Marijuana Law, Policy & Reform

Editor: Douglas A. Berman
Moritz College of Law

Tuesday, December 24, 2019

"How High? Adjusting California's Cannabis Taxes"

Taxes051816The title of this post is the clever title of this interesting new report from California's Legislative Analyst's Office released last week.  (Hat top: Crime & Consequences.)  Here is part of the report's "Executive Summary":

Proposition 64 (2016) directed our office to submit a report to the Legislature by January 1, 2020, with recommendations for adjustments to the state’s cannabis tax rate to achieve three goals: (1) undercutting illicit market prices, (2) ensuring sufficient revenues are generated to fund the types of programs designated by the measure, and (3) discouraging youth use.  This report responds to this statutory requirement and discusses other potential changes to the state’s cannabis taxes.  While this report focuses on cannabis taxes, nontax policy changes also could affect these goals.

Proposition 64 established two state excise taxes on cannabis.  The first is a 15 percent retail excise tax, effectively a wholesale tax under current law.  The second is a tax based on the weight of harvested plants, often called a cultivation tax.  (The measure authorizes the Legislature to amend its tax provisions without voter approval, but the scope of this authorization is unclear.)...

We analyze four types of taxes: basic ad valorem (set as a percentage of price, such as the current retail excise tax), weight-based (such as the current cultivation tax), potency-based (for example, based on tetrahydrocannabinol [THC]), and tiered ad valorem (set as a percentage of price with different rates based on potency and/or product type).  Our analysis focuses primarily on three main criteria: (1) effectiveness at reducing harmful use, (2) revenue stability, and (3) ease of administration and compliance.  No individual type of tax performs best on all criteria.  For example, tiered ad valorem and potency-based likely are best for reducing harmful use, but basic ad valorem is easiest to administer.  Given these trade-offs, the Legislature’s choice depends heavily on the relative importance it places on each criterion.  That said, the weight-based tax is generally weakest, performing similarly to or worse than the potency-based tax on the three main criteria....

Any tax rate change would help the state meet certain goals while likely making it harder to achieve others.  On one hand, for example, reducing the tax rate would expand the legal market and reduce the size of the illicit market.  On the other hand, such a tax cut would reduce revenue in the short term, potentially to the extent that revenue could be insufficient.  Furthermore, lower tax rates could lead to higher rates of youth cannabis use.  With a thriving illicit market, however, much of the cannabis used by youth could avoid taxation.  Where possible, this report provides quantitative estimates of the short-term effects of rate changes....

We view reducing harmful use as the most compelling reason to levy an excise tax.  Accordingly, we recommend that the Legislature replace the existing retail excise tax and cultivation tax with a potency-based or tiered ad valorem tax, as these taxes could reduce harmful use more effectively.  If policymakers value ease of administration and compliance more highly than reducing harmful use, however, the Legislature might prefer to keep the existing retail excise tax.  In contrast, we see little reason for the Legislature to retain the weight-based cultivation tax....

If the Legislature decides not to adopt a potency-based or tiered ad valorem cannabis tax, we nevertheless recommend that the Legislature eliminate the cultivation tax. In this case, we recommend that the Legislature set the retail excise tax rate somewhere in the range of 15 percent to 20 percent depending on its policy preferences.

https://lawprofessors.typepad.com/marijuana_law/2019/12/how-high-adjusting-californias-cannabis-taxes.html

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Comments

Doug, Just saw this and just started working on a response.

The Report does not analyze or mention the saving grace of every weight-based cannabis tax to date: That’s the existence of categories that approximate potency or value, avoiding the difficulty of measuring either.

Multiple categories of product are involved in the tried and true method of taxing intoxicating cannabis by weight, dating back to the 19th century, when the British Indian Hemp Drugs Commission reported on categories of weight-based cannabis taxes in use in 1893. In Bengal, for example, there were six categories: Bhang, Charas, and four categories of Ganja: Choor, flat, round, and Garbjat. Tax rates based on weight ranged from 8 rupees per ser (a little less than a kilogram) for Charas and Choor Ganaj to one-half rupee (eight annas) per ser for Bhang.

Every state with a statutory weight-based tax has at least three categories of products that bear different weight-based tax rates. These states are Alaska, California, and Maine.

In Alaska, “Mature bud/flower are taxed at $50 per ounces and trim is taxed at $15 per ounce. A new rate has been added at $25 per ounces for bud/flower that is considered immature or abnormal.” California, for instance, has three categories, with weight rates adjusted for inflation at these current levels: flower, $9.65 per ounce; leaves, $2.87 per ounce; and fresh cannabis plant, $1.35 per ounce. New categories can be created by regulation as needed.

Posted by: Patrick Oglesby | Feb 19, 2020 7:25:10 AM

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