Why local pot taxes could hurt California’s legalization initiative

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LOS ANGELES — Tax increases passed Tuesday by seven California cities will add to the already substantial tax burden on legal marijuana, potentially undermining California's fledgling legalization initiative, Fitch Ratings said in a report.

Voters in Cotati, Farmersville, Modesto, Pacifica, Palm Springs, Rio Dell, and Woodlake approved cannabis measures on Tuesday, joining local governments across the state that have adopted local taxes in prior elections, Fitch analysts said in a Wednesday report.

California voters approved legalizing recreational marijuana use in November 2016 and retail sales are set to begin Jan. 1.

"High taxes increase prices in legal markets, and have the effect of reinforcing price advantages to long established black market cannabis," said Stephen Walsh, a Fitch director. "Taken together, state and local tax burdens put California at the high end of the tax range for states that have legalized non-medical cannabis."

In total, Fitch said, 67 of California's 540 cities and counties have adopted local cannabis taxes to date, contributing to combined state and local tax rates that Fitch estimates could be as high as 45%.

Taxes applicable to non-medical cannabis include a 15% state excise tax, state cultivation taxes of $9.25 per ounce for cannabis flowers and $2.75 per ounce for leaves, state and local sales taxes currently ranging from 7.75%-9.75%, and local business taxes of up to 20% of gross receipts.

Local governments in the state hope to reap substantial revenues from legal cannabis sales, but Fitch said that price declines and black market sales may limit tax growth.

California Treasurer John Chiang released a report Monday that estimated marijuana sales could bring in $7 billion in revenue.

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