Why I think higher taxes on cannabis could bolster illegal sales

The new year brought new taxes to the cannabis community.

The new year brought new taxes to the cannabis community, with the California Department of Tax and Fee Administration announcing a tax hike on cannabis cultivation starting on January 1, 2022. However, from my perspective as executive chancellor of Oaksterdam University, this move could have a detrimental impact on the legal cannabis industry.

Back in 2009, the very first “tax cannabis” initiative found success in Oakland, California, where roughly 80 percent of voters voted in favor of a medical marijuana tax of 1.8 percent in gross sales. In fact, Oaksterdam University founder Richard Lee, as well as other industry players, helped lobby for the tax’s inclusion on the ballot.

We at Oaksterdam have always advocated for a safe, regulated and taxed cannabis market, but we oppose this increase on farmers. The race to extract more fees and taxes, starting with the farmer, has a negative effect on the end consumer, as well as the entire industry.

Why should you care if you don’t even smoke weed? Because the potential result I see is a booming illicit market that empowers and enriches drug cartels.

Raising taxes is the opposite of what we as cannabis advocates are working hard to accomplish, which is to lower barriers in the industry. Raising taxes in an already over-taxed market could bolster the incentives to stay illicit and pay no taxes or fees. The higher cannabis taxes rise, the harder it could be for legitimate businesses to compete with unregulated growers and sellers.

In addition to impacting businesses and consumers, the new cultivation tax especially impacts licensed farmers who are struggling from a price collapse due to overproduction. The CDTFA is authorized by law to adjust the cultivation tax annually in line with inflation, but MJBizDaily states that California’s wholesale prices for outdoor flower have dropped 60 percent in the past year.

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The new cultivation tax applies to the cost of production. These costs are magnified at every stage of production and passed along to patients and consumers. According to the LA Times, California state and local taxes can “add 50 or more percent to the price of cannabis products in legal shops,” causing the illicit market to remain as strong or even more robust than before the passage of adult-use legalization five years ago.

The City of San Francisco (from whom Oaksterdam was awarded the contract to provide technical assistance for social equity workforce development) has acknowledged this problem and made a move to counteract the new tax to some degree. On Dec. 1, 2021, city supervisors voted unanimously to suspend the city’s Cannabis Business Tax through the end of 2022 as a measure to mitigate illegal cannabis sales.

Oaksterdam has been at the forefront of the battle to legalize cannabis for a quarter-century and we are proud that California has served to spark the debate for legalization across the nation. However, our home state has not served as a model for viable taxation models. I believe leaders should take a stand for equity by keeping taxes low and the playing field level for those farmers and businesses just getting established in the industry, as well as prioritizing safety for patients and consumers who deserve a regulated and affordable legal market.

We, with fellow industry leaders, have been looking for ways to consolidate the taxes at the register and remove the cultivation tax altogether. To this, some might say: “Why? Taxes are why we legalized.” Yes indeed, which is why I argue we need to focus on taxing more businesses more fairly, not extracting a pound of flesh from growers in the legal industry.