High taxes on legal marijuana in California has the potential to turn many consumers away from the state’s cannabis shops and toward the black market, according to a report from Fitch Ratings.
The credit rating agency estimates state and local taxes on marijuana, which will become legal in California on Jan. 1, could be as high as 45 percent in some cases. It would trail only Washington state, which levies a 50 percent tax on marijuana.
“The existing black market for cannabis may prove a formidable competitor to legal markets if new taxes lead to higher prices than available from illicit sources,” the report says.
Recreational marijuana will be taxed on both the state and local level, contributing to the potential for high rates. California will impose a 15 percent excise tax, as well as cultivation taxes. Municipalities will also levy sales tax and a business tax, which could be anywhere from 1 percent to 20 percent, on gross receipts. Business taxes on recreational marijuana have been approved by voters in 61 California cities and counties, according to the report.
These high tax rates have the potential to drive customers toward the black market.
The state, which has a history of illegal marijuana cultivation, has long provided black market pot. The report states that Colorado, Oregon and Washington all reduced tax rates after the commencement of legalization to shift customers back toward the legal market.