BOSTON — Changing the way Massachusetts taxes legal marijuana could produce more revenue for the state, but it could also disrupt the fledgling cannabis industry here and undo some of the work to convert consumers from an illicit market to the state’s regulated and taxed market, a report found.
In a report to be considered Thursday by the Cannabis Control Commission, regulators and state revenue experts weighed the idea of taxing marijuana based on its weight or potency, rather than the current price-based tax structure. Although almost every single alternate tax structure studied in an analysis conducted by KPMG is likely to generate more tax revenue, the CCC determined the relatively small increases would not be worth the hassle.
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“The Massachusetts adult-use cannabis industry is in a nascent stage. A large-scale change in taxation scheme would cause disruptions that are not worth the potential short-term revenue gain, especially in a market with currently stable prices and inelasticity,” the agency wrote in a report that commissioners are expected Thursday to vote to submit to the Legislature. “Indeed, each scheme presents challenges for implementation and regulation, both in industry and government, that may not be worth the marginal gain. The Commission recommends the near-term focus remain on efficiency and market growth with potential for re-evaluation as the market matures.”
Adult-use marijuana consumers pay an effective 20 percent tax on the price of legal purchases while medical marijuana is not taxed. In addition to the state’s 6.25 percent sales tax, recreational marijuana is subject to a 10.75 percent excise tax and a local option tax of up to 3 percent. From April 2019 through March 2020, there was $544 million worth of marijuana sold through the state’s licensed retailers, which generated about $109 million in state and local tax revenue.
KPMG’s analysis estimates that legal marijuana sales from July 2020 through June 2021 will reach $1.053 billion and will generate about $211 million in tax revenue under the current framework, 94 percent growth in sales and tax collections driven mainly by the expected opening of new retailers.
The report, which was required by the 2017 legalization law, looked at the feasibility of calculating taxes on marijuana by weight, volume or THC potency, in addition to changing the current tax rate.
A hybrid tax scheme based on weight would first tax a cultivator’s sale to a manufacturer or retailer at a per-weight rate of the cannabis flower. That tax would then be combined with a tax to consumers based on a percentage of the sale price, KPMG said. Alaska, California and Maine use similar schemes, though Alaska does not levy a sales tax.
KPMG looked at what would happen to sales and revenue under four hybrid weight-based scenarios: a 34-cent per gram weight-based tax and a 17 percent price-based tax, a 34-cent per gram weight-based tax and a 20 percent price-based tax, a 74-cent per gram weight-based tax and a 17 percent price-based tax, and a 74-cent per gram weight-based tax and a 20 percent price-based tax.
Marijuana tax revenue would increase under all scenarios except the first, which would lead to higher sales but about $10 million less in annual tax revenue compared to maintaining the current tax scheme, the analysis found. The other three possibilities would decrease overall sales but result in higher tax revenue, potentially to as high as $253 million.
Under a potency-based tax scheme like the one Illinois relies upon, KPMG said different tax rates would be applied based on how much THC — the primary psychoactive compound in cannabis — the product contains.
The firm’s analysis considered two possible options for Massachusetts: a 20 percent price-based tax for products with THC content of up to 35 percent and a 23 percent tax on infused products and those with a THC content greater than 35 percent; and a 20 percent price-based tax for products with up to 35 percent THC, a 23 percent tax rate for infused products and a 25 percent tax on products with a THC content greater than 35 percent.
Sales would dip by $5 million under the first scenario and by $7 million under the second, but tax revenue would increase by $12 million and $18 million, respectively, KPMG found.
If the Legislature were to simply increase the effective tax rate to 25 percent, sales would be reduced to $1.034 billion but tax revenue would rise to $258 million, according to the KPMG analysis.
Though the analysis presented several possible ways to boost state and local tax revenue from marijuana, the CCC’s report to the Legislature recommends making no changes to the state’s tax structure.
“Looking beyond solely the tax revenue that may be generated by different tax schemes, the Commission and DOR recognize that changing the current tax regime would involve price disruptions, costly complexities in administration and enforcement, and costs to the new cannabis industry. Among the administrative advantages of the current retail sales model: the same tax rate applies to sales of all cannabis products; only cannabis retailers are required to file returns; and the tax return itself is relatively simple,” the agency wrote. “Most importantly, a retail tax by its nature would automatically adjust for the weight and potency of products sold, given that quantity and potency of the cannabis will be reflected in its retail sales price.”
The CCC said that “a re-assessment may be warranted as the market matures in the future,” but KPMG’s report made clear that Massachusetts is still a long way from market saturation.
“When more stores enter the market, they may reduce the prices to capture diminishing market share. From the perspective of the tax authority, when the retail sales are taxed as a percent of sales, a decrease in prices can result in declining tax revenues,” KPMG wrote in its analysis. “Therefore, it is important to understand the number of retail stores the market demand can support.”
Using Colorado, Oregon and Washington as a guide, KPMG estimated that the market saturation point in Massachusetts is somewhere between 627 and 921 marijuana retailers. Since the first legal stores opened in November 2018, the CCC has authorized 60 cannabis retailers to open their doors, according to the agency’s website.