Why Cannabis Taxes Will Be Hard To Predict

When a state legalizes cannabis, it must also decide how to tax the new industry. Should taxes be placed on the sale price of marijuana, or perhaps weight or potency? How high should the taxes be? Here are some ways the financial, social and competitive factors of this young and complicated industry can influence tax decisions:

The availability of cannabis can put upward or downward pressure on taxes. When neighboring states start selling legal cannabis, there is a downward pressure on tax rates because policymakers don’t want residents to drive across borders and spend their tax money there to purchase.

On the other hand, as a state’s cannabis industry expands, product prices fall as supply increases and as more businesses open and compete for customers. Raising taxes on the now cheaper products may be feasible without hurting the market, said Richard Auxier, co-author of The pros and cons of cannabis taxes, a study of the Tax Policy Center a joint venture of Washington DC think tanks, The Municipal Institute And The Brookings Institution.

The total price paid for legal marijuana must remain close to or below the price of an illegal/black market product in order to give consumers the incentive to legally purchase the product. The tax paid on the purchase of a legal cannabis product, such as an edible product or a pre-roll, is a factor in the overall price and must be taken into account.

Policymakers may also want to raise taxes for social welfare, for example raising taxes on the most potent products to try to prevent younger users from buying them. In New York, for example cannabis flower is taxed half a cent for every milligram of THC. Concentrates will be charged eight-tenths of a cent for every milligram of THC. Edibles are taxed three cents for every milligram of THC. This amount is added to the turnover tax percentage of thirteen percent.

Taxes based on sales price, weight or potency are all dials that policymakers can turn up or down, Auxier said. The last two are more difficult to track and manage. Cannabis entrepreneurs already face some challenges that others don’t, such as a lack of banking options, Auxier said, so there’s a push to keep taxes simple. “You want to develop a healthy market,” he said.

Another tax implication unique to the cannabis industry is that its businesses cannot deduct typical business expenses from their federal tax burden because cannabis is illegal at the federal level. That makes doing business more expensive.

Still, New border data estimates that the industry will continue to grow with sales of $57 billion by 2030. Other estimates are even higher, so tax rates will have a significant impact on the state governments that collect them.

According to Auxier, state officials may need to re-evaluate the cannabis tax every year as the market develops in their state.