Despite being among the largest and most mature legal marijuana markets in the country, the cannabis industry in California is struggling. Regulatory hurdles, high taxes, and a still-thriving illicit market have left legal cannabis companies in California fighting to stay afloat.
Perhaps more importantly, the move would finally allow state-sanctioned cannabis businesses to deduct ordinary business expenses–such as payroll and rent–from their federal corporate income taxes. Such deductions are afforded to other legal businesses but barred for those trafficking in federally controlled drugs categorized as Schedule I or Schedule II substances. As a result, state-licensed cannabis companies have been paying an effective tax rate upwards of 70%.
Those tax and compliance costs get passed onto consumers. According to some estimates, taxes alone account for upwards of upwards of 40% of the final price of legal marijuana in California. Legal producers compete directly with illicit ones that have established market share over decades. Illicit cannabis operations are not subject to the taxes and compliance costs faced by their licensed counterparts and often offer lower prices to consumers.