Cannabis Taxes and the Illicit Market

For years now the California commercial cannabis community has argued that taxes are too high.  With declining pot prices, slackening consumer sales at the retail level, an impending tax hike, and ever-expanding illicit market production things have come to a fever pitch recently.  Industry insiders are lobbying governor Newsom for tax reform and he is listening.  Newsom has publicly stated that he supports reform and his spokeswoman, Erin Mellon recently stated that the “current tax construct is presenting unintended but serious consequences” in reference to the continued strength of the underground market.[1]  

Given higher regulatory costs and a heavy tax burden, legal companies have a hard time competing with illicit market operators not burdened with the same cost structure.  Despite more cannabis tax dollars being directed toward enforcement, the underground or unregulated market continues to thrive.  As mentioned last week, the sheriff’s office estimates approximately 4,000 illegal farms in Humboldt alone.  Across the state, reports are the same.  For example, Southern California has seen a massive influx of illegal operators launching huge scenes in the California desert around areas like Palmdale and others.

With millions of pounds produced, in many cases, with cheap or forced migrant labor, illicit operators are flooding the market and putting downward pressure on prices.  Unfortunately, when given the opportunity to purchase more expensive products through legal channels, or much cheaper ones on the street, many consumers opt for the latter.

Both retailers and cultivators are feeling the pain.  A recent report from California’s Legislative Analyst’s Office notes that on average, retail pot shops pay a tax rate of 27% based on the state excise tax and tax on price markups alone.  Add to that business operating costs, payroll taxes, workers comp, and local taxes it’s clear to see the legal market is facing an uphill battle with respect to competing with the black market where zero taxes are paid.[2]  In fact, it’s estimated that regulated storefront price tags are 50% higher than street prices.

Cultivators face an even more challenging scenario.  Here in Humboldt, cultivators pay from one to three dollars a square foot of cultivation area depending on whether they grow outdoor, mixed-light, or indoor.  In addition, the state charges cultivators approximately $154 per pound and around $46 a pound for trim.  These rates are set to increase nearly 5% on the first of the year as the law ties cultivation tax rates to the rate of inflation.  Given wholesale or bulk flower prices of around $400 currently, taxes for sun-grown or outdoor cannabis farmers are enormously high and make competing with illicit operators nearly impossible.

Many conscious consumers prefer to buy lab-tested, pesticide and pathogen-free products from a permitted dispensing facility and are willing to pay more for them.  Others, however, shop on price and purchase in the underground market even though illicit products are often laden with harmful pesticides and fungicides.  When growing organically keeping plants free from pests and pathogens like mildew can take considerable effort.  Many growers, especially those farming in regions with high nighttime humidity levels, often spray plants once a week with approved pesticides such as oils, insecticidal soaps, or citric acid-based products.  Not only is this expensive, but time-consuming as well.  Those using dangerous chemicals can spray once or twice an entire cycle and be done with it.  Some of those poisons remain in the plant for months and are incredibly bad for your health when combusted.

It gets worse.  The Connecticut Forensic Science Laboratory states that over the past four months, some 39 individuals claiming to have consumed cannabis have experienced differing levels of overdose – the culprit Fentanyl laced flower.  Fentanyl is an incredibly powerful, highly addictive narcotic that’s estimated to be some fifty times stronger than heroin.[3]      So not only is illicitly grown and sold product often tainted with harmful toxins, cannabis is now being laced with deadly and addictive compounds…scary stuff indeed.  While not everyone selling cannabis in the unregulated market poisons their products, generally speaking, stuff off the street is far more likely to be toxic.  Additionally, unregulated grows tend to have far more egregious environmental violations, and many use forced labor, subjecting employees to terrible living conditions and inhumane treatment. 

By reducing tax rates, cultivators and retailers can become more price competitive and can begin to compete more effectively with non-licensed operators.  Prices for consumers can be reduced and, in all likelihood, more operators would enter into the regulated space.  With greater participation in legal channels, the state would have a broader, more sustainable tax base, and receipts would likely meet or exceed those received currently.  Interestingly the Legislative Analysts Office previously mentioned articulates the same argument – that reducing tax rates for legal operators will help curb illicit activity and contribute to a more functional industry.

As someone who cultivates commercially, I obviously have an ax to grind in this matter and would like to see lower taxes and greater participation in the legal marketplace.  That said, I am also sensitive to arguments that we ganja farmers are a bunch of tax-evading lawbreakers.   I remind colleagues that when we originally lobbied the county and the state of California to allow commercial cultivation several years back, many of us stated a desire to support our communities by paying taxes.  In fact, tax revenue for localities and the state was one of the major selling points in legitimizing the industry. When Humboldt County ultimately proposed cultivation tax rates that were two times higher than the $1-3 range landed upon, a host of growers showed up in front of the Board of Supervisors arguing rates were too high.  I feel the cultivation community and the California cannabis industry more broadly suffered a reputational hit as a result.  Some leaders within the county agreed.  The County Treasurer, Mr. Bartholomew called out the cultivation community during that meeting and noted that many had been avoiding taxes for twenty years…it was on camera and gave me a real sense that our industry had a lot of bridges to build and a lot of ground to cover in terms of professionalizing and legitimizing ourselves.

Fast forward a few years to the current time and there are now calls from across the industry for a complete repeal of state cultivation taxes and a few years pause to the fifteen percent excise tax on products.  To be clear, I fully support my colleagues in the area of tax reform and reduction but understand how some community members will roll their eyes when hearing this.  I would remind folks of three simple truths.  First, cannabis is here to stay and will soon be produced and distributed legally around the world.  Despite your personal views, acceptance of cannabis as medicine and as an honorable profession is growing worldwide and the train has already left the station.  Second, without cannabis, the economic prospects for Humboldt look bleak, at least over short and intermediate horizons.  Finally, if legal operators can’t become more competitive, the illicit marketplace will continue to dominate the industry and continue to harm the environment, workers, and consumers alike.

[1] Blood, Michael.  (2021, December 17).  California Pot Companies Warn of Impending Industry Collapse.  Yahoo News.

[2] Petek, Gabriel.  (2019, December).  How High? Adjusting California’s Cannabis Taxes. Legislative Analyst’s Office. 


[3] Miller, Shannon.  (2021, November 22).  CT Lab Confirms Marijuana Laced with Fentanyl is New Public Safety Threat.  NBC Connecticut.

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s