State officials in California recently revealed that cannabis excise taxes will increase as of January 1, 2020. Higher cannabis excise taxes means higher prices for customers, thus giving unlicensed vendors the opportunity to undercut licensed vendors on pricing.

In addition to the hike in California’s cannabis excise tax, state cultivation taxes will also climb next year. The change, once effectuated, will see an ounce of flower increase 4.3 percent in price from $9.25 to $9.65; an ounce of leaves will increase 4.3 percent, from $2.76 to $2.87; an ounce of fresh cannabis plant material will increase 4.6 percent, from $1.29 to $1.35.

The news has not been well received by many, since the existing high tax rates have stunted economic growth in California’s legal cannabis market. 

Markup rate for California’s cannabis excise tax will increase 20 percent

Following the announcement that California’s cannabis excise and cultivation taxes had been increased, the California Department of Tax and Fee Administration (CDTFA) disclosed how the markup rate would climb from 60 percent to 80 percent on New Year’s Day. 

The 20 percent increase will be recalculated by the CDTFA every six months and it will serve as the basis for California’s 15 percent excise tax. In order to settle on what the new markup rate would be, the CDTFA took into account the average market cost of cannabis in California. Prior to the recent move, the agency rejected to increase the markup rate for cannabis excise taxes.

“An analysis of statewide market data” is what the CDTFA says that California’s markup rate change was based on.

“When implementing (Proposition 64), the Legislature moved the incidence of the tax from the retailer to the distributor, requiring CDTFA to determine the average markup rate every six months,” wrote CDTFA spokesman Casey Wells in an email to Marijuana Business Daily. “The purpose of the markup is to have the actual tax match the 15 percent gross receipts rate approved by voters. After analyzing thousands of transactions in the state’s Track and Trace system, CDTFA analysts have determined that the required markup rate for the period beginning January 1, 2020, is 80 percent.”

When Wells was questioned about whether or not California’s excise cannabis tax markup rate would be adjusted after a six-month review, he said that the outcome would be dependent on wholesale market data. Adjustments will only be made to the cultivation tax markup rate once annually, since it is contingent on inflation.

Democratic state assembly member says California’s cannabis tax increase is “deeply concerning”

Shortly after the decision to increase California’s cannabis taxes was revealed, state officials received backlash from industry insiders. Oakland Democrat Rob Bonta is one of many cannabis industry advocates who aired an opinion on the subject. 

“This short-sighted move ignores the realities that licensed businesses are at the breaking point, with many struggling to survive,” says Bonta, who previously attempted – twice – to reduce medical cannabis taxes in California by means of a legislature vote. He was unsuccessful in his endeavors.

Members of the California Cannabis Industry Association (CCIA) were also displeased with the changes to California cannabis taxes. According to the organization, members felt “stunned and outraged” at the amended law.

“Tax burdens on compliant cannabis operators is counter to developing a safe industry,” according to the association’s statement. “Widening the price disparity gap between illicit and regulated products will further drive consumers to the illicit market at a time when illicit products are demonstrably putting people’s lives at risk.”

They have a point. This year, tax revenue gleaned from California’s legal cannabis industry did not generate as much as lawmakers initially hoped it would; just $74.2 million in the second quarter of 2019. Back in January, Gov. Gavin Newsom’s put forward a budget prediction of $355 million and $514 million in excise tax revenues for the fiscal years 2019 and 2020, respectively.

Tax revenue forecasts were reduced in May, when Gov. Newsom announced that the budget had shrunk to $288 million for the 2019 fiscal year and $359 million for next year’s. As a result of high state taxes, luring in customers won’t be such an easy task for California’s supply chain.