Policy Study: The impact of California’s cannabis taxes on participation within the legal market

 

 

Geoffrey Lawrence
Managing Director

Introduction

In November 2016, California voters approved Proposition 64 to enact a regulated, adult-use cannabis market in the Golden State. At the time, four other states had already created adult-use cannabis markets, including Alaska, Colorado, Oregon, and Washington.

California already had a largely unregulated medical cannabis market in place, following voters’ historic passage of Proposition 215 in 1996, which was the first medical marijuana law in the nation to go into effect. Since Proposition 64 required specific regulations to govern inventory tracking, licensing, testing and more, these regulatory provisions would have to extend to the unregulated legacy medical market. If not, market participants could subvert the regulatory intent contained in Proposition 64 simply by remaining in the unregulated medical market

Realizing this need, California lawmakers passed the Medicinal and Adult-Use Cannabis Regulation and Safety Act (MAUCRSA) in 2017.

MAUCRSA superseded prior legislation from 2015 called the Medical Cannabis Regulation and Safety Act, which sought to create a regulatory structure for the medical market but never took effect due to the passage of Proposition 64 and MAUCRSA, which largely built on the regulatory approach that had been developed within that prior legislation, but also extended it to the newly authorized adult-use market.

The statutory language contained in Proposition 64 and MAUCRSA combine to create the legal framework for California’s commercial cannabis industry. Regulations governing the industry must be consistent with these authorizing statutes. Proposition 64 contained important provisions that strongly affect California’s commercial cannabis market that cannot be changed through regulatory action alone. Chiefly, these include imposing two new excise taxes and devolving authority to local governments to regulate or outright ban certain or all types of commercial cannabis activity within their jurisdictions.

Taxes affect both consumers’ and producers’ decisions in the legal market primarily by introducing a price disparity between legal cannabis products and comparable cannabis products offered through the illicit market. Similarly, local bans on legal sales over extended geographic areas can drive consumers without access to legal products within a reasonable distance of their homes to purchase substitute goods on the illicit market.

This analysis develops an empirical model to estimate the degree to which California’s tax regime affects participation within its commercial cannabis market, and how participation may change through different approaches to taxation.

Part 2 of the study details the various tax structures currently facing legal cannabis enterprises in California and how those tax structures have performed in yielding public revenue.

Part 3 examines the key factors that influence consumer decisions to participate in the legal or illegal market.

Part 4 reviews the existing literature on consumer price sensitivity for cannabis products and calculates a price sensitivity for consumers of legal products in California and Oregon.

Part 5 uses data calculated in prior sections to model California consumers’ expected behavior due to changes in retail price in response to a change in tax policy.

Finally, Part 6 of the report concludes with recommendations for improving the performance of California’s legal cannabis market.

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