What we have seen in California, is that high taxes on legal cannabis lead straight to the illegal market. It’s very concerning that it will be the same here.
Tax hikes on marijuana products may be an advantage to the illicit drug dealers.
According to experts in the cannabis industry, entrepreneurs, and at the very least, a prominent DFL legislator, the relatively high state cannabis tax is causing consumers to choose the informal black market over regulated legal dispensaries.
Minnesota’s state marijuana tax of 15 percent is the fifth highest in the nation, behind only Arizona (16%), Oregon (17%) California (19%) and Washington (37%).
Senator Ann Rest of DFL, New Hope and chair of Senate Tax Committee said: “I believed it was a bad thing, to raise the tax.” What we have seen in California is the fact that a high tax rate on cannabis led straight to the blackmarket. It’s very concerning that it will be the same here.
Compare Minnesota’s taxes to other states.
Minnesota’s marijuana tax initially stood at 10%. Bipartisan budget talks between Gov. Tim Walz and Erin Murphy of the Senate, DFL in St. Paul. Lisa Demuth R-Cold Spring. The late Melissa Hortman DFL Brooklyn Park. After months of gridlock due to a DFL Senate majority and a DFL House tied, the leaders intervened in order to find a way to compromise the state budget.
Demuth explained that at the time the tax hike was a simple “rightsizing” of the tax rate in order to bring it more in line the other state’s rates. Tax Foundation research shows, however, that Minnesota’s new tax rate is higher than the median rate of states which have legalized recreational marijuana.
Fourteen of these 23 states have lower taxes on cannabis than Minnesota. Illinois taxes edibles, concentrates, and marijuana flowers at a higher rate than Minnesota. There are also nuances like two states which tax based on weight, rather than by price.
Minnesota sales tax is 6.875 percent. Local taxes are not included. Minneapolis’s state, city, county and local sales tax is 9.03 percent. When you combine the state, county and city sales taxes in Minneapolis with the cannabis tax, it results in an effective tax of more than 24 percent.
Mark Eide is the owner of In-Dispensary in Minneapolis, which was the first licensed recreational dispensary.
What are some of the disadvantages to higher cannabis taxes
Since July 1, the new tax rate of 15 percent has affected THC drinks and edibles that have been on shelves in most smoke shops and dispensaries for many years. Minnesota will legalize these categories of cannabis products by 2022. Minnesota’s medical marijuana has been available since 2014 and is exempted from the cannabis sales tax as well.
THC vapes, marijuana flowers and other cannabis products will be available as soon as growers can produce them. Retailers can also sign agreements with tribal nations who have the right to cultivate plants after recreational use was legalized for all cannabis in 2023. It will provide consumers with more choice, but also higher prices than the illegal market.
Taxes are not the only reason for price differences. Licensees must not only pay for a shop and hire employees but also comply with the Office of Cannabis Management regulations regarding security and odor control. Their cannabis must be sent to a lab approved to test it, measure its potency and label it.
The cannabis retailer said they all have one commonality: these costs cost them money their illegal dealers wouldn’t. They can’t recoup that money until they secure a supply.
Jacob Macumber Rosin is an expert on excise taxes and a Tax Foundation analyst. He said that there’s evidence that states with high barriers, be it a low number of retailers because of regulations, insufficient suppliers to supply the retailers or high tax rates, are more likely to have a parallel market that takes some of the business.
According to research conducted by his organization, Minnesota, for example, has the highest cigarette taxes in the country, as well as the 6th-highest rate of illegal cigarette trafficking.
He said that if efforts to legalize marijuana in Wisconsin and South Dakota are successful, the “price differential” between states on either side of Minnesota will determine whether or not the illicit market is thriving.
A January report from California’s cannabis regulator revealed that, in one of the states with higher taxes, only 38 percent (or 63 million pounds) of marijuana sold on the legal market is consumed by the residents of California. The rest, it appears, comes from unlicensed or illicit sources.
Colin Planalp is a senior researcher at the University of Minnesota School of Public Health Cannabis Research Center. He believes that the demand for cannabis-based products at the consumer level can be described as “somewhat elastic”.
He said that an increase in the price of legal market marijuana would likely reduce the demand for it.
Planalp says that this could lead to people either using less marijuana, cultivating their own plants or buying cannabis on the black market.
Illicit cannabis is not without its risks. It can be used to finance criminal groups, put the purchaser in dangerous situations or smoke cannabis with harmful additives that make it stronger. The differences between illicit and legal cannabis were a part of arguments used to legalize cannabis in Minnesota, and other states.
Planalp stated that “Minnesota, along with other states, which have legalized nonmedical cannabis use, have established regulatory systems intended to enhance safety, mitigate risks, and reduce certain risks.” Planalp noted the lab tests for pesticides and heavy metals as well as other contaminants as required by law, as was the labeling of dosage requirements.
If someone wants to buy cannabis, he or she should purchase it from a legal market. It’s safer overall.
What are the businesses doing about it?
Businessmen are coping with cannabis taxes in different ways.
Eide, of In-Dispensary Minneapolis said: “We have switched to an out-the-door price system. What you see on your label is exactly what you pay.”
We are paying the full 5 percent additional tax and also some initial tax to keep our sticker prices appealing. “Our prices have dropped since the tax hike,” said he.
To do this, Eide took on a second job, and reduced the working hours of his one employee, his older brother, to just 10 hours per week.
Cory Lake is the owner of Lake Group Insurance which covers cannabis stores and other businesses. Cory Lake said that investors who are interested in financing marijuana operations in Minnesota have also been put off by this tax hike.
“Those with Capital in the Economy” [Minnesota] “Those who want to invest in the industry or are planning on expanding investments into other states are delaying, or even reducing, their investments,” said he.
Investments in the sector are relatively opaque. Therefore, it’s difficult to tell how much has been lost. But any drop in investment could slow down the progress of an industry which took years more than anticipated to start.
Cannabis is illegal at the federal level, which has led to a combination of state-level regulatory challenges and its unique status as an illicit substance. The federal nature of cannabis means that owners can’t deduct their expenses for business on federal tax returns once they open a shop and start selling the drug. This complicates banking, as most cannabis businesses are forced to only accept cash, making building owners who have bank loans nervous to lease storefronts for cannabis dispensaries.
Jennifer Swanson is the owner of Fridley Dispensary. She said that she was unable to lease a building in Blaine or Bloomington and had been rejected by other landlords. She claims to have invested over one million dollars in the newly licensed business.
The product that we will have to purchase once the suppliers become available is not included in this figure.
Some retailers, however, are less concerned about the new tax. They rely on their low overheads and their loyal customers to maintain their business without having to change their prices.
Sarabear Kelly Modlin, the co-owner at Lucky Strain New Brighton, said that most of her customers used these products for anxiety, depression and pain relief. The customers are not only looking to have a great time. They want the products on a regular basis.
If the tax money is going towards services, such as school lunches or addiction services, then “most of our clients are for it.” The additional five percent is not a problem as long as the money goes to a good cause that we can easily see.
She said that if the fall came, school opened, and people saw cuts in public services, while paying more for products, they would “be upset”.
This article first appeared on MinnPost and is republished here under a Creative Commons Attribution-NoDerivatives 4.0 International License.
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