By Evan Shields
People who live in California have watched the landscape of the state change over the past few years with the emergence of the marijuana industry. When medical marijuana was legalized, citizens watched the practice become increasingly illegitimate. By 2015, it was common for high schoolers to FaceTime doctors on sites, such as NuggMD, and fake medical problems in order to receive medical marijuana prescriptions. The abuse of the system was widespread, and in November of 2016, the citizens of California voted “yes” on the Adult Use of Marijuana Act (Proposition 64), legalizing recreational marijuana in the state.
I often stumble across recreational marijuana dispensaries when walking or driving around my hometown of Oakland. I have always supported recreational marijuana, and I voted “yes” on Proposition 64 back in 2016. The government of the City of Oakland has also used recreational marijuana to increase social equity. For example, Oakland implemented a program that allows former criminals, who were convicted of non-violent marijuana possession crimes, to open dispensaries. Moreover, aside from the privatized growth of marijuana dispensaries, I assumed the increased taxes on marijuana would lead to a substantial increase in tax revenue.
My assumption of significant tax revenue from marijuana was shared by lawmakers. California Governor Gavin Newsom, as well as other California lawmakers, had dreams of a large cannabis market due to spikes in cannabis sales seen in states like Colorado and Washington. According to the Los Angeles Times, California legislators in 2016 initially expected a $1 billion tax windfall from the 15% excise tax placed on recreational marijuana.
In the most recent fiscal year, California only made $288 million in marijuana tax revenue. Governor Newsom has lowered his expectations for marijuana tax revenue this fiscal year, lowering his estimate to $359 million in tax revenue.
The main problem with California’s recreational marijuana industry is that its tax system is not set up to attract new customers. Along with the previously mentioned 15% excise tax, marijuana customers in California also have to pay a 5-10% city tax and an 8-10% sales tax; by the time a marijuana purchase is finished, the tax rate is often above 30%. For heavy users who view marijuana as an inelastic good, these heavy taxes are likely not an issue. These users will pay whatever taxes necessary simply because they need marijuana.
However, the prevalence of the marijuana black market, which often provides cheaper marijuana with no taxes, could attract heavier users with less disposable income. For light users or low-income users, this tax structure can be a barrier to entry. These people are more likely to view marijuana as an elastic good, so being taxed over 30% likely deters them from purchasing more marijuana.
For the marijuana industry to succeed in California, legislators need to recognize that marijuana is more of an elastic good than an inelastic good. Lowering the excise tax could lead to a significant increase in customers, possibly increasing tax revenue despite the lower tax rate. This increase in customers would also help private businesses as it could lead to an increase in revenue (and possibly profits) for dispensary owners, stimulating local commerce.
One thing, however, is clear: for the marijuana industry to thrive in California as it did in Colorado, taxes on marijuana purchases need to be lowered.