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Current federal tax policies are causing legal-market operators to become unprofitable, and these businesses are unlikely to find relief absent substantive legislative changes being made at a federal level. That’s the conclusion of a new study published by the consulting firm Whitney Economics.
Because cannabis remains federally illegal as a Schedule I controlled substance, state-licensed cannabis businesses are unable to take standard business deductions or access other standard tax breaks. As a result, the effective tax rates for cannabis operators is staggeringly high; regularly exceeding over 70 percent for retailers. In 2022, cannabis operators paid in excess of $1.8 billion in additional taxes. In 2023, the study’s authors forecast that this excessive tax burden will increase to $2.1 billion.
Because of this unjust financial burden, less than 25 percent of cannabis operators surveyed by the firm said that they are currently profitable – a nearly 18 percent decrease from the previous year.
Commenting on the study’s findings, Whitney Economics’ Chief Economist Beau Whitney said, “The cannabis industry is under extreme economic distress and the current regulatory and taxation environment is untenable, even in the short term.” Whitney said that he believes several state markets are barely avoiding systemic collapse.
In response, some states have enacted legislation allowing licensed businesses to deduct certain expenses from their state taxes. Most recently, New Jersey Governor Phil Murphy signed legislation allowing them to do so. Numerous other states, including Iowa, New York, Pennsylvania, and Virginia, have also sought to do so.
In hopes of remedying the tax issue at a federal level, Oregon Congressman Rep. Earl Blumenauer, along with eight cosponsors, reintroduced the Small Business Tax Equity Act in mid-April.
