Alaska’s annual marijuana tax revenue is set to drop for the first time since legalization, according to reports covering the last fiscal year, even though the total amount of marijuana sold continues to grow.
Growers produced nearly 3,000 pounds more of marijuana than the year before, setting a record of almost 68,000 pounds, yet total revenue dropped from $29.5 million to $28.8 million. That’s a result of growers’ increasing reliance on classifying their products under categories with a lower tax rate, a point that industry advocates argue shows just how dire things are getting for a system that has been essentially unchanged since legalization.
Under Alaska’s tax system, marijuana is taxed at the cultivation level at $50 an ounce for mature bud, regardless of its potency or final sale price. That rate drops to $15 for trim and $25 for immature and seedy bud. At a legislative hearing last week, Alaska Marijuana Industry Association legislative liaison Lacy Wilcox told legislators that determining what’s mature or immature is a fuzzy line left largely to growers—and growers are increasingly turning to the lower tax rate.
“It’s an honor system. Another way to say it is the industry is incentivized to cheat,” she told a House Labor and Commerce Committee meeting last week. “I don’t like to put those kinds of words out there into the world except in this case because I’m here to protect an industry that’s incentivized without enforcement to cheat because of something that is not sustainable. This is a very desperate situation we’re in.”
Numbers from the Alaska Tax Division show the amount of marijuana sold under the $50 rate for bud has been dropping over the last two years while immature bud and trim have steadily increased. In the past tax year, more pounds of immature bud and trim were sold than mature bud. If you take the total revenue raised divided by the total ounces sold, the effective tax rate is about $26.60 per ounce.
Within the industry, there’s a general belief that not all the marijuana being taxed under the immature or seedy bud should really fall under that classification. Some argue that businesses are taking advantage of the system. In contrast, others claim it’s what companies must do to stay afloat as prices fall and are undercut by an influx of black-market marijuana.
Wilcox and the industry have been pleading with lawmakers to lower the overall taxes, arguing that the rates are putting the pinch on growers as the price of marijuana falls. Instead of investing in new lines of products or opening stores, she said growers are struggling to pay the bills, and some are losing their licenses over mounting tax bills.
The situation casts the discussion over pending legislation on marijuana taxes in a new light.
The governor convened a special task force on recreational marijuana, which recommended a slate of changes for the industry along with a steep cut in taxes. It proposed cutting the wholesale tax to a flat $12.50 per ounce before transitioning to a 3% sales tax at the retail counter.
Earlier this year, legislators balked at the price tag of the proposed change. Under the state’s forecasting, that would have led to a reduction of total marijuana taxes by as much as 75%. Instead, legislators proposed a 10% sales tax to keep marijuana revenue effectively the same under the projections.
At the House Labor and Commerce Committee hearing, legislative aide Cody Rice told the committee those forecasts were based on the assumption that marijuana revenue would continue to grow, which he said is not the case.
“There’s been a lot of discussion about being revenue neutral, and that looks like, and what I can tell you with a high degree of confidence, is that the tax revenues this year for marijuana will be lower than the tax revenues last year because of this change in the product mix,” he said.
The change in product mix produced a weighted tax rate of about $26.60 per ounce, he told the committee, and that a cut down to $12.50 was more likely to come out to a cut of 50% in total revenue rather than the 75% drop the state forecasted. He also presented modeling that showed moving from the current mixed tax rates to the proposed 10% sales tax would actually increase the total taxes on the industry.
Asked what rate would be acceptable, Wilcox called the 10% rate “punitive” on Thursday and reiterated her support for the 3% rate.
The committee also heard some analysis on how Alaska stacks up against other states with legalized marijuana, most of which have moved to a sales tax model. Rice told the committee that when compared to other states—a potentially big deal if federal legalization comes to pass and marijuana can legally cross state borders—Alaska’s tax rate would be “wildly uncompetitive.”
The House Labor and Commerce Committee is expected to meet again in October to explore the issue further. Chair Jesse Sumner, R-Wasilla, has expressed support for changing to a sales tax but was wary about putting forward a steep decline in revenue.
Matt Acuña Buxton is a long-time political reporter who has written for the Fairbanks Daily News-Miner and The Midnight Sun political blog. He also authors the daily politics newsletter, The Alaska Memo, and can frequently be found live-tweeting public meetings on Twitter.