Taxes, Regulations, and Small Business in California’s Marijuana Industry
Californians voted in 2016 to legalize marijuana for adult recreational use. The voter initiative, Proposition 64, provided for taxes, licensing, and a county option on whether to allow marijuana businesses at all (much like the alcohol rules in my home state of Kentucky, where some counties are “dry” to this day). Libertarians applauded the advance for liberty, and mostly understood that some taxes and regulation were inevitable — what product isn’t taxed and regulated in modern America? — but warned that excessive taxes and regulations could keep much of the marijuana trade in the black market.
Well, guess what? As usual, policymakers should have listened to the libertarians.
Scott Wilson, the Washington Post’s California correspondent, has a long look at the state of the taxed and regulated marijuana market in California. It’s a libertarian nightmare:
The once‐mystical heart of the nation’s marijuana industry is dying, fast, strangled not by law enforcement but by the high taxes and baffling regulation that have crushed small farmers since state voters approved legalization almost six years ago.…
Following legalization, state officials made several far‐reaching decisions that have effectively driven many small cannabis farmers to the brink of insolvency while consolidating a $5 billion‐a‐year legal market in the hands of industrial‐scale growers, most of them based far from these northern reaches [in] the Emerald Triangle of Humboldt, Trinity and Mendocino counties.
It’s a story we’ve written about before, based on an earlier report from Wilson and other reporting from the East Bay Express. Economists and journalists have pointed out for decades that regulation tends to be a greater burden on small businesses and start‐ups than on established, successful firms.
Wilson notes complaints that big industrial‐scale growers have benefited at the expense of longtime illegal growers trying to go legal.
The state imposed multiple taxes across the cannabis supply chain, a burden unmatched in other nearby marijuana‐legal states.…
Since 2018, when the new legalization rules took effect, the state has taxed marijuana three separate times as it travels from farm to consumer. Many counties and cities impose their own taxes, at varying levels, on top of the state levies. In some regions of the state, one pound of cannabis is subjected to as many as five separate taxes.…
California’s cannabis taxes come on top of licensing fees and regulatory permits, which can cost tens of thousands of dollars annually for growers, burying those who used to work without regulation in red tape and state invoices. The option to become legal, which roughly half of Humboldt’s farmers once accepted, has been a stunningly expensive one.
To be sure, some of the small growers have complaints that libertarians wouldn’t endorse. Wilson notes that “the state declined — after initially signaling it would do so — to limit the size of cannabis cultivations or the number of grower licenses it would issue to farmers.” The large growers produce a lot of marijuana, causing prices to fall. “Cannabis, unlike wine grapes, is not classified as an agriculture product here and so farmers are denied state benefits that accrue to other crops.”
There may be economies of scale in marijuana growing, as in many industries. There were hundreds of automobile companies in the early 19th century, but only a handful survived. But there’s no need for the government to add extra burdens to the challenges of small growers. As I said before, this is just another way that regulation contributes to inequality.
For more on this topic, see the new book Can Legal Weed Win?: The Blunt Realities of Cannabis Economics by economists Robin Goldstein and Cato adjunct scholar Daniel Sumner.