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Individuals who have engaged in transactions at licensed dispensaries are acutely aware of the substantial taxation imposed on cannabis products. This fiscal imposition is largely a consequence of the fragmented regulatory landscape across the United States, where state-specific legislation prevails in the absence of a unified federal legal framework for cannabis legalization. The lack of a cohesive national policy on cannabis taxation leaves room for skepticism regarding the federal government’s capability to institute an equitable tax regime, should nationwide legalization come to fruition. Nonetheless, the prevailing state-by-state patchwork of regulations ensnares a broad spectrum of stakeholders, from governmental entities to commercial brands, and most critically, the consumers. The cannabis plant and its derivatives are ensnared in a labyrinth of fluctuating legal stipulations, which vary not only across state boundaries but also within individual municipalities. Consequently, the retail cost of cannabis products, such as a flower with a THC potency exceeding 30 percent (assuming the accuracy of this potency claim), can exhibit dramatic fluctuations, ranging from slightly below thirty dollars for an eighth of an ounce to more than seventy dollars, depending on the geographic location of the purchase.
The methodology for cannabis taxation diverges significantly from one state to another, incorporating a spectrum of excise taxes predicated on either fixed quantities and weights, a percentage of the retail sales price, or a combination thereof. Among these, taxes levied based on the sale price emerge as the predominant model.
In the state of Maine, for instance, a nuanced hybrid tax structure is employed, wherein a 10 percent excise tax is levied on the retail price, supplemented by additional charges based on the weight of the product and the number of seedlings or seeds sold. New Jersey presents another compelling example, adopting a sliding scale tax rate that varies from under ten dollars to as much as sixty dollars per ounce, contingent upon the average retail price of an ounce of cannabis. This intricate tax regime further encompasses a less commonly applied excise surcharge predicated on the THC potency of the product.
As of April 2023, a trio of states, namely Connecticut, Illinois, and New York, have adopted taxation models that incorporate an element of THC potency in their tax calculations. In Connecticut and New York, the tax is calculated on a per milligram basis, while Illinois employs a multifaceted approach that includes wholesale, product-specific taxes, and an additional tax on products with a THC concentration exceeding 35 percent. This approach to taxation, focused on THC potency, represents a relatively novel and complex facet of the broader cannabis tax landscape, underscoring the diverse and often convoluted nature of cannabis taxation across the United States.
Backing and Resistance
The discourse surrounding the implementation of THC potency taxes, as evidenced by deliberations in states such as California and Washington, remains a contentious topic among legislators. To date, only a select few states, notably Illinois and New York, have adopted such taxation measures, illustrating the polarized perspectives that pervade policy discussions on this matter.
Advocacy groups with a conservative stance on cannabis usage, such as Smart Approaches to Marihuana (SAM), have emerged as vocal proponents of potency-based taxation. They argue that imposing taxes on products with high THC levels serves as a deterrent against the consumption of such potent cannabis products. Kevin Sabet, a prominent figure within SAM, articulated in 2021 that the cannabis available today markedly surpasses the potency of the “Woodstock weed” familiar to previous generations. He advocates for potency taxes as a means to curtail accessibility to high-potency cannabis, positing that such measures are essential for public health. Proponents further contend that taxes based on THC potency could enhance the precision of regulatory frameworks, augment state revenues, and establish a parallel with the taxation models employed in the alcohol industry.
Conversely, there exists a significant contingent of individuals and entities within the cannabis industry and its peripheral sectors who vehemently oppose the notion of potency taxes. Critics argue that such taxation schemes are tantamount to perpetuating the prohibition of cannabis, albeit under a different guise. They highlight several drawbacks associated with the imposition of potency taxes, including the financial burden of implementation, the potential impediment to the development of a regulated legal cannabis market, and the adverse impact on efforts to eradicate illicit cannabis sales and consumption within the United States. This opposition is not merely a fringe sentiment but is broadly shared across the cannabis industry, stemming from a conviction that potency taxes would undermine the progress toward a fully legal and regulated cannabis market. The debate over THC potency taxes thus encapsulates a broader dialogue about the future of cannabis regulation, public health, and the balance between state revenue generation and the cultivation of a responsible, accessible legal cannabis market.
Insufficient Clinical Research Findings
The longstanding federal prohibition of cannabis has significantly hampered scientific research into the plant, thereby constraining the accumulation of comprehensive knowledge regarding its dosage, effects, and potential therapeutic applications. This restriction has persisted despite a vast repository of anecdotal evidence collected over decades, which suggests a complex interplay between cannabis and its myriad effects on the human body. The dearth of sanctioned scientific inquiry into cannabis has left a considerable gap in our understanding, hindering the ability to formulate evidence-based policies and regulations concerning its use.
Benedict J. Lubbon, serving as a managing director at Jude Benedict & Associates and a prominent figure within the cannabis advocacy landscape, underscores the necessity of a more rigorous examination of claims about cannabis dosage. As the founder of Deschedule NOW, a group dedicated to advocating for the removal of cannabis from the list of federally controlled substances, Lubbon emphasizes the importance of distinguishing between fact-based evidence and the sensationalism often propagated by those in favor of continued prohibition. He critically addresses the discourse surrounding the imposition of a potency tax on cannabis, attributing much of the support for such measures to a combination of hype and misinformation disseminated by individuals who are apprehensive about the evolving potency of cannabis compared to that of previous generations.
Lubbon’s perspective illuminates a broader concern within the cannabis reform movement regarding the necessity for policies to be grounded in scientific evidence rather than reactionary fears. He argues that the dialogue on potency taxation, in particular, is emblematic of a larger issue of how cannabis is perceived and regulated in society. The call for further scientific investigation into cannabis dosage and effects is not merely a technical demand but a foundational step towards demystifying cannabis, debunking long-standing myths, and paving the way for informed regulatory frameworks that reflect the plant’s true nature and potential benefits. This stance advocates for a shift from prohibitionist rhetoric to a more enlightened approach that embraces the complexities of cannabis through the lens of empirical research and rational discourse.
Challenges in Achieving Profitability
The cannabis market in Illinois has experienced a remarkable upsurge in recent years, a development significantly influenced by state and local potency taxes. These taxes, capable of augmenting product costs by up to 40%, have emerged as a pivotal factor in shaping the market dynamics. Despite the substantial impact of these taxes on product pricing, the state of Illinois has expressed no intentions to amend the existing tax regulations, attributing this decision to the nascent stage of the market’s development.
In contrast, the state of Connecticut has witnessed a steady month-over-month increase in cannabis sales since the commencement of legal sales in January 2023. However, the fiscal yield from these sales has fallen short of projections. The state reported generating approximately $9.5 million in sales tax from cannabis transactions in the year 2023, a figure markedly below the anticipated $20.4 million, underscoring a discrepancy between expected and actual tax revenue generated from cannabis sales.
The state of New York presents another intriguing case study. Operators within the state, including Jason Ambrosino, a military veteran and the proprietor of the Broadalbin, NY-based dispensary Veterans Holdings, Inc., have articulated concerns regarding the financial implications of high-potency product taxation. Ambrosino elucidates the cost structure of tinctures, detailing how a substantial portion of the retail price constitutes a tax. This taxation framework results in significant price escalations for consumers, with the retail price effectively doubling the wholesale cost, thereby embedding the potency tax within the price paid by end consumers.
Wyatt Harms, co-founder of the brand FLAMER, echoed this sentiment, highlighting how potency taxes are factored into the cost structure, ultimately exacerbating the retail price of cannabis products in New York to become among the highest nationwide. This taxation strategy not only impacts consumer pricing but also influences the operational and financial strategies of businesses within the cannabis industry.
Matt ‘Fuzz’ Faughnan, owner of the Ossining, New York-based service firm Fuzzy Around The Edges, provided further insight into the operational challenges posed by potency taxes. Faughnan shared an anecdote about a negotiation over a three-ounce cannabis product, revealing how the THC tax constituted a significant portion of the wholesale price, thereby eroding profitability. This scenario underscores the broader implications of potency taxes on the cannabis industry, affecting everything from pricing strategies to profitability margins.
Collectively, these accounts from Illinois, Connecticut, and New York illuminate the complex interplay between potency taxes and market dynamics within the burgeoning cannabis industry. They underscore the need for careful consideration of tax structures to balance state revenue objectives with the sustainability and growth of the cannabis market.
Encourages Unauthorized Transactions
The imposition of taxes on cannabis significantly undermines the profitability of legal dispensaries, simultaneously escalating the retail cost for consumers. Despite assertions by various states that legally purchased, laboratory-tested cannabis, albeit at a premium, would deter consumers from patronizing the illicit market, practical observations suggest otherwise. This discrepancy is particularly pronounced in states like New York, which boasts a long-standing history of legacy sales intertwined with substantial illicit market activity. Leah Heise, Chief Executive Officer of Maryland’s Gemini Twin Consulting, articulates that potency taxes exert a detrimental impact on the expansion of the legal cannabis market, effectively alienating consumers. Heise emphasizes, “The illicit market remains the foremost adversary of the legal cannabis sector, and at present, we are on the losing side of this battle, primarily due to the burdens of overregulation and onerous taxation.”
Echoing Heise’s sentiments, Jason Ambrosino presents a parallel perspective, asserting that the current framework of potency taxes renders it unfeasible for licensed vendors to offer competitive pricing against the pervasive unlicensed market. Ambrosino speculates that the elimination of potency taxes could dramatically enhance the competitiveness of the legal cannabis industry in New York State, potentially capturing a significant portion of the market currently dominated by illicit transactions, estimated at 70%.
Supporting these viewpoints, a 2019 report by the Washington State Liquor and Cannabis Board sheds further light on the complex dynamics at play. The report reveals a divergence of opinions among public health community members participating in the working group, with some advocating for a tax structure aimed at discouraging the consumption of high-potency cannabis products. However, there was a consensus of skepticism regarding the efficacy of such a tax in achieving the desired public health outcomes. The report acknowledges that while a potency-based tax structure might be theoretically beneficial for states in the nascent stages of cannabis legislation implementation, the financial and logistical implications of establishing such a tax infrastructure would necessitate substantial investments, potentially imposing further financial strains on the legal cannabis market.
These analyses collectively underscore the intricate challenges facing the legal cannabis industry, spotlighting the counterproductive effects of potency taxes on market competitiveness, consumer preferences, and the broader goal of transitioning consumers from the illicit to the legal market. The insights offered by industry leaders and regulatory bodies illuminate the need for a balanced approach to taxation that considers the economic realities of the legal cannabis industry while striving to achieve public health objectives.
Eliminate the Potency Tax?
The introduction of potency taxes has precipitated a myriad of complications within the cannabis industry, manifesting in phenomena such as lab shopping and the inflation of potency figures. These practices complicate the valuation of cannabis products and engender inconsistencies in regulatory enforcement, presenting significant hurdles for the industry. Moreover, the imposition of potency taxes raises profound concerns regarding the impact on medical cannabis patients. Individuals who rely on higher doses of THC to manage their health conditions are disproportionately affected by these taxes, potentially incurring exorbitant medical expenses as a result. This situation underscores the need for a taxation framework that considers the therapeutic use of cannabis and its financial implications on patients.
The discontent with potency taxes is palpable among both industry operators and consumers, further exacerbated by the realization that state revenues generated from these taxes have fallen short of projections. In response to these challenges, New York State, under the leadership of Governor Kathy Hochul, is contemplating a significant overhaul of its cannabis taxation strategy. In her fiscal year 2025 budget proposal, Governor Hochul has advocated for the abolition of potency-based taxes in favor of a weight-based taxation model. This proposed amendment aims to simplify tax compliance for cannabis distributors by imposing a uniform 9% excise tax, thereby streamlining the tax obligations to a more manageable framework. Retailers would continue to navigate the complexities of dual sales and municipal taxes, albeit within a potentially more stable taxation environment.
The proposed transition to weight-based taxes in New York represents a pivotal moment in the ongoing discourse surrounding cannabis taxation. While this shift may not address all prevailing concerns within the cannabis market, it heralds a significant stride towards rectifying market distortions and enhancing the appeal of the legal cannabis market to consumers. Moreover, New York’s potential departure from potency taxes could serve as a cautionary tale for other states, signaling a reconsideration of the efficacy and desirability of potency-based taxation in the cannabis industry. This move could precipitate a broader reevaluation of cannabis tax structures across the United States, fostering a more equitable and sustainable approach to the taxation of cannabis that prioritizes market stability, consumer accessibility, and the equitable treatment of medical cannabis patients.
