Illinois cannabis taxes among nation’s highest, could keep black market thriving

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.

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.

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.