Legal weed pays off. At least according to the numbers coming in from the cannabis tax authorities in Arizona, Colorado, and five other states (The Growth Op).
If legalization has proven anything over the last five to 10 years, it’s that governments can make a lot of money from cannabis taxes. Often, that means significantly more than they already do from alcohol taxes.
But, while these taxes are doing a lot of good for regional and federal governments, how have they impacted consumers?
Cannabis Taxes by the Numbers
Benzinga reported that Arizona collected $6.3 million in cannabis-related taxes in March 2022 alone. That broke down into three separate tax categories: a 16 percent Recreational Marijuana Excise Tax, the sales tax on all recreational purchases, and a sales tax on medical cannabis purchases.
Arizona made some of the most recent headlines regarding cannabis tax collection. But is far from the only legal market seeing the same sort of cannabis-generated tax income.
The Institute of Taxation and Economic Policy dove into this issue earlier this year to explore how much tax is rolling in from legal markets everywhere.
The ITEP reported in 2021, 11 adult-use markets in the U.S. raised a whopping $3 billion in recreational cannabis excise taxes. In seven out of the 11 markets, the amount brought in surpassed that raised through alcohol sales. Between 2020 and 2021, cannabis tax revenue increased 33 percent.
In Canada, the story is much the same. As per BNN Bloomberg, since legalization, taxes (direct and indirect) have raised more than $15 billion in revenue for provincial and federal governments.
Few other consumer industries are contributing as much to government coffers as cannabis. Plus, the market is still rapidly expanding. Unlike alcohol and tobacco, two other recreational consumer industries, the revenues from cannabis taxes continue to grow year after year.
Cannabis Tax Frustrations for the Retailer and the Consumer
Yet, even if the various regional cannabis excise taxes are paying off for federal governments, there are increasing calls by retailers, producers, and consumers for change. Especially in Canada and other tax-heavy districts, the substantial excise tax burden prevents further growth in the industry.
The Canadian Chamber of Commerce and the B.C. Chamber of Commerce have recently called for change. A BC Chamber report stated clearly, “The current excise system keeps the black market alive. Costs trickle down to the consumer as well as pose business viability risks to producers.” Meanwhile, the Canadian Chamber called the excise tax untenable.
Because the tax burden falls on producers, retailers, and subsequently onto the consumer, more consumers are still turning to the legacy market to source recreational cannabis. Of course, there will likely always be cheaper weed on the black market. But the current tax climate distorts this picture even more.
As the B.C. Chamber put it, “Regulatory changes are needed to enable the market price of legal cannabis to be as competitive as possible.” While the number of people legally buying cannabis has finally surpassed purchases from illegal sources, many Canadians are still relying on the legacy market. The Globe and Mail found that illegal cannabis still accounts for more than 35 percent of all cannabis sales in the country.
Price point and the associated taxes may have a lot to do with Canadians’ lingering inclination to head to the legacy market.
As a side note, edible regulations may be a secondary reason.
Cannabis Regulation in Canada, Under New Mandate
The current frustrations with cannabis taxation are trickling into federal policy in Canada. Although underreported, the federal government’s 2022 Budget includes a section titled “Engaging the Cannabis Sector.”
A few of the more notable points indicate the government has heard the complaints and is taking steps toward resolution. Importantly, this strategy would be managed via the Department of Innovation, Science and Economic Development rather than Health Canada.
Second, it’s focused on creating “an ongoing dialogue with businesses and stakeholders in the cannabis sector.” And third, this new mandate aims to “improve conditions for investment, enhance Canada’s innovation performance, increase Canada’s share of global trade and build a fair, efficient, and competitive marketplace.”
Of course, it’s early days yet before this task force reports on their findings. Still, the information gathered will likely feed into the regulatory changes predicted for 2023. This is when the first rollout of the Cannabis Act gets evaluated.
Getting the Balance Right Between Cannabis Tax and Consumer Budgets
Recreational cannabis is a brand new sector that is still in an era of restlessness. Although similar in some regards to recreational alcohol, its trajectory and regulation have been remarkably different. As a result, it will take a long time for the market to mature. Especially given the number of new regions still waiting to legalize.
One of the biggest challenges facing regulators will continue to be the competition from the black market. Although legal markets offer consumers safety, testing, consistency, and reassurance, prices remain a sticking point for consumers. Cannabis taxes, often much more substantial than those applied to other recreational products, dissuade consumers from making the switch.
High taxes also prevent some legacy owners from transitioning and new smaller producers from entering the market. Cannabis taxes have already proven their worth in the current legal market. But it may be time to adjust to being more in line with consumer expectations.