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Analysts Propose Tax Based on Potency

In other words, the stronger the smoke, the more you pay.

This Dec,. 12, 2019, photo shows a display with jars of marijuana at Save Greens Cannabis dispensary in Los Angeles.
This Dec,. 12, 2019, photo shows a display with jars of marijuana at Save Greens Cannabis dispensary in Los Angeles.
Megan Kiefer/Department of Consumer Affairs via AP

LOS ANGELES (AP) — California analysts Tuesday recommended scrapping the state's often-criticized system for taxing legal marijuana and replacing it with one hitched to the potency of products.

In other words, the stronger the smoke, the more you pay.

The proposal comes as legal businesses have been pleading with the Legislature for a tax cut, blaming hefty tax rates imposed by state and local governments for driving consumers into the thriving illegal market. In some areas, the combined tax rates on legal pot can approach nearly 50%.

The plan recommended by the Legislative Analyst's Office would nix existing taxes, including an across-the-board, 15% levy paid by consumers at the retail counter. They say it could be replaced with one based on potency or a tiered system, with different rates linked to potency or product types.

The office concluded that anchoring taxes to potency could reduce harmful use more effectively.

The plan was welcomed by the California Cannabis Industry Association, which said the recommendations mirror priorities the group's members have been advocating for over three years, including removing weight-based taxes on cultivation.

“As California’s regulated market struggles against a thriving illicit industry, we believe that comprehensive tax reform will incentivize consumers to purchase regulated cannabis products, ease administration and compliance, and increase and stabilize revenues for the state,” the group said.

Just last month, the state announced it was increasing business tax rates on legal marijuana, a move that stunned struggling companies that have been asking Sacramento to do just the opposite.

State Assemblyman Rob Bonta, an Oakland Democrat, said in a statement that the report “delivers a clear message that the status quo is not working."

“I continue to believe we must lower and simplify the taxes on cannabis if the regulated cannabis industry in California is to survive, let alone thrive,” Bonta said. He said he planned to reintroduce legislation to temporarily reduce pot taxes.

The state’s top cannabis regulator, Lori Ajax, recently told an industry conference that the legal marketplace can expect more strain and turbulence for at least a couple of years as it deals with sustained competition from illegal sales, industry layoffs and fallout from a national vaping crisis.

State taxes include a 15% levy on purchases of all cannabis and cannabis products, including medical pot. Local governments are free to add taxes on sales and growing too, which has created a confusing patchwork of rates around the state.

Slower-than-expected legal pot sales have been blamed for punching a hole in California's budget. Early projections said that within a few years, the state would collect $1 billion annually in new tax revenue from pot. Those figures have fallen far short.

The report suggested the state consult experts before structuring the details of a potency tax, saying detailed information from a state computer system that tracks sales would be needed to make conclusions. The state could set a lower rate if it wants to reduce the illegal market, or a higher one to raise more tax dollars.

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