October 3, 2022
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Finance

Black Market Cannabis and the Age-Old Tax Question

Some say that California is shooting itself in the foot where marijuana sales are concerned. Whether you call the plant cannabis or marijuana, people in California buy it by the pound. And they do so with an eye on taxation.

Fresh Toast contributor Maureen Meehan recently wrote a post discussing California’s rather robust cannabis black market. She blamed the size of the black market on taxes and regulation. It is the same old story in the Golden State.

Among the Nation’s Highest

California is among the nation’s highest in terms of tax rates. The golden state taxes nearly everything. It certainly taxes the cannabis industry with little mercy and little regard for how taxes affect legitimate businesses trying to make a go of it.

In her piece, Meehan cites data from the Reason Foundation suggesting that the state could increase its total cannabis revenues just by eliminating the current cultivation tax. This makes little sense to people who view economics as a zero-sum game. But to someone who understands supply-side economics, it makes perfect sense.

A supply side view of economics suggests that the government collects more tax revenue by encouraging sales. How do you encourage sales? By reducing prices. Every sale generates more tax revenue. So boosting sales boost revenues. California might lose some tax revenue by eliminating the cultivation tax, but they would more than make up for such losses with higher retail sales. That is the whole point.

Why the Black Market Thrives

California’s black market thrives. There is no debating that much. Data in Meehan’s piece suggests California’s black market could be three times the size of the legal market. It all boils down to cost.

Because black market operators don’t obtain licenses or pay state taxes, they can offer their products cheaper. Often, price disparities are such that it’s not even close. Customers buy from black market operations because they can get the same products at a discounted price.

Eliminating the cultivation tax would at least allow growers to lower their prices on the wholesale market. Common sense suggests that lower prices are passed along the supply chain. Why? Because every player in the supply chain has a set margin. They take the price they pay and increase it by a certain percentage to make that margin.

If a processor is paying less for raw plant material, it is likely to charge less for processed products sold on the other end. That means the dispensary or pharmacy pays cheaper wholesale prices. They apply their margin and sell at retail for a lower price.

A Nationwide Problem

Deseret Wellness, a Utah medical cannabis pharmacy in Provo, says that high prices are not just a California problem. High prices are problematic throughout Utah and the rest of the country. The culprit is always the same: taxation.

Conservative politicians have long said that no country taxes itself into prosperity. It is hard to argue that point. Anyone who uses recreational marijuana knows this first-hand. The legal marijuana industry in states like California is suffering because of taxation. Meanwhile, the black market continues to thrive.

Is there a black market in Utah? More than likely, yes. There isn’t as much study on illegal operations in the Beehive State, so exact numbers are harder to come by. But there are undoubtedly black market sellers providing medical cannabis patients with cheaper products.

The age-old tax question is answered by the cannabis industry. Like it or not, the supply side economics model has it right when it comes to taxes. The higher the taxes in a state, the less revenue that state collects. Meanwhile, high taxation only cripples business.