.Taxing THC: Federal legalization of cannabis could make costs in California much, much higher

We might be at least a few years away from federal legalization of cannabis. Lawmakers on both sides of the aisle are resistant—though of course Republicans, with some exceptions, make for the biggest obstacle. At this moment, there just aren’t enough votes in the Senate to pass a bill. If the Republicans retake the House in 2022, as current forecasts have it, that will likely set the effort back by at least another two years.

Still, the trend seems to be in favor of legalization, and most observers seem to think it will happen sometime this decade—assuming that America, and planet Earth, still exist.

It could happen sooner than that if the politics align. For now, we are at an impasse, but legislation has been introduced, and from it, we can see where the starting point is for Congressional proponents of cannabis reform, most of them Democrats. The consensus among analysts seems to be that if the legalization bill in the Senate—the House has already passed a similar bill—were to pass in its current form, it would be less than ideal for both the cannabis industry and consumers. Just for starters, legal weed would become even more expensive than it already is.

New Frontier Data, an analytics firm focused on the weed business, last week issued a report saying as much. Titled “Up in Smoke? Analysis of the Cannabis Administration & Opportunity Act,” the report concluded that the bill “would advance the legal cannabis industry, enabling businesses to operate and thrive in legal, regulated environments, while also benefiting local economies.” But at the same time, New Frontier warned, the bill’s proposed federal taxes on pot would “result in a comparatively less competitive market than the illicit one.”

In other words, it would make a bad situation, like the one we have in California, even worse. High prices and lack of availability in many areas of the state have resulted in legal pot taking only about a fifth of the total market. The vast majority of weed sold in California is sold illegally, thanks to high taxes, overregulation and home rule, which allows localities to deny licenses to cannabis businesses.

Local governments are getting on board, but slowly. According to Hirsch Jain, a cannabis consultant quoted recently in by the trade publication MJBizDaily, in the past two years the number of municipalities and counties issuing cannabis licenses has risen from about a third of the total to about 40%. But there are still only 745 full-service dispensaries in the state—not including delivery services. To really serve demand, he told MJBizNews, “there should be between 4,000 and 5,000.”

Delivery is legal across the state, but, especially for people in remote areas, it’s often just a lot easier to buy weed from the dude down the street. It’s also way cheaper, given California’s high tax rates. On top of a cultivation tax and a normal sales tax, every legal weed sale is slapped with a 15% state excise tax, plus whatever local taxes are levied. The effective total tax on legal weed can be as high as 40%.

The Cannabis Administration & Opportunity Act, sponsored by Senate Majority Leader Chuck Schumer, Senate Finance Committee Chairman Ron Wyden, and Sen. Cory Booker, all Democrats, would impose a further tax that would after a few years reach 25%. It’s likely that California will by then have lowered its tax rate, though probably not by nearly enough to offset the effect of the new federal tax. The proposed levy would “significantly increase the cost to consumers,” New Frontier concluded.

The report also examined the regulatory aspects of the bill, and found that they would be onerous. Stringent, though often necessary, regulations in California and elsewhere are already dissuading would-be entrepreneurs from entering the business. Schumer’s bill would only exacerbate that problem, meaning that only large, well-funded businesses would be able to thrive.

“Once the costs of regulatory compliance and operational expenses are factored in, the environment for cannabis businesses under the proposed legislation would be encumbered, especially for small or under-capitalized businesses,” said Giadha A. DeCarcer, New Frontier’s founder and executive chairperson.