increases, and as more businesses open and compete for customers. Raising taxes on the now-less-expensive products may be feasible to do without harming the marketplace, said Richard Auxier, co-author of The Pros and Cons of Cannabis Taxes, a study by the Tax Policy Center a joint venture of the Washington D.C. think tanks, The Urban Institute and The Brookings Institution.
The total price paid for legal marijuana needs to stay near or below the price of illegal/black market product to give consumers the incentive to buy the product lawfully. The tax paid on the purchase of a legal cannabis product like an edible or pre-roll is a factor in its total price and needs to be taken into account.
Policy makers may also want to target taxes for social good, for example, increasing taxes on the most potent products to try to keep younger users from buying them. In New York for example, cannabis flower will be taxed half a cent for each milligram of THC. Concentrates will be taxed eight tenths of a cent for each milligram of THC. Edibles will be taxed three cents for each milligram of THC. This amount is added to the percent-of-price sales tax of thirteen percent.
Taxes based on sales price, weight, or potency are all dials that policy-makers can spin up or down said Auxier. The latter two are more onerous to track and manage. Business owners in cannabis already have a number of challenges that others don’t, like a lack of banking options, said Auxier, so there’s a push to keep taxes simple. “You want to develop a healthy marketplace,” he said.
Another tax implication unique to the cannabis industry is that its companies can not deduct typical business expenses from their federal tax burden because cannabis is illegal at the federal level. That makes doing business more expensive.
Still, New Frontier Data estimates the industry will continue to grow with sales of $57 billion by 2030. Other estimates are even higher, so tax rates will have significant implications for the state governments collecting them.
According to Auxier, government officials may need to reevaluate cannabis taxes each year as the marketplace in their state develops.