The Negative Effects of High Taxes on Medical Marijuana

New California bill latest attempt by state to tax medical marijuana, raising the debate over whether medical cannabis patients should be so heavily taxed.

Laws surrounding cannabis in the U.S. are often complicated and contradictory. Although marijuana is legal in certain states both medically and recreationally, it remains federally illegal. This creates a minefield of issues when trying to build a regulatory framework, including applying taxes.

To many, taxing recreational use of marijuana seems like a logical move, treating it in many ways similar to tobacco and alcohol.

However, the discussion changes when deciding whether to tax medical marijuana. While many advocates argue that medical use of cannabis should not be taxed, lawmakers are more and more looking to medical marijuana programs as a source of revenue for their states, at times taking it too far.

Adding extreme taxes on cannabis products, though, is not a new idea. The Marijuana Tax Equity Act, introduced in 2013, would have included a 50% excise tax on sales from growers to processors. Never passed, the bill continues to open the door to the idea of further taxation of the marijuana market. Compared to a 50% tax, most proposals seem like a fair compromise.

Nowhere has this battle been fiercer than on the West Coast. California is the largest cannabis market in the U.S. and, on the cusp of possibly legalizing recreational use, has been struggling with the idea of how to tax its vast medical marijuana program. A newly proposed law has added more fuel to the debate.

The Marijuana Value Tax Act, introduced by Sen. Mike McGuire, calls for a statewide 15% excise tax on medical cannabis.

“Now that there is a long overdue regulatory framework put into place, it’s time to help fund the areas that are most affected by the cultivation — those communities that have long been paying the price of the negative effects of cultivation brought on by the ‘bad actors’ who destroy the environment and bring in crime,” said state Sen. McGuire.

The tax is expected to bring in nearly $150 million for the state yearly. However, while some lawmakers are lured into medical marijuana for the high tax revenue, others feel it is wrong to tax what amounts to prescription medications.

California assemblywoman Melissa Melendez has said lawmakers might be reluctant to tax something that people rely on as medicine. “I anticipate that it will be a difficult choice for members of both parties,” she remarked. Melendez did not vote for the bill herself.

McGuire’s tax would be an additional tax to the current system. Medical cannabis in the state is already subject to the state sales tax of 7.5 percent, and some local municipalities have been specifically taxing medical marijuana sales for years.

“[The 15% tax] California is proposing would be highly unique,” says Paul Armentano, deputy director of the National Organization for the Reform of Marijuana Laws (NORML). “I’m not aware of other states where a tax rate like this has been proposed or imposed.”

In the loosely structured California medical marijuana system, it is common for people to access cannabis who don’t truly need it, an argument often made in defense of high taxes on medical marijuana. However, patient advocates respond that it is wrong to punish deserving patients with such high costs.

In some California cities, like Palm Springs, local taxes on medical cannabis run as high as 10%, meaning patients are charged almost 18% more for their medicine than the base price. If McGuire’s bill passes, that number will shoot to around 34%. Such high costs have the potential to drive patients to cannabis’s black market, which is still thriving in California

“I’m the first to admit that government is too bloated and that Californians are overtaxed,” former California state Rep. George Runner said in a statement. “But the fundamental question here is who should pay the steep costs of marijuana-related activities that include trespass on public lands, water theft and unregulated use of pesticides.”

Apparently, the answer here is the patients, who are most likely to absorb these higher costs, and because insurance companies do not reimburse medical marijuana patients for their medicine, these taxes will come directly out of the pockets of the sick.

Further north in Washington State, as in most states, medical marijuana sales are considered retail sales, and thus are subject to retail sales taxes and are not eligible for the exemption given to other prescription drugs.

All this falls on the fact that the FDA does not recognize medical marijuana as a prescription medication, allowing individual states to tax patients and the industry as they please. While nearly every state in the country exempts prescription drugs from its general sales tax, very few states exempt non-prescription drugs.

At present, medical marijuana is best regarded as a non-prescription drug because it doesn’t have approval by the Food and Drug Administration (FDA), meaning doctors can recommend that their patients use marijuana, but not formally prescribe it. Barring FDA approval, state sales taxes will continue to apply to medical marijuana, as is the case in most states today.

The issue changes, however, when discussing excise taxes like Sen. McGuire’s. Typically, excise taxes are used as a tool to discourage use, like those placed on tobacco and alcohol, to help offset negative societal costs. While there is an argument for excise taxes to be applied to recreational use of marijuana, placing excise taxes on medical marijuana denies that, when used correctly, medical marijuana may provide health benefits for those using it.

Currently, 12 states with medical marijuana programs have some form of specific tax on marijuana sales. However, not all states are so eager to heavily tax their patients. In Colorado, medical marijuana sales are taxed marginally at 2.9%, compared to a 27.9% tax rate on the recreational market. However, some state officials are against even marginal tax rates.

“I think taxing any kind of medicine is patently offensive,” says Colorado state Rep. Jonathan Singer. “I would support repealing it.”

Neither Maryland nor New Hampshire plan to tax medical marijuana sales when their systems get off the ground.

High taxes and complicated regulatory atmospheres also affect cannabis businesses.

That’s partly because Section 280E of the tax code denies even legal dispensaries tax deductions because marijuana remains a federally controlled substance.

Congress passed the measure in 1982 so that businesses “trafficking in controlled substances” prohibited by federal law may not access the many tax deductions and credits available to other businesses, such as rent and employee-related expenses.

That means a marijuana business owner can pay an effective tax rate as high as 70%, as opposed to the more typical 30% rate for other businesses.

Sen. Ron Wyden (D-OR) and Sen. Rand Paul (R-KY) introduced The Small Business Tax Equity Act last year that would let marijuana businesses compliant with state law make standard business deductions. The bill has been stuck in committee ever since.

Sky-high federal taxes on top of state taxes can make it almost impossible to operate a legal business. This is made worse by the high cost of licensing fees.

In Pennsylvania, a hopeful dispensary owner can plan on spending at least $1 million in fees, including a $200,000 application fee. Hawaii shop owners will pay $75,000 for their application fee and $50,000 a year after opening, with eligible owners needing over $1 million in cash on hand to open. In New York, prospective dispensary owners need to put up a refundable $200,000 application fee, as well as another $45,000 in non-refundable fees.

Illinois, however, has taken these fees the furthest in an attempt to cash in on their medical marijuana program. The state charges an application fee to cultivators of $200,000 and a yearly renewal fee of $100,000. The state fees for dispensary owners in Illinois are lower than for cultivators but still top the average costs among medical marijuana states.

While most Americans will agree that it is necessary to collect fees in order to help fund the regulatory systems put in place to oversee state medical marijuana programs, prohibitively high costs have held back the growth of medical marijuana access in states like New York and Illinois, while double digit tax rates cut into the treatment funds for society’s most vulnerable.

Until such time arrives that FDA approved cannabis-based medications are available by prescription and covered by insurance, the debate over the correct way to tax patients and the cannabis industry will continue.