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ILLINOIS
CANNABIS TAXES AMONG NATION’S HIGHEST, COULD KEEP BLACK MARKET THRIVING
Illinois Policy Institute/
Austin Berg
Springfield
lawmakers have yet to learn the lesson that money walks. And it’s not
just to other states. Sometimes, it walks past the legal dispensary with
a 40% tax rate and into a dealer’s house. |
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 Illinoisans awoke to a brand new industry on New Year’s Day,
with legal recreational marijuana sales coming online Jan. 1. Lines were long.
Enthusiasts celebrated. Dispensaries cleared more than $10 million in sales in
the first week.
At the same time, images of customers’ receipts were spreading across social
media.
“Wait, taxes are how much?”
Even in Illinois, which financial forecasting service Kiplinger dubbed the least
tax-friendly state in the nation, weed buyers had sticker shock.
Of the 10 states with legal recreational marijuana regimes, Illinois is home to
the second-highest tax burden on retail sales, according to a review of state
and local statutes. In Chicago, customers will pay up to 41.25% in taxes on some
marijuana products, after factoring in a soon-to-be-passed Cook County excise
tax. That total doesn’t even include a 7% state wholesale tax further up the
supply chain, which will be passed down to consumers through higher prices.
Compare that with neighboring Michigan, where the total tax on recreational
marijuana is 16% across the board.
“We knew it was imperative that our licensed businesses would be able to compete
with the unregulated market’s prices,” said Robin Schneider. She’s the executive
director for the Michigan Cannabis Industry Association and served on the
drafting committee for the state’s legalization ballot initiative.
“[We’re] glad that Michigan’s voters agreed with our decision to keep taxes
lower and pricing competitive.”
Springfield lawmakers have yet to learn the lesson that money walks. And it’s
not just to other states. Sometimes, it walks past the legal dispensary with a
40% tax rate and into a dealer’s house.
That’s exactly why too-high taxes should be a concern for marijuana lovers and
haters alike.
Not only are there health risks associated with consuming black market products,
but industries without law enforcement mete out justice themselves, resulting in
public safety problems.
California legalized recreational marijuana in 2018. Still, 80% of cannabis sold
in California comes from the black market, according to New Frontier Data, a
Denver firm that studies cannabis sales. Why? One big driver is price. Experts
point to high taxes and high barriers to entry for legal sellers. The New York
Times reported in April that in some areas of California, the illicit market is
larger today than it was before legalization.
Illinois’ consumer-facing taxes on marijuana are even higher than California’s.
The only state with higher taxes on cannabis sales than Illinois is Washington.
But Washington is also home to some of the lowest legal cannabis prices in the
nation because the state licenses so many growers. Evidence suggests its black
market is less powerful than California’s, making up roughly half of sales
according to a study by the Rand Corporation.
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Besides going to Michigan or an illegal dealer,
there is another tax-avoidance option for most Illinois consumers:
going medical. Illinois greatly expanded conditions for which a
patient may be prescribed medical marijuana in 2019. And at least
one Chicago dispensary was encouraging new customers to use a list
of nearby doctors to get a medical card in order to skip the long
lines and avoid higher taxes. This kind of arbitrage would not only
poke a hole in the state’s revenue estimates, but could crowd out
existing medical marijuana patients with dire illnesses.
There are other elements of Illinois’ marijuana rollout that don’t
quite add up, regardless of whether you supported legalization.
The state’s tiered taxation on products is one example. Illinois
slaps a 10% tax on products containing less than 35% THC (the
psychoactive substance in cannabis), a 20% tax on cannabis-infused
edible products and a 25% tax on products with more than 35% THC. No
other state has adopted this system.
Some argue this tax structure can discourage higher-potency
consumption. But at the same time, it may incentivize black market
consumption for the riskiest products. When health officials in
Wisconsin and Illinois interviewed 86 patients with vaping-related
lung injuries in 2019, they found the vast majority reported using
street-purchased THC cartridges, which typically have a potency
higher than 35% and would fall into the highest tax bracket.
Another pitfall as officials tout hundreds of millions of dollars of
potential new government revenue is that Illinois tied its marijuana
taxation entirely to the price of marijuana, which has been shown to
fall in other states after legalization.
The Institute on Taxation and Economic Policy suggests mixing in a
weight-based tax to smooth out revenue, similar to how alcohol is
taxed by volume. They also recommend states start with low taxes and
gradually phase-in higher rates in order to root out as much of the
illicit market as possible. While no state has taken this route yet,
the federal government employed this strategy successfully following
the end of prohibition on a different substance: alcohol.
Weed or no weed, Illinois state government has an insatiable
spending appetite driven by a 500% increase in pension costs since
2000. Leaders have not balanced a state budget since 2001. They have
avoided key spending reforms and instead are grasping for new
revenue at every turn.
In doing so as part of marijuana legalization, they may have invited
additional problems.
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