High weed tax in Pennsylvania may repeat California’s mistakes

(The Center Square) — A revenue analysis estimates that Gov. Josh Shapiro’s budget proposal for adult-use cannabis could bring in more than $250 million annually — but legalization advocates aren’t so enthusiastic about the Pennsylvania weed tax.

The concern is not about legalizing and regulating marijuana. Instead, it’s a worry that Pennsylvania will repeat the mistakes of high-tax states that have failed to move people from the illegal market into a regulated one.

“I think a twenty percent tax rate is the fastest road to looking like California,” said Meredith Buettner, executive director of the Pennsylvania Cannabis Coalition.

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The California comparison isn’t a compliment. High taxes and overbearing bureaucracy has kept the state’s marijuana industry in the black market, analysts say as only twenty percent of the industry has moved into the regulated market.

Other high-tax states, like Illinois, have similar problems — though they come closer to converting a majority of the industry to the legal market.

Instead of learning from the mistakes of other states, Pennsylvania is in danger of adopting them.

“A twenty percent tax is prohibitively high,” Buettner said. “We’ve seen markets that have rolled out tax rates that high and really have a hard time pulling folks into the regulated market … it’s simply cost-prohibitive for folks. They’re more likely to just stay in the illicit market.”

In Shapiro’s proposed budget, he estimated that marijuana sales would bring in $189 million annually by fiscal year 2027–28. The latest analysis, from the Independent Fiscal Office, estimated that legalizing marijuana would do more for the budget than Shapiro expects: $253 million would flow into the commonwealth’s coffers annually by fiscal year 2027–28.

When you look at the numbers, you really have to look holistically about how expensive these products are already going to be. It has the potential to stunt the success of a market.

The IFO assumes legal sales would start in January 2025 with a twenty percent excise tax and that retail sales would also be subject to sales and use tax.

But lower taxes in border states means residents may buy elsewhere, Buettner said.

“I don’t think that it is reflective of a tax rate that will work for the commonwealth,” Buettner said. “You can see the tax rates of our surrounding states. … What’s the incentive to buy legal products here in Pennsylvania when it’s cheaper to go to New Jersey or Maryland? Not only do you drive folks back to the illicit market, but you drive folks out of the Pennsylvania market.”

Regulating marijuana is a tricky business. Federal law complicates action on the state level and fixing mistakes becomes harder after legalization. New Jersey has been slow to capture the illicit market due to limited numbers of dispensaries and an onerous licensing process.

States like Colorado, however, have grown their program and captured the vast majority of the black market. Colorado has a fifteen percent excise tax and a 2.9 percent sales tax on recreational marijuana.

Pennsylvania starting at twenty percent, before local taxes are added, makes it harder to have prices low enough to be competitive with the illegal market, Buettner said. Marijuana operators face a 70 percent effective business tax rate, so without a “reasonable” levy, legalization could fail.

“When you look at the numbers, you really have to look holistically about how expensive these products are already going to be,” she said. “It has the potential to stunt the success of a market.”

Anthony Hennen is a reporter for The Center Square. Previously, he worked for Philadelphia Weekly and the James G. Martin Center for Academic Renewal. He is managing editor of Expatalachians, a journalism project focused on the Appalachian region.

This article was republished with permission from The Center Square.