Editorial: Why can’t California find the pot tax sweet spot?

It’s been three years since Californians voted to legalize marijuana, but the state is still struggling to figure out the right levels of regulation, taxation and enforcement to apply. The sweet spot remains elusive.

The black market in marijuana continues to thrive. The amount of tax revenue coming in is a fraction of what proponents of legalization predicted. And legal shops complain they’re being undercut by unlicensed competitors who don’t adhere to testing and safety requirements.

State lawmakers will consider slashing marijuana taxes in 2020 to help legal sellers compete with unlicensed operators. But now another option has been floated that should be seriously considered: Completely overhaul the way California taxes marijuana by levying higher taxes on the strongest cannabis products.

Taxing the product by its level of THC — the psychoactive compound in marijuana that makes users high — wouldn’t necessarily cut the price of legal pot. Rather, the goal of a so-called potency tax would be to discourage the high-frequency use of high-THC products, which are associated with the greatest health risks.

Proposition 64, which legalized marijuana, imposed state taxes on commercial cultivation and sales. But the initiative also directed the state Legislative Analyst’s Office to report to lawmakers by January 2020 on how the state should adjust the tax rates to address critical goals of Proposition 64 — namely, how to undercut the illicit market, discourage underage use and raise enough revenue for law enforcement, research and public health programs. It is the LAO that has recommended a potency tax.

But there is a tension among the state’s goals. Public health experts have long recommended treating marijuana like tobacco and alcohol: as a legal product, but one in which the state has an interest in discouraging excessive use through regulations and high taxes. That’s the LAO’s perspective too. “We view reducing harmful use as the most compelling reason to levy an excise tax,” analysts wrote in their report to lawmakers.

But cannabis industry representatives, as well as some lawmakers, argue that the state’s top priority right now should be quashing the huge illicit market. After all, taxing THC to discourage harmful use is pointless if Californians continue to buy high-potency cannabis products tax-free from the black market. Illicit shops pose another public risk — by selling untested and unregulated products. Many vaping-related illnesses have been tracked back to illicit cannabis vape products.

The booming black market is a legitimate concern. There are about three unlicensed pot shops and delivery services for every one licensed operator in California, according to one industry group analysis. Consumers continue to buy lots of pot from illegal businesses, and one reason is the steep state and local taxes that can add 50% to the price of the product in legal shops. The price gap between legal and illegal shops is only going to get bigger, too. The state will raise cannabis taxes on Jan. 1, an increase baked into existing regulations.

High taxes aren’t the only reason the black market persists. Fewer than 20% of California cities allow retail shops to sell marijuana for recreational use. Just one-third of Californians live in areas with at least one licensed adult-use pot shop, according to the LAO. (However, new state regulations that allow licensed delivery service into all cities will mean 90% of adults will have access to legal pot.) It’s also clear that state and local enforcement agencies should be working harder to shut down illicit operators.

Lawmakers have a tough balancing act in 2020 as they consider cutting or restructuring marijuana taxes. There are good reasons to adjust the tax structure, either temporarily or permanently. But public health and harm prevention should be front and center in any cannabis tax debate.