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Taxes may take a chunk out of the legal week market.
Taxes may take a chunk out of the legal week market.
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High Taxes Could Be Driving Legal Pot Consumers Back to Black Market

Legalizing marijuana for recreational use was supposed to deal a death blow to smugglers, cartels and the black market while simultaneously pumping new money into state government coffers.

But now, less than a month into the recreational reefer rollout, California consumers could decide to bypass legal dispensaries and head back to the black market in a bid to avoid taxes that could double the price of pot.

The state announced Jan. 10 that pot taxes will put $643 million in the state’s piggy bank for 2018. That’s because, for every ounce sold, $9.25 goes to a flower or "bud" tax, $2.75 for a tax on leaves that few people want and 15 percent of the purchase price to a sin tax known as an excise tax. And don’t forget the sales tax – as much as 10 percent in some parts of Los Angeles County.

And those taxes come out of pockets that aren’t used to the cost of doing legal transactions. Most buyers are looking for the best deal they can get, and that doesn't include an extra $15 or $20 for the same pot they can get on the street for that much less.

Osiris Santos of Americann Made dispensaries said his company pays all its hefty taxes but understands there's a temptation for legal dispensary owners to hide money under a large mattress. "Black-market people don't pay taxes,” he said. “Since we're in a cash-only business, it's tempting not to pay your taxes."

If taxation continues on these levels, legal weed will have a tough time competing with the black market, say growers, pot industry experts, a tax group that monitors excessive government tax-and-spend programs, and people from other states.

For example, the current dispensary price for one-eighth ounce of high-grade marijuana is around $65. But if you stick to buying from your local pot dealer, you could save as much as $30. Low-grade weed with low THC concentration can be had for $20 an eighth on the street. It'll cost you $40 at a licensed dispensary.

And that phenomenon likely will continue for at least another year, maybe two, said Beau Kilmer, co-director of the Rand Corp. Drug Policy Research Center in Oakland, as prices even out.

Hezekiah Allen, executive director of the marijuana-centric California Growers Association, said two years is optimistic. With taxes on pot set so high as a result of language in Proposition 64, the black market isn’t going anywhere, he said.

Hidden deep in Proposition 64's official wording was information on the taxes that would be levied. But the taxes received little media coverage, and voters either ignored them or weren't paying attention when they approved legal recreational sales, Allen said.

Now, Allen wants legislators to put a pot reform measure on the November ballot to give voters a chance to reduce the taxes to make it easier and cheaper for them to get their green fun from a government-licensed shop. Allen will have a few months to put together a ballot proposal.

He would like to see the state reduce the 15 percent tax on retail sales to 5 percent and get rid of the $2.75 tax per dry ounce of leaves. The 15 percent state excise tax is in addition to any local sales taxes, he said.

On top of that, there’s the annual $1,000 state license fee and a requirement by cultivators to pay the $9.25 per dry weight ounce of flowers, both of which Allen wants to see lowered. The leaves are rarely sold for smoking but instead are sent to processors who make things like pot butter and edibles out of them, he said.

The craziness surrounding pot taxation can be seen in the difference between two Northern California cities. In the agricultural hub of Salinas, southeast of San Francisco, voters approved a tax that eventually will rise to $25 a square foot for space used to cultivate pot, according to a Nov. 11 Associated Press story. That adds up to a tax of a little more than $1 million per acre per year. On the other hand, in Humboldt County, a tax on growing is a bargain at $1 to $3 per square foot, or $43,560 to $130,680.

A thriving black market under the current tax structure is quite the opposite of what the state wanted, said David Wolfe, legislative director for the Howard Jarvis Taxpayers Association. The nonprofit got its start back in the 1970s fighting for the passage of Proposition 13, which limited property taxes and prompted politicians to look at cigarettes, alcohol and now pot as potential tax revenue sources.

Now, Wolfe says, the anti-tax group has other taxes in its crosshairs – including the pot tax.

“A tax structure should be put in place but not so punitive as to drive marijuana businesses underground and create a bigger problem than you had before,” he said. “The point is, how close are those price points? That will determine the strength of the black market. Come back in six months or a year and I’ll let you know.”

Kilmer of the Rand Corp. said taxes are necessary to pay for pot industry regulation. That includes testing and proper labeling and packaging. Whether or not voters approved a reasonable taxing system for pot is debatable, he said.

“No one knows the best way to tax cannabis,” Kilmer said. “In most places, taxes are a function of price. If that’s the case, when prices go down, tax revenue goes down.”

In Alaska, where recreational pot is legal, the state taxes pot according to weight. So does California. However, basing taxes on weight gives cultivators an incentive to grow less pot and concentrate on pot that’s higher in the active ingredient THC. The more THC, the more cannabis costs, because that’s what smokers demand.

Cultivators can game the weight-based tax system by growing more potent pot; they get more money per pound and thus pay less in taxes because under California’s system, it’s about weight, not THC levels.

“Taxing as a function of THC is easy just like taxing weight is easy,” Kilmer said. “There are a lot of different options.”

Allen of the Growers Association said attaching the tax to THC levels would give policymakers a tool to influence behavior while creating a more fair tax rate.

“You can’t do it by taxing weight,” Allen said. “The more potent the marijuana, the more potential for abuse. But you can impact behavior (with higher taxes on higher THC content). Government does this all the time with alcohol and whiskey, which they tax at a higher rate than wine and beer.”

Santos of pot-industry leader Americann Made said the current black-market price of one-eighth ounce can be as low as $20. The same eighth in one of Americann Made’s shops in Oakland, Los Angeles or San Diego can go for $35 to $40, all because of taxes. On the upper end of A-list recreational pot, an eighth-ounce of top-quality, high-in-THC buds priced at $50 will now cost the consumer $66.13 because of taxes.

“If you’re a grower who’s used to going to door-to-door, you’re going to have to deal with illegal shops and the black market,” Santos said.

The city of Los Angeles wants to make sure pot businesses don’t get away with anything.

L.A. charges pot dispensaries $100 per $1,000 in gross receipts on recreational marijuana and $50 per $1,000 on medicinal. If you transport pot, it’s $10 per $1,000, $20 per $1,000 for cultivators and $20 per $1,000 for anything not covered above.

Unlicensed commercial cannabis businesses in L.A. can be fined up to $20,000 a day. Property owners who lease to an illegal operation face the same fine, too.

Marketing director Kelsey Barney of the Rose Collective in Venice takes a laid-back approach to taxation.

“So far our patients have been half and half,” Barney said. “Some say, ‘Great. It’s legal.’ And some tell me they’re going back to their guy. I try to stay positive because we offer a rewards program — 7 percent back with every purchase.”

That’s probably not the case on the street corner.

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