Thor Benson / Cannabis News Box Contributor

States tend to approve legalizing cannabis because there’s a lot of tax revenue to be made. Many people want to buy cannabis without facing criminal charges, which provides for a lot of demand.

However, a new report from Fitch Ratings claims taxing cannabis too much can help the black market, because then social use options won’t be as affordable as illegal ones.

The report specifically focuses on California, where it says state and local taxes could mean products will be taxed up to 45 percent in some places. It notes that markets like Oregon and Colorado have reduced taxes since starting social use sales to avoid the black market issue. California will have a 15 percent excise tax, plus some other taxes, and towns and counties can throw taxes on top of those rates. If taxes get too high overall, illegal sellers may benefit.

“They need to evolve over time and progress over time,” Pat Oglesby, a North Carolina lawyer who has worked on tax policy for Congress, told Cannabis News Box. He said regardless of where California starts at first, the state will surely adjust as it observes market changes.

He said that there is no tax rate low enough to completely obliterate the black market, so California will simply have to find the right rate that keeps the black market from being too competitive.

“They can charge whatever price they want to, and there will still be some black market,” Oglesby said.

“It’s just going to be [a game of] cat and mouse forever, and… how much cat and mouse is the public willing to put up with?” Oglesby said. He pointed out that many politicians who are making these decisions don’t know the market very well and might not know tax policy all that well, so it’s going to take time for them to get things right.

Furthermore, beyond state and local taxes, the federal government actually taxes cannabis businesses at a high rate.

An antiquated part of the federal tax code that was meant to combat illegal drug dealing has made it so a cannabis business owner can pay an effective tax rate as high as 70 percent. Oglesby said this surely makes it harder for legitimate cannabis business owners to compete with black market dealers.