Tax burden on California marijuana may encourage black market

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LOS ANGELES — California’s legal marijuana markets may have a tough time competing with the well-established black market for pot, because of the tax burden on legal shops, Fitch Ratings said.

California joined seven other states in legalizing non-medical marijuana in November.

Marijuana use for medical purposes had been legal since 1996. Beginning on Jan. 1, marijuana sales will be allowed for recreational uses.

Local business taxes have been adopted in 61 communities in addition to state taxes on cultivation, a state excise tax and state and local sales taxes, Fitch analysts Stephen Walsh and Karen Ribble wrote in Monday's report.

If California governments don't temper taxing, it could hamper sales by driving consumers to the black market, according to the report.

The applicable taxes include a 15% state excise tax, state cultivation taxes of $9.25 per ounce for cannabis flowers and $2.75 per ounce for leaves, and state and local sales taxes currently ranging from 7.75% to 9.75%.

Fitch estimated that as the prices drop with legalization that effective tax rates on recreational cannabis could surpass 45%. That would place California among states with the highest tax rate on the drug. Alaska comes in the lowest with an estimated 20% estimated tax rate, according to Fitch.

High taxes present a major impediment to legal markets and will reinforce the price advantage of black markets, Fitch analysts wrote. Increased enforcement efforts may discourage illegal efforts, but high taxes may “complicate such efforts by diverting in-state sales to the black market,” Fitch wrote.

The state’s regulatory framework splits regulatory and taxing authority between the state and its municipalities. The state and localities can tax marijuana; but cities and counties have the authority to impose restrictions on sales cultivation and sales within their boundaries.

“These arrangements magnify the uncertainties surrounding cannabis legalization and may contribute to disparate impacts for local governments,” analysts wrote.

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