Cannabis research firm Whitney Economics conducted an impact analysis of federal taxes on the cannabis industry. In 2022 alone, cannabis operators paid more than $1.8 billion in additional taxes when compared to ordinary businesses. This is excess is forecasted to increase to $2.1 billion in 2023.
Cannabis operators are subject to federal tax provision 280E. According to Bloomberg Tax, "Section 280E penalizes traffickers of Schedule I or II drugs by disallowing the deduction of "ordinary and necessary" business expenses, essentially resulting in federal income tax liability calculated based on gross income, not net income.
In addition to cannabis taxes, the lack of banking services, anti-business regulation and lack of interstate commerce are cited as the most critical issues facing cannabis operators in the U.S. today. The tax burden is so heavy that only 24.4% of cannabis operators surveyed indicated that they are profitable. This is down from 42% the year prior. The effective tax rates often exceed 70% for cannabis retailers.
In a business conditions survey report to be published later this month, Whitney Economics observes that cannabis operators are hanging on by a thread and do not expect things to change any time soon.
"The cannabis industry is under extreme economic distress and the current regulatory and taxation environment is untenable, even in the short term," said Beau Whitney, chief economist at Whitney Economics. He added that he observed that several state markets are teetering on the brink of systemic collapse, which would result in significant personal wealth destruction and disproportionately impact smaller operators. Tax reform may be the solution that helps support the cannabis industry, while generating billions in economic activity.
Whitney Economics conducted a rescoring of the tax policy and finds that 280E reform would increase operator profitability, increase cannabis employment and increase economic activity by $35.2 billion over a 10-year period. This comes at a time when the cannabis industry experienced its first decline in employment and is forecasted to experience anemic growth for the next seven quarters.
