California’s experiment in marijuana legalization is spurring some radical thinking on the political left. Lo, high taxes and over-regulation are bad for the economy—or at least the pot economy.
Golden State voters in 2016 legalized recreational marijuana on the promise that this would reduce the black market. While marijuana remains a banned substance under federal law, nine states including Washington, Nevada, Oregon and Colorado have legalized consumption and production within their borders. Many are still struggling to draw cannabis businesses out of the shadows, none as much as California. Less than 1% of the state’s 68,150 marijuana cultivators had obtained licenses as of last month, according to a recent report by the California Growers Association. The problem turns out to be the heavy hand of the state.
“The incredible volume of regulation is part of the issue,” the report notes, adding that “consultants and attorneys are often a major cost for small businesses.” Pot growers also complain that the “division of responsibility” among an alphabet soup of regulators—CDFA, BCC, MCSB, Water Board, CDFW, CDTFA, OSHA—can cause confusion, and that “delayed permitting can have make-or-break impacts for businesses.”
Other gripes: environmental restoration requirements, water conservation regulations and zoning restrictions, which “have resulted in severely inflated real estate prices that price smaller businesses out of a chance at compliant operation.”
But above all, “taxes were identified as the single greatest barrier to entry for small businesses,” according to the report. The state-and-local effective tax rate on marijuana growers is between 40% and 60% in California, compared with 18% in Oregon and 33.1% in Nevada.
The notion that excessive taxation and regulation can suffocate small businesses seems to be a revelation to the pot growers, many of whom believe “there is a dangerous concentration of wealth in our economy and see cannabis as a way of counterbalancing that trend,” according to the report. A pair of Democratic and Republican state Assembly members have introduced legislation to slash taxes on pot businesses. They note that Washington state saw an increase in cannabis revenues after cutting taxes—the Laffer Curve at work.
All of this new tax wisdom is welcome, but pot growers may also fear that going legal will cramp their growth prospects. California produces about five times as much weed as its citizens consume, thus much is sold out of state—illegally. It’s only a matter of time before the growers start lobbying Congress to legalize pot nationwide and pre-empt the states that haven’t legalized it.
Appeared in the March 24, 2018, print edition.