Californians Learn That Raising Taxes on Marijuana Fuels Black Markets for Drugs

If only they would apply that lesson to other goods and services.


At the beginning of 2022, tax rates for marijuana cultivated in California are set to increase, even though black market sales completely dominate the retail market in the Golden State.

Experts estimate that about three-quarters of all marijuana sales in California happen not through legal dispensaries, but through unlicensed vendors. California voters legalized the cultivation and sale of marijuana for recreational use in 2016, but extremely high taxes and oppressive regulations have caused the rollout to be a disaster.

The tax increase set to hit on New Year's Day is a prime example. California taxes the cultivation of marijuana by weight. In the tax regulations that state lawmakers passed for cannabis in 2017, the cultivation tax rate was tied to inflation. When inflation rises, the cultivation tax will also automatically rise.

Inflation rose in 2021, and not by a small amount. The U.S. Bureau of Labor Statistics calculates that consumer prices rose nationally 6.8 percent between November 2020 and November 2021. Because of California's law, cultivation taxes will rise 4.5 percent. For growers of fresh cannabis plants, the cultivation tax will jump from $1.35 an ounce to $1.41 an ounce. On top of the cultivation tax, the state charges a 15 percent excise tax, and the cities that allow dispensaries have their own local sales tax rates. A person attempting to legally buy marijuana in California can expect the price to balloon between 35–50 percent through tax add-ons, depending on the city.

This, obviously, will make it all the more difficult for legal vendors to compete with the black market. That the increase is happening anyway is absurd and should be seen as a warning against automatically tying any tax rate to inflation.

Legal growers are rebelling, and some are reportedly talking about withholding their state taxes and demanding relief. They might actually have some leverage here, given the amount of energy that state and local law enforcement agencies are exerting by trying to shut down illegal grow operations. In October, Attorney General Rob Bonta bragged about a massive multi-agency operation that resulted in the eradication of 1.2 million illegally grown marijuana plants. Does Bonta also want to start going after legal growers who are protesting the state's absurd tax rates?

Before Bonta became California's attorney general, he was a Democratic assembly member representing the city of Alameda. Back then, he actually agreed with marijuana vendors that the state's tax rates were way too high. In 2019, he introduced legislation that would have reduced the state's excise tax and temporarily eliminated the cultivation tax until 2022. It didn't make it out of the committee stage. So while Bonta may now complain that illegal growers are "cheating the state out of millions of tax dollars," he knows (or at least used to know) that California's own high taxes are the real culprit here.

How bad are these marijuana taxes and regulations? High enough to cause the Los Angeles Times editorial board to thoroughly grasp—at least in this case—that oppressive government controls are what cause black markets. The board's Sunday editorial column sounds at least partially like something we might run here at Reason, though we'd leave out the demands for "ramping up enforcement" (we'd also probably edit out the handwringing over the environmental impact of illegal grow operations, which all seems to be a talking point for progressives and liberals to convince themselves that these giant drug busts are somehow different from ones launched by drug war advocates over the past four decades):

California can emerge from this marijuana mayhem by flipping the incentives. It's too easy and profitable to remain in the black market and too onerous and expensive to join the legal one. By easing licensing procedures or reducing taxes temporarily, and ramping up enforcement and penalties for illegal operators, the state has a better chance of coaxing fence-sitting operators to get licensed.…

Far too many cities and counties still ban cannabis businesses. Proposition 64 guarantees that right, which is why some advocates are floating the idea of another ballot measure to eliminate cities and counties' veto power over marijuana businesses. Local leaders have to acknowledge that refusing to recognize a now-legal industry is only encouraging the black market. Some localities are beginning to shift. Los Angeles County, for example, is considering revisiting its ban on pot shops in unincorporated areas.

I would invite members of the Times' editorial board to go back and look at how they've written about other taxes, like those on cigarettes and those proposed for soda. With marijuana, they grasp that too many taxes and regulations lead to a black market. But with cigarette and soda taxes, they're entirely certain that states and cities should jack them up. They're sure it will only lead to the thing that they want—fewer smokers and obese people—and not other unforeseen and negative consequences.

But we know that's not true. New York City has some of the highest cigarette taxes in the country. It also has a massive black market for cigarettes, accounting for as much as half of all sales. Cigarettes are to New York City what marijuana is to California. The absurdly high cost may have caused some people to quit, but it also made a market for bootlegging.

It's great that this marijuana disaster may be causing some leaders to rethink the state's high tax and regulatory burdens and their downstream consequences. But don't think they're unique to cannabis. It's just more noticeable because the legal cannabis industry is relatively new.

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  1. To paraphrase: Californians learn nothing and forget everything.

  2. "Californians Learn That Raising Taxes on Marijuana Fuels Black Markets for Drugs"

    Same thing happened with tax free moonshining for several decades after the 1932 federal repeal of alcohol prohibition in states that legalized, but excessively taxed and regulated the manufacture, wholesaling, transport and retail of beer, wine and/or hard liquor.

    1. Thisis exctly so.. not right, mind you, but so.

      California have handled other goods the same way as they are handling MJ. Teir ridiculous tax and background check requirement for ammunition purchases has sprouted a HUGE commerce in non-regulated ammunitoon coming into California. Everyone I know who is involved with firarms, when they visit folks in Californoia, always check ahead.. hy what do you need? I'll buy it untaxed etc here and "happen to have it" wlong with when I come. ONy works for road travel. On the toher hand, WA and OR have insane levels of taxation on alcoholic bevereages, and some enterprising outfits calipalise on this in towns near the border with Oregon. The Costco in Redding sell a 1.75 litre bottle of a very drinkable vodka for $16 and change. That very same item number in Washington crawls out the door under a price burden of close to $48. THREE TIMES the price for exctly the same item. Liquir stors near the Oregon line and even one within sight of "the line" with Oregon run a land office business selling "last chnace" liquor to northern residents as they go home. Funny the doofi in Californias gummit see that but don't see the flip side as it relates to their treatment of pot and ammunitioin. And starting next year, small gas powered implements like lawn mowers, leaf blowers, chainsaws, etc. Illegal to sel lin CA after some date next year, I can envision some signficant profits to be taken by sasually importing such items and blacmarketing them inside the "safe zone" of California's tyranny.

      ALL of this should be eliminated under the terms of Article One of the US COnstituion that mandates the COngress "make regular" trade between the several states. How can one state mandate special requirement,s banning items readily availble in all otehr states? Or even their own "spayshull" versioins of pollutioin requirements for vehicles.... which is the root of the shipping snafu in California, as about 60% of truck tractors that were legal to operate into/out of California and within the state have been outlawed by the infinite Whizz Dumb of that state's gummit.... thus reducing the fleet of "legal" truck tractors to about 40% of waht it was lastAugust. No wonder the sips are bounding on the hook in the Catalina Channel, by the thousands. And the ports clogged with cans the state refuse to allow to be moved by "non-compliant' tractors that were legal last August but are no longer. Interstate commerce much?

  3. It's not even the taxes (so much), it's that many cities don't have a legal dispensary, even though it's legal throughout the state.

    1. ^

      "Legal," but still not permitted.

  4. Meanwhile no state in the bible-belt has yet legalized marijuana, and they still routinely prosecute people for possession of even small amounts. California is still a better place to live then any deep red state.

    1. There's that. Also, tariff on opium was a major source of revenue before the Harrison Act. Historically it has proven itself a fairly workable "sin" tax to all but the most rabidly coercive absolute prohibitionists. Only opiates and their imitations cause genuine addiction (complete with withdrawal sickness). So pricing them higher shifts demand to enjoyable drugs that are neither addictive nor as dangerous as alcohol. Tim Leary called them utopiates.

  5. By easing licensing procedures or reducing taxes temporarily.....

    I would suggest the contention that "Californians Learn That Raising Taxes on Marijuana Fuels Black Markets for Drugs" is a dubious proposition at best.

  6. As usual, they just don't know when to stop. Here they have a new source of tax revenue; all they had to do was keep the rates in bounds and the money would just roll in. But no; they have to be so fucking greedy.

    On top of that, with marijuana legalized they save on enforcement costs. But now they'll have to crank the enforcement machine back up to chase the black market.

    I guess part of the swearing in process for a politician is having half of their brains sucked out.

    1. all they had to do was keep the rates in bounds and the money would just roll in

      The trouble is that anybody who can apply a tax is not only going to, but is going to apply as much as they think they can get away with. Once you've got a city-level tax, a county-level tax, an industry board fee, and the state-level tax, you've now got the highest tax the market will bear x4. Prices in the boutiques are now higher than they were on the black market before 'legalization.'

      On top of that, with marijuana legalized they save on enforcement costs.

      Except "saving on enforcement costs" also means "cutting into the police union's revenue," such that further criminalizing unauthorized grow operations had to be part of the deal. I eagerly await the coming scare stories about the dangers of unlicensed weed.

      1. The stories already started. Have seen few news stories saying "FeNtANYL in black market weed". They have been debunked for the most part.. doesn't stop my friends from believing it.

        1. The "presumptive" test used by many police agencies has a nasty habit of spitting out false positives for fentanyl. The stories will persist as long as the police officer can honestly say that the cannabis he seized tested positive for fentanyl.

  7. Cannabis in California is going up in smoke over onerous Cali rules and regulations. I remember when there were 300 dispensaries scattered throughout LA Country. Many of those dispensaries were mom and pop operations paying rent, salaries boosting the local economy instead they were closed down then cannabis became recreational. After pot become recreational in California, I noticed the price for an ounce, or a few joints was heading for the moon. Even with high pot prices I continued to support the few dispensaries who were complaining of high taxes and too many rules. I would think that with one party government they would get it right sadly no they have screwed it so badly for cannabis they will have to drastically cut taxes.

    1. What if the looter politicians are using high license "legalization" as a mere "gotcha" pretext to more airily impose fines, confiscation, forfeiture and jack up court and legal fees? Objections can now be parried with "you chose to sin instead of obey." Making it a sin tax is a step up from fanatical prohibition. But if the Harrison Act is any indication, it's not a very helpful or realistic step--possibly another grasping and extortionate opening bid in the power struggle.

  8. The results of unreasonable levels of taxation are strange and amazing, or are they simply what one would expect? I would say that reasonable expectations have come home to roost

  9. The Kalifornia government and the pathetic Marxist politicians in this state are some of the dumbest monkeys on this planet. Kalifornia "progressives" screw everything up with their lust for tax dollars as they drive business into the ground. I don't know a single business person in this state that doesn't do a lot of their business underground for cash to avoid taxes and crippling regulations.

  10. The old axiom is if you want less of something you tax it more. Apparently California wants less of their legal distributors that pay taxes. Don't politicians remember why they raised taxes on tobacco and alcohol?

  11. Laws against production and trade are anti-market. Invariably they cause Crashes and Depressions. But California's politicians exploit "high license" as an alternative to the police takeovers of bribery and organized crime that occurred when beer and wine were banned in January 1920. Policeman Roy Olmstead, as a wealthy bootlegger, helped postpone America's dry crash until 1929. Today he could be another bribe-taking West Coast cop without the bother of ships, inventory and cargo-handling facilities--or another 2008 asset forfeiture crash.

  12. New York is following the same path. The license is 200k.. meanwhile there are people setting up weed tables on the street. Delis and Bodegas want a piece of the action too and followed suit.

    Who in their right mind would want to open licensed dispensary in this environment? My guess is big corps will come.. get prices down to the point where black market can't profit and that will be the end of that.

  13. In Oakland, the permits are being handed out in an 'equitable' manner; who's nephew got the first one?

  14. Reason might want to see how much law enforcement time and money is being spent on enforcement. Riverside County and others are spending millions on cannabis enforcement task forces, resources that are draining other coffers.

    1. So instead of tossing 'em in the clink for having some dope, they end up there for not having the proper permits!
      That's some Catch you got there, that Catch 22...

  15. So, California government even managed to screw up legal weed.

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