Why one town suspending cannabis sin tax could have a major impact

The promise of swimming in cannabis taxes like Scrooge McDuck has enticed many to vote in favor of legalization. This results in exceptional taxation in several states and cities throughout the U.S. However, many small business owners are struggling to keep up. The Pueblo, Colo. city council recently voted 4-2 to suspend the excise tax on weed in hopes of bolstering the now decade-old industry.

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Small towns, big taxes

Colorado has a 15 percent tax set for cannabis businesses. Cultivators that grow adult-use weed in the city of Pueblo are subject to an additional eight percent excise tax. This isn’t uncommon. Many legalization packages come along with taxes set by the state, but localities have the ability to add an additional excise or sales tax to the products. This is often referred to as a “sin tax.”

This practice of applying a sin tax isn’t uncommon in the weed space. In California, the cannabis tax rate is 15 percent. On top of that, Los Angeles companies pay an additional tax ranging from 2-4 percent based on the operation sector. Throughout California, cities and counties have enacted anywhere from the lower two percent additional sin tax all the way up to an additional 15 percent of gross receipt sales in Dixon, Calif.

On the other side of the spectrum, the city of San Francisco has opted out of an additional tax.

This large, cannabis-centric state shows the swath of options cities and counties have for taxing the industry. This cost often reaches the consumer in higher pricing, which creates an advantage for the untaxed legacy market.

Cannabis operators face a unique set of challenges in comparison to other industries like hospitality and traditional retail. From high taxation to competing with a sometimes thriving underground market to licensing and regulatory issues–there aren’t many sectors like weed.

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These challenges haven’t gone unnoticed, either. A 2023 report from Whitney economics showed that under 25 percent of cannabis businesses are profitable. In Pueblo, the topic of cannabis excise tax has been divisive for years.

A Colorado city divided

Sin tax may seem steep or unnecessary to some, but not everyone is on board with lowering the rates. The Pueblo City Council Members who voted no on the excise tax suspension believe the rate speaks to the will of their constituents.

“The voters of Pueblo voted to implement an excise tax in Pueblo allowing the council to set the amount within the state limits of 15 percent. It is irresponsible for the council to reduce it to zero without a vote of the people,” Councilor Regina Meastri shared with GreenState.

Cannabis operations in the city were voted in based on proposed tax revenue, a point Maestri believes should hold precedent when suspending tax rates.

Council President Heather Graham believes the sin tax suspension may lead to a $500k loss over three years. She called the move to suspend the tax “reckless and irresponsible” in a comment to GreenState, sharing news about a possible compromise.

“I am proposing an ordinance to bring it back to five percent which would be what Pueblo County is. So, if anyone wanted to move into the city, there would be no additional cost of excise tax. This will be happening in the next few months,” Graham said.

This isn’t a quick decision for Pueblo City Council. The council debated the issue last year but eventually left the matter to voters. Petitioners for the tax suspension couldn’t gather enough signatures to get the vote on the ballot at that time. Because of this, Maestri and other opposing council members believe that Pueblo voters did not want any decrease in city-implemented cannabis taxes.

“The tax revenue generated through legalizing marijuana was the carrot dangled to tempt voters to vote in favor,” Maestri explained. “The current marijuana industry is built on private businesses who now face financial challenges, just like every other business trying to stay in business with our current economic setbacks.”

Could removing the sin tax help the cannabis industry?

Though the country is reeling from inflation and economic hardship, the strife of the cannabis business is a bit different than that of other industries. Dispensary taxes reach as high as 45.8 percent in some locales like Bellingham, Wash., where the state cannabis tax is 37 percent, and sales tax is 8.8 percent. The lost tax money of suspending a sin tax may feel daunting when faced with a city budget. However, one might ask why this weight was placed on the fledgling space?

Despite the nuances, both sides of the council have posed valid points. As the tax suspension plays out in the city of Pueblo, Colo., many other siloed U.S. cannabis industries may be watching to see the impact on both sides of the stream.