Could lowering taxes lead to more revenue?

It’s a question that can be applied to many retail areas, from train tickets to electronics. Could you increase overall revenue by charging less per item and thus hopefully selling more? That’s a question that can be applied to cannabis. But with an added dimension: taxes and illegal sales also need to be considered.

It has previously been established that black market sales are driven by availability as often as they are by price, with local restrictions and licensing laws playing a massive part in black market sales still occurring in US states that have legalised cannabis.

But that is not to say price has no effect whatsoever. If purchases were motivated solely by quality and convenience, there would be none made on the black market in areas where the sale of cannabis is legal.

This makes Democratic California governor Gavin Newsom’s proposals to eliminate tax on the cultivation of cannabis in the state even more intriguing. California hopes the loss in revenue at the cultivation level will be more than compensated for by an increase in tax collected at the retail end as more consumers choose to buy from legal sources at a lower price.


Consumers and cultivators could win, but who stands to lose?


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    Newsom proposes eliminating the state cultivation tax currently imposed on cannabis flowers at a rate of $161.28 per dry-weight lb (some local jurisdictions impose additional cultivation taxes), according to the law firm Sheppard, Mullin, Richter, & Hampton.

    This would still leave a 15% statewide excise tax, sales and use taxes that can reach up to 10.75%, and local business licence taxes which are as high as 15% in some jurisdictions, the law firm added.

    The worry is that if the elimination of the cultivation tax does not result in at least a reciprocal increase in revenue from retail taxes, several worthwhile programmes will suffer.

    Nonetheless, it looks like Newsom plans to proceed with the decision and likely will have support from the Democratic majority legislature following talks with party leaders. Come July it will be time to see whether slashing the cultivation tax really does affect illegal sales.

    One issue remaining is that wholesale prices of California cultivated cannabis have already fallen. So presumably the end price being paid by the consumer has, too. In that case, if cultivation taxes are cut, it really would be cultivators alone who will benefit, and it could be citizens supported by government programmes who do take the brunt.

    Cannabis advocates seem to be aware of the issue and have asked for further cuts to retail taxes as well to ensure a lower price for consumers. However, currently it doesn’t seem like that is going to happen.

    – Freddie Dawson CBD-Intel staff

    Photo: Ciarán Ó Muirgheasa

    • Do you want more information related to cannabis regulation in California? You can now download our regulatory briefing “Legal dispute leads to US Ninth Circuit Court ruling delta-8 THC federally legal” for free using the form at the top of this page.

    Freddie Dawson

    Managing editor, news
    Freddie studied at King’s College, London and City University and worked for publications including The Times, The Malay Mail, PathfinderBuzz and Solar Summary before joining the ECigIntelligence team. He has extensive experience in covering fast-moving consumer goods (FMCG), manufacturing and technological innovation.