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420 with CNW — Cannabis Taxes Are Underperforming Expectations in Several States

Approximately one-half of the U.S. population resides in states where recreational cannabis is legally accessible. Furthermore, 11 additional states, including Florida and Wisconsin, are contemplating legalization this year.

One of the primary arguments for the legalization of cannabis is the potential for increased state tax income. However, the amount of revenue generated depends on the regulatory decisions made by each state regarding the cannabis industry and the method of taxation employed.

Taxes on recreational cannabis typically revolve around factors such as potency, price, weight and quantity, similar to the taxation of other “sin products” such as alcohol and tobacco. Taxation of these goods is not merely a revenue-generating mechanism for the government but is also seen as a tool to influence public-health policies and mitigate the adverse effects associated with their consumption. These taxes are intentionally higher compared to taxes on other commodities.

The rationale behind aggressive taxation of such goods lies in the recognition that their usage imposes societal burdens such as increased healthcare costs and violence, termed as “negative externalities” by economists. Research has indicated potential health risks associated with cannabis, particularly among adolescents. Consequently, governments frequently structure cannabis taxes in a manner aimed at curbing its use.

Most states that have legalized cannabis implement a sales tax specific to marijuana. Some use weighted or quantity-based taxation techniques in addition to sales taxes. For example, a set of six cannabis brownies weighing a pound might be taxed based on their quantity or weight. Similar to the taxation of alcoholic beverages in many states, potency-based taxation is also utilized to regulate cannabis consumption. Spirits have significantly higher taxes than beer and wine. Similarly, cannabis can be taxed based on the level of THC.

Washington and Colorado became the first states to legalize cannabis for recreational use in 2012, with sales beginning in 2014. The states adopted an aggressive approach to cannabis taxation compared to others. Colorado, for instance, levies a marijuana sales tax of 15% for consumers and an additional 15% tax based on weight for retailers, in contrast to New Mexico’s 12% sales tax. Washington imposes an even higher tax rate of 37%.

Washington and Colorado anticipated substantial tax revenues from their burgeoning cannabis industries due to the high tax rates imposed. However, these predictions were based on estimates of illegal cannabis usage, leading to an overestimation of legal consumption, which is typically more expensive than illicit drugs.

Former Colorado governor John Hickenlooper predicted that cannabis taxes would bring in more than $130 million during the first year of sales in 2014. However, the actual revenue fell short, amounting to approximately $88 million. Washington faced a similar situation, with tax revenue significantly below projections. Furthermore, both states experienced a decline in tax revenue from tobacco and alcohol products, attributed to a shift in consumer preferences toward marijuana consumption. This led to a reduction in revenue from these sin goods, although overall tax revenue increased postlegalization, albeit not to the extent anticipated by policymakers.

Additionally, states such as Colorado, California and Oregon have witnessed a slowdown or decline in cannabis sales and revenue due to market maturation, leading to a drop in average cannabis prices and subsequent reductions in tax revenues.

Potency-based taxation appears resistant to falling prices, assuming consistent cannabis sales volumes. However, its effectiveness hinges on consumer preferences for products with high potency, which may not align with market realities. Moreover, suppliers could manipulate THC potency to avoid taxes, potentially leading to unintended consequences such as the proliferation of low-potency products.

Ultimately, there is no one-size-fits-all tax structure capable of guaranteeing a steady stream of cannabis tax revenue. While they have an impact on market dynamics, tax laws are not able to completely counteract demand swings. State tax collections are likely to continue declining or at least remain stagnant as the cannabis industry matures and becomes more competitive as additional states legalize its use.

Licensed companies that are bearing the heavy taxes imposed by the states in which they operate, such as Verano Holdings Corp. (CSE: VRNO) (OTCQX: VRNOF), likely long for a time when favorable tax reforms will be enacted so that the regulated market can outcompete the illicit marijuana actors.

About CNW420

CNW420 spotlights the latest developments in the rapidly evolving cannabis industry through the release of an article each business day at 4:20 p.m. Eastern – a tribute to the time synonymous with cannabis culture. The concise, informative content serves as a gateway for investors interested in the legalized cannabis sector and provides updates on how regulatory developments may impact financial markets. If marijuana and the burgeoning industry surrounding it are on your radar, CNW420 is for you! Check back daily to stay up-to-date on the latest milestones in the fast -changing world of cannabis.

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