California Officials Suggest Switch to Potency-Based Cannabis Tax Rates

California’s non-partisan Legislative Budget Office is suggesting the state move to a “potency-based or tiered ad valorem tax” for cannabis to stabilize revenues and discourage abuse. The report recommends that the state get rid of the tax on cultivators based on weight but said if the state keeps the current tax regime they should increase the excise tax by 5 percent or risk not meeting the $350 million in annual cannabis tax revenues needed to fund all of the programs outlined in the legalization bill.

The agency points out that Canada’s legalization law includes a C$0.01 tax per milligram of THC along with sales taxes and that a tiered ad valorem tax would set different tax rates on different potency and product types – similar to the model used in Illinois, which sets a 10 percent tax on cannabis flower and other products with THC concentrations below 35 percent, a 20 percent tax on “cannabis infusions,” such as edibles, and a 25 percent tax on products with THC potency above 35 percent, such as concentrates.

Ellen Komp, deputy director of NORML’s California chapter, told the O.C. Register that she was “flabbergasted” that the LAO would suggest raising the tax rate and that the advocacy organization “expected them to recommend, or at least discuss, the benefits of lowering the state tax.”

The report outlines four tax structures – including the current model – and found that, while a potency tax would be best for reducing harmful use and raising stable revenue, the current model is best for administration and compliance funding and that a weight-based tax would also be effective in raising stable revenues but would be ineffective for reducing harmful use or funding administration and compliance. The agency found the tiered tax was just average at reducing harmful use, raising stable revenues, and funding administration and compliance.

California’s current 15 percent tax rate is equal to or below tax regimes in other states with legalized adult-use but the state also imposes up to 10 percent in sales taxes on nonmedical cannabis and cities are allowed to impose their own taxes of 5 percent to 20 percent. The state’s cannabis growers also pay a rate of $9.25 per ounce for dry flowers or $2.75 per ounce for leaves. On January 1, that levy on cultivators is being hiked from $9.25 to $9.65, while leaf taxes per dry-weight ounce move from $2.75 to $2.87, and the plant rates will increase from $1.29 to $1.35.