Cannabis Operators Suffer Under Heavy Tax Burden, According to Impact Analysis by Whitney Economics
LOS ANGELES– Cannabis operators are facing a significant hurdle in the form of federal tax provision 280E, which penalizes traffickers of Schedule I or II drugs by disallowing the deduction of “ordinary and necessary” business expenses. The provision was first introduced in 1982 in response to a case involving a drug dealer who tried to claim deductions on his tax returns. Since cannabis remains a Schedule I drug at the federal level, this provision applies to cannabis operators and prevents them from deducting expenses like rent, marketing, and wages from their tax bills, resulting in an effective tax rate that often exceeds 70% for cannabis retailers.
As a result, cannabis operators paid over $1.8 billion in additional taxes in 2022 alone when compared to ordinary businesses, according to a recent impact analysis conducted by cannabis research firm Whitney Economics. This excess is forecasted to increase to $2.1 billion in 2023. The tax burden is so heavy that only 24.4% of cannabis operators surveyed indicated that they are profitable, down from 42% the year prior.
In addition to the tax burden, cannabis operators also face challenges with the lack of banking services, anti-business regulation, and lack of interstate commerce. These factors, combined with the high taxes, make it difficult for cannabis operators to run a profitable business, which is reflected in the bleak sentiment of the cannabis industry. Whitney Economics conducted a business conditions survey report, which is set to be published later this month, that shows cannabis operators are hanging on by a thread and do not expect things to change any time soon.
Beau Whitney, chief economist at Whitney Economics, said, “the cannabis industry is under extreme economic distress and the current regulatory and taxation environment is untenable, even in the short term.” Whitney observed that several state markets are teetering on the brink of systemic collapse, which would result in significant personal wealth destruction and disproportionately impact smaller operators.
Tax reform may be the solution that helps support the cannabis industry, while generating billions in economic activity. Whitney Economics conducted a rescoring of the tax policy and found that 280E reform would increase operator profitability, increase cannabis employment, and increase economic activity by $35.2 billion over a 10-year period. This comes at a time when the cannabis industry experienced its first decline in employment and is forecasted to experience anemic growth for the next 7 quarters.
The cannabis industry is hoping that the Biden administration’s commitment to reforming cannabis policy will include addressing the issue of excessive taxes. While it remains to be seen whether this will happen, the industry is pressing ahead with efforts to lobby for tax reform. The National Cannabis Industry Association (NCIA), for instance, has launched a campaign called “End 280E” to push for the repeal of the provision. The campaign has garnered support from both Democrats and Republicans, as well as the broader business community.
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