Alaska marijuana industry says baked-in taxes are too high

Representatives from Alaska’s marijuana industry say state taxes are too high, making it difficult to compete with untaxed, illegal marijuana sold on the black market.

When local taxes are added to the state’s rate of $50 per ounce, Alaska marijuana is taxed at a higher rate than any other state that has legalized recreational marijuana.

That’s according to the Alaska Beacon, relying on an analysis by the Brookings Institution’s Tax Policy Center.

Alaska Beacon reporter James Brooks has been following the marijuana industry’s efforts to change how it is taxed, and Brooks says representatives are advocating for, not only lower taxes, but a shift from taxing cultivation to taxing retail sales.

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The following transcript has been lightly edited for clarity.

James Brooks: So the tax gets collected on the front end. It’s buried in the cost of the product itself. When you buy it at a store, you don’t see that $50 per ounce tax as a consumer directly, because it’s already baked in to the cost of the cookie you’re eating.

Casey Grove: So to speak. And now we’ve had this tax structure in place for eight or nine years. I think there was kind of some lag time between when legalization happened and actual legal marijuana was being sold. But over that time, we’ve had the same tax structure, and some folks in the industry are saying that that’s not working, right?

JB: Right. Since the first sales started, the marijuana industry here in the state’s been growing fairly steadily, new businesses opening up, new farms starting, and sales growing as well. And we can track that, by figures reported to the state Department of Revenue, which is in charge of collecting taxes. And marijuana taxes, over the past few years have peaked at about $30 million a year. But in the last year, and the year before, and even now, we’re starting to see those tax figures decline. Now, Alaska doesn’t regulate the number of marijuana stores. So there’s the potential of a market bubble, that we just have so many stores now that some are starting to fail. And businesses are going out of business. But that wouldn’t fully explain the decline in tax revenue. And the thought now from the marijuana industry is that prices are so high, because the state’s tax is so high, that people are going back to the black market to purchase marijuana, and that the black market prices are so low that they’re able to compete successfully with the legal market.

CG: And then you covered this hearing on Friday, which you noted in your story in the Alaska Beacon was kind of an unusual offseason hearing. The Legislature is not in session right now. But industry representatives and liaisons are saying that this tax structure needs to change if the legal businesses are going to be able to compete with the black market, right?

JB: Right. Gov. Dunleavy, last year, commissioned a special task force on recreational marijuana issues. He said, “Let’s take a look at the state of the industry, see what changes need to be made.” Now that we’re a few years into legalization, one of the big recommendations that came out of that task force was a change to the tax system. And so, as a result of those recommendations, some members of the House put together a bill changing the tax structure. The change in the tax isn’t as much as the industry was hoping. And so on Friday, members of the industry testified that the current version of the bill doesn’t work for them, but they’re still looking for some kind of tax break.

CG: And is it just that they’re advocating for a lower tax? Or is the actual structure of the way that marijuana is taxed part of it, too?

JB: You’re absolutely right, Casey. Instead of a $50 per ounce tax paid at the cultivation level, they’d be switching to a sales tax paid at the retail counter. The industry has preferred something like a 3% statewide sales tax on marijuana. As currently written, the bill contains a 10% sales tax, which industry representatives have said is too high and effectively is a sidestep from where the tax rate is at right now.

CG: So part of this that I don’t understand, personally, is how that changing of the structure or the changing of where the marijuana is taxed might help the situation. I can kind of understand why if, you know, the taxes were lower, that it would be easier for them to compete with the black market, but is there some, I guess, incentive to not taxing at the cultivation level?

JB: That’s a really good point, Casey, because state law and regulations allow a lower tax rate for different products, different parts of the plant. The $50 per ounce tax applies to marijuana flower, but you can, theoretically, get a lower tax rate if you turn your marijuana into edible products, if you extract the psychoactive chemicals and use it in vape pens, for example, and a lot more of the marijuana being grown in Alaska is being transferred and transformed into these other products, because the tax rate is lower. And so the idea is that if you just do a sales tax at the counter, you’re avoiding all of these issues with different tax rates for different products. And you just have one sales tax that’s easier to collect.

CG: Gotcha. Yeah. And I mean, like you said, we’re talking about a lot of tax revenue here. What is the risk, I guess, to the state if the tax is lowered or changed in such a way that the state doesn’t get as much tax revenue, other than, you know, the state wants money and needs money to operate?

JB: Yeah, the marijuana industry has, at this point, more than paid for the cost of setting up a legal system. It’s now a cash source for the state. And a lot of that cash, or at least a significant fraction of it, is designated for use in drug treatment and prevention programs. And the concern by some state officials is that if marijuana taxes decline, the amount of funding available for those programs will be reduced as well.