The politicians are counting on legalized cannabis to reduce law enforcement costs and bring in gobs of tax money. But, the emerging industry is facing prickly tax problems at all levels of government and all along the distribution chain. Local governments have their property taxes on the outdoor grows, which can hit the grower for several thousands per year in addition to ordinary property taxes. The state imposes cultivation taxes of $9.25 per ounce of cannabis flowers and $2.25 for leaves.
Then the honest retailer has licensing fees and inventory taxes to pay and excise or sales taxes on every customer’s purchase as he toils away to make profits then taxed by the federal government.
According to Fitch Ratings (one of the big three statistical rating agencies along with Moody’s and Standard and Poor’s) those taxes are likely to undermine the state’s attempt to foster a thriving marijuana industry. State and local taxes could amount to as much as 45% in some counties.
“High taxes increase prices in legal markets, and have the effect of reinforcing price advantages to long established black market cannabis,” said Stephen Walsh, Director. “Taken together, state and local tax burdens put California at the high end of the tax range for states that have legalized nonmedical cannabis.”
And on top of all those taxes, that hungry monster, the IRS, is poised and ready to take its bite. Not only will the retailers pay income taxes at the usual rates, but their business expenses (salaries, rent, insurance, equipment) are not deductible on the federal tax return. Why not? Because their business is illegal under federal law, ergo the expenses are not legally recognized. Pot is still a Schedule I drug–along with heroin. For the same reason, banks can’t accept deposits of pot-sale receipts, which adds further to retailers’ woes and expenses.
So, the state should not expect to get rid of the illegal traffickers and all the law enforcement money spent trying to stop their underworld profiteering. The outlaws can grow and sell pot with no taxes and few selling costs. Why would anyone go to a retail store for a reefer when it sells much cheaper on the street.?
In their fervid drive for taxes, the state will likely find, as Colorado already has, that revenues depend on legal sales and sales are impaired by low price competition from the illegal market.
The aim of government policy should be to make illegal drug sales unprofitable. California politicians need a refresher course on basic economics. Massive law enforcement costs could be saved by a truly competitive legal cannabis market, making high taxes unnecessary. Haven’t we always known a penny saved is the same as a penny earned?
© Rights reserved to Dave Finch 11/6/2017
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