Cato Insitute: Marijuana, Taxation, and Unintended Consequences

DECEMBER 6, 2021

We’ve been hearing stories for three years now about how California has botched its marijuana legalization with taxes and regulation that were causing some longtime cannabis entrepreneurs to prefer to remain illegal. Now the problem of unintended consequences — that the taxes are making legal cannabis more expensive than illegal supplies — has been noticed by legislators. As KPIX of San Francisco reports:

San Francisco supervisors on Tuesday unanimously approved an ordinance to suspend the city’s Cannabis Business Tax through the end of next year, in an attempt to curb illegal marijuana sales.

According to Supervisor Rafael Mandelman, the legislation’s author, suspending the city business tax through Dec. 31, 2022, would help support legal cannabis retailers as they struggle to compete with illegally sold cannabis.

San Francisco voters approved the tax in Nov. 2018, which imposes a 1 percent to 5 percent citywide tax on gross receipts from cannabis businesses. The tax is set to go into effect on Jan. 1, 2022.

“Cannabis businesses create good jobs for San Franciscans and provide safe, regulated products to their customers,” Mandelman said in a statement. “Sadly, the illegal market is flourishing by undercutting the prices of legal businesses, which is bad for our economy as illegal businesses pay no taxes while subjecting workers to dangerous conditions and consumers to dangerous products. Now is not the time to impose a new tax on small businesses that are just getting established and trying to compete with illicit operators.”

Mandelman’s office pointed to a Dec. 19 report from the California Legislative Analyst’s Office that found that increased state cannabis tax rates were directly linked to illegal cannabis sales.

So it’s good that the supervisors see the problem their tax has created. But they can’t just leave well enough alone. They can’t just repeal laws and stop arresting people; instead, they prefer to set up a regime of taxes and regulation that they refuse to give up even after years of reports on the problems it causes. As KPIX goes on to report:

Mandelman said his office will next work with the City Controller’s Office, the Treasurer and Tax Collector’s Office, and the Office of Cannabis, among other stakeholders, to analyze data on cannabis business sales in the city.

The goal would be to present a set of recommendations on tax rate and structure for cannabis retailers to the Board of Supervisors and implement a new plan for 2023.


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