Cannabis Taxes: Weight, Potency Or Price? Impact On Businesses, Patients And Consumers

Cannabis companies are bracing for a cash flow boost. President Biden's decision to reschedule cannabis could free up over a billion dollars in tax breaks thanks to the elimination of the burdensome IRS code 280E. This tax code currently prevents cannabis businesses from deducting normal operating expenses.

Estimates suggest a potential market valuation exceeding $110 billion by 2030 although this question remains: what does this mean for the future of cannabis taxation on a national level?

Comparing Cannabis Tax Designs: Weight vs. Potency vs. Price

The most common approaches to cannabis taxation include weight-based tax, price-based tax, and potency-based tax. A 2023 report by the Tax Foundation offers valuable insights into the tightrope states have to balance when designing cannabis tax schemes. It highlights the drawbacks of current methods like weight-based taxes, which don't consider potency variations.

Potency-Based Taxation

An optimal system, according to the report, would tax based on THC content - the psychoactive compound in cannabis.

According to the report, potency-based taxation ensures fairer pricing for consumers. The report argues that a weight-based tax would charge the same, despite the significant difference in effects. Thus, potency-based taxation would reflect the product's true 'value' through THC content.

The report argues that potent products carry a higher risk of negative effects, and taxing potency could redirect revenue toward programs that address these costs, such as public education or health treatments.

However, the report recognizes the limitations of technology and proposes temporary solutions: A hybrid model using a few broad potency categories (low, medium, high THC) which allows for varying tax rates based on strength while keeping testing costs manageable.

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Potency-Based Taxes May Not Apply To Cannabis

Industry stakeholders have long complained about the potency tax, arguing its complexity and that variable rates discourage legal sales and drive consumers to the illicit market and cultivators to shop around for labs willing to inflate THC content.

That is why states like Colorado and New York are looking for alternatives, such as simpler, wholesale taxes upstream the supply chain. However, this could be restrictive for smaller producers, not big enough to play in wholesaling.

The problem with potency taxes is they're based on the product itself, not the price. This means if market forces drive down the retail price of cannabis, the tax stays the same. As a result, the tax becomes a bigger chunk of the sales price than it was originally.

In addition, taxing THC content falls short of recognizing the complexity of cannabis. Much less represents common taxation drivers such as the actual cost of producing the commodity, the value incorporated, or the premium paid by consumers.

The far-reaching constituency of cannabinoids determines the efficacy of the cannabis plant, unlike other regulated substances, taxing cannabis based on its THC potency is like taxing wine based on its alcohol content.

Furthermore, taxing THC for its impairing effects mirrors alcohol taxation and does not speak to the benefits of THC in several medical conditions none of which can be treated with alcohol.

Potency taxes focus on THC content might be outdated in 2024. Consumers now care more about specific effects and ingredient combinations than just THC strength. By taxing based on potency, states miss out on taxing new trends in the industry that don't necessarily involve high-THC products.

Photo: AI-Generated Image.